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Drobak, John N.; North, Douglass C. --- "Legal change in economic analysis" [1999] ELECD 10; in Backhaus, G. Jürgen (ed), "The Elgar Companion to Law and Economics" (Edward Elgar Publishing, 1999)

Book Title: The Elgar Companion to Law and Economics

Editor(s): Backhaus, G. Jürgen

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781858985169

Section: Chapter 3

Section Title: Legal change in economic analysis

Author(s): Drobak, John N.; North, Douglass C.

Number of pages: 6

Extract:

3 Legal change in economic analysis
John N. Drobak and Douglass C. North


One school of law and economics analyses legal problems by using economic
principles. Scholars working in the new institutional economics reverse that
process and incorporate legal analysis in their explanation of economic events.
The new institutionalists believe that economic growth cannot be understood
with neoclassical theory alone. Neoclassical theory can be a powerful ex-
planatory and predictive tool, but it is also a static theory that often
oversimplifies, sometimes erroneously, the dynamic world. In an attempt to
bring order to this uncertain and constantly changing world, human beings
have used institutions - the rules of the game of a society - to structure
human interaction. Institutions provide the framework of incentives that shape
economic, political and social organization. They provide a foundation for
the formation of property rights. Institutions affect economic performance by
determining, together with the technology employed, the transaction and
transformation costs that make up the total costs of production. Informal
institutions include such things as norms of behaviour, codes of conduct and
business conventions. Many formal institutions, such as constitutions, stat-
utes, regulations and decisions of courts, are legal. Some formal institutions
are created by non-governmental organizations - religious laws, corporate
rules of self-governance and use restrictions imposed by residential groups,
for example (see North, 1990).
An institution is defined by how it is enforced, as well as by the written or
understood terms of the rule. Enforcement can be carried out by third parties
( ...