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Neo-institutional theory and economic analysis of law

Unlike other economic theories, the neo-institutional theory analyses economic categories as a result of the concerted actions of individuals. Economic categories such as money, goods and the market are, from the perspective of this theory, the coordinated result of interaction between individuals, consciously making specific concessions for each other in order to achieve a goal and realising individual interests, which could otherwise never be achieved.

It should be noted that economic theory, with the development of different branches of neo-institutionalism, encompasses all the new spheres of analysis from legal matters to problems in making objective and democratic choices. Economic imperialism has even begun to make accusations against it. Neo-institutional theory, which is made up of multiple trends, does not contradict other trends in economic theory, but, rather, fills their gaps.

As a methodological foundation for research, a new branch of neoinstitutional theory is applied in this study economic analysis of law, which was identified as an independent discipline in the mid 1960s. R. Coase and R. Posner became key figures in the development of economic analysis of law.

The works of G. Becker also had enormous significance for the economic analysis of extra-market forms of conduct, criminality in particular.

In Russias study of economics, the principles of economic analysis of law are only just being applied, while in other countries, particularly the USA, it has already become a powerful trend. Economic analysis of law, which emerged in the 1970s, is now one of the most influential trends in the study of the economy of the USA and other western countries. There probably remains not one legal standard, nor one single element of a legal system that has not been subjected to economic analysis of law in recent times. In practice, this is conveyed in the successive transfer of micro-economic analytical instruments to non-market relations, one of which is law.

A classic work in the field of economic analysis of law is the book by Richard Posner, Economic analysis of law, published for the first time on the USA in 1972. It was not translated into Russian and published in Russia until 20057. Economists of this type have made a contribution by proving that the legal system and matters of its function have clear explanations within the framework of economic theory.

Economic analysis of law studies two types of problems:
  • firstly, how economic agents react to various legal establishments;
  • secondly, how legal standards themselves change under the influence of economic factors.

It is worth noting that our analysis of the interaction between the economic and legal natures of money takes place in the course of economic analysis of law, and so the mutual influence of the economic nature of money and law will be examined.

The basic thesis of economic analysis of law consists in the following: legal rules must imitate the market. According to American economist J. Hirshleifer, the conceptual framework of economic analysis of law comprises three theorems: the theorem of A. Smith, the theorem of R. Coase and the theorem of R. Posner8

We shall examine the essence of these theorems, as well as the possibility of adapting them to our own study.

According to A. Smiths theorem, voluntary exchange increases the welfare of participants in a transaction. From this he concludes that legislation must, as far as possible, encourage exchange, firstly, removing artificial barriers of any kind, and secondly, ensuring legal protection of voluntarily concluded agreements. Correspondingly, legislation must ensure the safety of participants in contracts, that is, the investors and the owners of securities, etc.

According to R. Coases theorem, all opportunities for a mutually profitable exchange are fully concluded by the interested parties themselves, on the condition that transaction expenses are nil, and the property rights precisely defined. Consequently, legislation must ensure clear specification of property rights for all economic resources, such as money and securities.

R. Posners theorem is linked with R. Coases theorem. It states that when transaction expenses are positive, that is, when in the course of the exchange objective obstacles arise, which prevent the achievement of effective results, different variants of the distribution of property rights prove not to be of equal value from the point of view of the interests of the company. As a result, legislation must elect and establish the most efficient distribution of property rights of all available options.


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