Table of Contents

ACKNOWLEDGEMENT ................................................ Error! Bookmark not defined.

CONCEPT OF LAISSEZ FAIRE ..................................................................................... 2
The Invisible Hand ....................................................................................................... 2
HOW LAW AFFECTS ECONOMICS .............................................................................. 4
Arguments for legal intervention .................................................................................. 4
Arguments for government intervention to improve equality .................................... 4
Government intervention to overcome market failure............................................... 5
Arguments against government intervention ............................................................... 6
Should governments save declining industries? .......................................................... 7
Macro Economic Intervention ...................................................................................... 7
HOW ECONOMICS AFFECTS LAW .............................................................................. 8
Economic Growth and Law .......................................................................................... 8
ECONOMIC ANALYSIS OF LAW ................................................................................. 10
METHODS OF LEGAL INTERVENTION ...................................................................... 11
Enforcement Directorate ............................................................................................ 11
Regulatory Agencies.................................................................................................. 12
REFERENCES .............................................................................................................. 13
Books Referred .......................................................................................................... 13
Articles Referred ........................................................................................................ 13
Websites Referred ..................................................................................................... 13
CONCEPT OF LAISSEZ FAIRE1

Laissez-faire is an economic theory from the 18th century that opposed any government
intervention in business affairs. The driving principle behind laissez-faire, is that the less
the government is involved in the economy, the better off business will be—and by
extension, society as a whole. Laissez-faire economics are a key part of free market
capitalism.

The underlying beliefs that make up the fundamentals of laissez-faire economics

include, first and foremost, economic competition constitutes a "natural order" that rules
the world. Because this natural self-regulation is the best type of regulation, laissez-faire
economists argue that there is no need for business and industrial affairs to be
complicated by government intervention. As a result, they oppose any sort of federal
involvement in the economy, which includes any type of legislation or oversight; they
are against minimum wages, duties, trade restrictions, and corporate taxes. In fact,
laissez-faire economists see such taxes as a penalty for production.

The Invisible Hand2

The phrase invisible hand was introduced by Adam Smith in his book 'The Wealth of
Nations'. He assumed that an economy can work well in a free market scenario where
everyone will work for his/her own interest. The unobservable market force that helps

1 Adam Smith, An Inquiry into Nature and Causes of Wealth of Nations, W. Strahan and T. Cadell,
London, 1776
2 Adam Smith, An Inquiry into Nature and Causes of Wealth of Nations, W. Strahan and T. Cadell,

London, 1776

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the demand and supply of goods in a free market to reach equilibrium automatically is
the invisible hand.

He explained that an economy will comparatively work and function well if the
government will leave people alone to buy and sell freely among themselves. He
suggested that if people were allowed to trade freely, self interested traders present in
the market would compete with each other, leading markets towards the positive output
with the help of an invisible hand.

In a free market scenario where there are no regulations or restrictions imposed by the
government, if someone charges less, the customer will buy from him. Therefore, you
have to lower your price or offer something better than your competitor. Whenever
enough people demand something, it will be supplied by the market and everyone will
be happy. The seller end up getting the price and the buyer will get better goods at the
desired price.

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HOW LAW AFFECTS ECONOMICS3

One of the main issues in economics is the extent to which the law should intervene in
the economy. Free market economists argue that government intervention should be
strictly limited as government intervention tends to cause an inefficient allocation of
resources. However, others argue there is a strong case for government intervention in
different fields, such as externalities, public goods and monopoly power.

Arguments for legal intervention

 Greater equality – redistribute income and wealth to improve equality of
opportunity and equality of outcome.
 Market failure – Markets fail to take into account externalities and are likely to
under-produce public/merit goods. For example, governments can subsidise or
provide goods with positive externalities.
 Macroeconomic intervention. – intervention to overcome prolonged recessions
and reduce unemployment.

Arguments for government intervention to improve equality

In a free market, there tends to be inequality in income, wealth and opportunity. Private
charity tends to be partial. Government intervention is necessary to redistribute income
within society.

Diminishing marginal returns to income. The law of diminishing returns states that as
income increases, there is a diminishing marginal utility. If you have an income of Rs. 2
Crores a year. An increase in income to Rs. 2.5 Crores gives only a marginal increase
in happiness/utility. For example, your third sports car gives only a small increase in
total utility.

3ALAN DEVLIN. “LAW AND ECONOMICS”. Irish Jurist, vol. 45, 2010, pp. 165–197. JSTOR,
www.jstor.org/stable/44027116.

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However, if you are unemployed, and surviving on Rs. 500 a week. A 10% increase in
income gives a substantial boost in living standards and quality of life. Therefore,
redistributing income can lead to a net welfare gain for society. Therefore income
redistribution can be justified from a utilitarian perspective.

Fairness. In a free market, inequality can be created, not through ability and handwork,
but privilege and monopoly power. Without government intervention, firms can exploit
monopoly power to pay low wages to workers and charge high prices to consumers.
Without government intervention, we are liable to see the growth of monopoly power.
Government intervention can regulate monopolies and promote competition. Therefore
government intervention can promote greater equality of income, which is perceived as
fairer.

