Rather than my usual fall schedule of teaching in the Economics
Department at George Mason University, I taught “The Economic
Foundations of Legal Studies” at the university’s School of Law to
first-year law students.
Economics is no stranger at George Mason’s Law School. It’s home to
the Law and Economics Center directed by Frank Buckley. Under the
leadership of Dean Mark Grady, the study of economics is a required
integral part of the law program. In fact, GMU Law School has a national
and international reputation for excellence in the relatively new field
of law and economics.
It’s important for legal practitioners to have at least a working
knowledge of economics. Why? Because most of what lawyers and judges do
has economic implications and can be informed by economics. In their
jobs as attorneys general, judges and sometimes legislators, an
understanding of economics might help them avoid grossly uniformed
pronouncements and harmful policy. Let’s look at just a couple of cases
where a bit of economic understanding might help.
When there’s a natural disaster, prices tend to skyrocket. That’s
what we saw in the wake of hurricanes Andrew and Floyd. States’
attorneys general threatened to prosecute businesses for
“price-gouging.” They simply didn’t understand the role of prices. What
kind of behavior serves the social interests in the wake of a disaster?
At least two: People should conserve on the use of suddenly scarce
resources (food, plywood, gas and so on), and producers should produce
more. Rising prices create incentives for consumers to abandon reckless
consumption and for producers to produce more. Rising prices not only
accomplish those two goals, but they do so voluntarily.
Another important concept for legal practitioners is opportunity cost
— there’s no free lunch. Say you’ve been selling coffee to me from your
large inventory for $6 a pound. Crop disaster in Brazil spikes the world
coffee price to $10 a pound. What will you charge me now? If you said at
least $10, go to the head of the class. Why? Because the opportunity
cost of coffee is now $10. What coffee cost before the disaster is
irrelevant. That’s no different from the fact that though you might
have paid only $40,000 for your home 30 years ago, it has nothing to do
with its price today. What it costs to buy a similar home helps
determine today’s selling price.
What’s the relevance? When OPEC actions led to a surge in gasoline
prices, some of our lawmakers talked about investigations and possible
prosecution of U.S. oil companies for price-gouging. They could
understand how prices of gasoline might rise after the OPEC action, but
couldn’t understand why oil companies were charging higher prices for
oil products already in the pipeline, purchased long before the OPEC
action. That’s just like the coffee or house example. Historical costs,
or what was paid in the past, do not determine today’s price. My law
students would be able to inform these lawmakers about the concept of
opportunity costs.
At the risk of appearing to be self-serving, I contend that any law
school graduate bereft of basic economics cannot possibly understand the
law as well as his counterpart who knows some economics.
The good news is that an increasing number of law schools have made
economics a mandatory part of their curriculum. Better news is that
through the auspices of George Mason’s Law and Economics Center,
workshops and seminars are conducted for federal judges so they can
learn about the important connections between law and economics. In the
spirit of equal opportunity, the center also conducts workshops and
seminars where economists get to learn something about law.
Syria and America’s bloody diplomacy
Mike Pottage