Relevance of Economics in Law: Economics and Law are Social Sciences. Economics is the study of the Economy or the Money Flow in the country. Law is the study of Legislative and Executive aspects of the Economy. The two sciences are closely interlinked and influence each other in very many ways. For the study of law it is important to appreciate economics and it provides context for law making and enforcement. Some of the reasons why the study of economics is important as a part of the study of law are: 1. Economics is the study of human behaviour and its interaction with money flow and social factors and hence provides a unique lens into law making. Understanding human behaviour is therefore imperative to the study of law. 2. Every aspect of the economy like Cash Flow, Demand, Supply, Foreign Exchange, Types of Markets etc. is covered in the study of Economics. Economic law making is impossible without a deep understanding of these concepts. The creation, development and regulation of Indian financial markets has been enabled by legislations. Regulatory bodies are guided by a set of laws that specify their powers and conduct. RBI, LIC, SEBI, PFRDA are examples of creation of financial market players through legislation. 3. Economics helps us in understanding the Negative Externalities in Law of Torts. Today environment protection is a key agenda of governments across the world. Environment laws are developed in the context of the economy. For e.g. laws may be stringent on violations in certain countries while they may not be so in other given the state of the economic development. Understanding economic structure is therefore critical to development and application of laws. 4. In Law of Contracts, the study of Economics helps us to evaluate the concepts of Compensation and damages. 5. The study of economics facilitates a better understanding of the economy. This understanding helps in the development and application of legal roots through legislation or common law. As a result, economic efficiency and equitable resource distribution can be achieved through these policies. For example, the Union Budget is announced at the
start of every financial year. To prepare the Budget and the fiscal policies, the study of Economics would be very beneficial to achieve Economic Efficiency. 6. Economic offenses like insider trading, Havala channels, betting cheating, frauds, and money laundering can be known and understood through the study of economics. As a result, better policies can be enacted to prevent these offenses. 7. Economics enables logical reasoning which is pivotal to the study of law. 8. The Study of economics is helpful in the study of Intellectual Property Rights like Copyrights and Patents. 9. To frame trade and foreign exchange policies, the study of Economics is imperative. For Example, before the New Economic Policy of 1991, the FERA Act was in force to govern Foreign Exchange and trade in Indian Economy. However, post 1991, as the economy went through great changes, the FERA Act was repealed and gave way to the FEMA Act. Thus, no trade policy can be framed without the study of the Economy or Economics. 10. It also helps in framing and implementation of Labour Laws. For example, today, the labour law is restrictive in terms of hiring and firing of employees. As a result the enterprises are facing surges and slumps in terms of their development. So this study is important to make necessary changes in the law. Hence the study of economics is imperative to the framing of labour laws. 11. For framing of industrial policies, the study of economics is critical. For example, the study of market behaviour, the development of ratio of the sectors like the primary secondary and tertiary sectors in the economy, the study of the requirements of the industries helps in framing a favourable industrial policy which facilitates equal growth of all sectors.
Positive and Normative Science: Microeconomics is concerned with positive and normative analysis. Here is how we distinguish both the approaches: a) Positive analysis deals with explanation and prediction. In other words, positive analysis describes the cause and effect relationships. The positive analysis is central to microeconomics. Theories are developed to explain phenomena, tested against observations, and used to construct models from which predictions are made. For example, Indian Government imposes a quota on the import of some goods. What will be the impact of this policy on the forces of market? How will that affect the Indian consumers? These questions belong to the realm of positive analysis as they describe the causal relationships between factors. b) Normative analysis deals with what ought to be. Normative analysis is not only concerned with alternative policy options, it also involves the design of particular policy choices. For example, consider the situation of a new tax on petrol. The auto mobile companies would evaluate as to how many large and small cars are to be produced to maximize profit. How much money is to be invested to make the cars fuel efficient? On the other hand, the policy makers would evaluate whether the policy is in public interest or not. If it is found desirable, then what could be the optimal size of the tax? If it is undesirable, then what could be the alternative to the tax? These questions belong to the realm of normative analysis.