Inherited wealth. Often the argument is made that people should be able to keep the
rewards of their hard work. But, if wealth and income and opportunity depend on being
born into the right family, is that justified? A wealth tax can reduce the wealth of the
richest, and this revenue can be used to spend on education for those who are born in
poor circumstances.

Rawls social contract. Rawls’ social contract stated that the ideal society is one where
you would be happy to be born in any situation, not knowing where you would end up.
Using this social contract, most people would not choose to be born in a free market
because the rewards are concentrated in the hands of a small minority of the
population. If people had no idea where they would be born, they would be more likely
to choose a society with a degree of government intervention and redistribution.

Government intervention to overcome market failure4

1. Public goods. In a free market, public goods such as law and order and national
defence would not be provided because there is no fiscal incentive to provide goods
with a free rider problem (you can enjoy without paying them). Therefore, to provide

4 “Keynes’ Economic Theories Re-emerge in Government Intervention Policies”, The Economist, 23

February 2009

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public goods like lighthouses, police, roads, e.t.c it is necessary for a government to pay
for them and out of general taxation. see: public goods

2. Merit goods / Positive externalities. Goods like education and health care are not
strictly public goods (though they are often referred to as public goods). In a free
market, provision tends to be patchy and unequal. Universal education provided by the
government ensures that, in theory, everyone can gain an education, which has a
strong social benefit.

3. Negative externalities. The free market does not provide the most socially efficient
outcome, if there are externalities in consumption and production. For example, a profit
maximising firm will ignore the external costs of pollution through burning coal. This
leads to a decline in social welfare. By contrast, other forms of energy production, like
solar power, are environmentally friendly and have a positive externality. By taxing
production which causes pollution costs and using the subsidy to encourage other forms
of energy production, there is a net gain in social welfare.

4. Regulation of monopoly power. In a free market, firms may gain monopoly power;
this enables them to set higher prices for consumers. Government regulation of
monopoly can lead to lower prices and greater economic efficiency.

Arguments against government intervention

Governments liable to make the wrong decisions – influenced by political pressure
groups, they spend on inefficient projects which lead to an inefficient outcome.

Personal freedom. Government intervention is taking away individuals decision on how

to spend and act. Economic intervention takes some personal freedom away.

“The market is most efficient at deciding how and when to produce.”

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Should governments save declining industries?
If large industries go out of business, there will be high regional unemployment and
market failure from the difficulty in finding new jobs. In this case the government should
save declining industry as was the case with the recent capitalization scheme for Public
sector banks and the government is still investing in these banks to revive them.

If the government prop up declining industries, they will be saddled with high costs and
a permanently unprofitable industry. In this case the government should not intervene.
Thus the government needs to analyze whether to save the industry or not. Study of
economics also helps the government to make the rational choice.

Macro Economic Intervention

In recessions, there is a sharp fall in private sector spending and investment, leading to
lower economic growth. If the government also reduce spending at the same time, there
is an even bigger fall in economic growth and collapse in confidence. In a deep
recession, governments can borrow from the private sector and spend the money to
employ unemployed resources. If there is a collapse in the money supply, there may be
a role for the Central bank or Government to print money.

Similarly, the government may need to prevent an economic boom and explosion of
credit. Keynesian economists argue that the government can positively influence the
economy through fiscal policy. Monetarists believe monetary policy can help encourage
economic stability, though an independent Central Bank may not be considered
government intervention

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HOW ECONOMICS AFFECTS LAW5

Law and economics is the application of economic principles to analyze the effects of
various laws on the individual and society at large. In other words, economic concepts
(like scarcity of resources, supply, demand, market efficiency, and bargaining power)
are used to explain the purpose and effects of various laws, to assess which legal rules
are economically efficient, and to predict which legal concepts will be effective and
which will not.

As early as the 18th century, Adam Smith (writer of "Wealth of Nations" and famous for
coining the phrase "life, liberty, and property") discussed the economic effects of
mercantile laws. Many other political philosophers also saw an interplay between
economics and law and wrote about it at great length, including the father of
communism, Karl Marx. However, the idea of applying economic concepts directly to
the analysis of laws in a non-market manner is a fairly new concept. Economic analysis
of law is usually divided into positive and normative. Positive analysis of law uses
economic analysis to predict the effects of various legal rules, often explaining the
development of laws in terms of their economic efficiency. Normative law, on the other
hand, goes further and actually makes policy recommendations based on the projected
economic consequences of different legal approaches.

It has many practical applications, such as helping with the drafting of laws, or in
assessing the amount of damages required to return a person to the level of welfare
enjoyed before an accident occurred.

Economic Growth and Law

The nature of a country’s law, and the reliability of its legal system, also has a direct
impact on economic performance, as shown by the “law and finance” literature.
Countries possessing independent, reliable, and relatively corruption-free legal systems
tend to show higher growth, less inflation, and higher levels of employment. The

5Baker, C. Edwin. “The Ideology of the Economic Analysis of Law.” Philosophy & Public Affairs, vol. 5,
no. 1, 1975, pp. 3–48. JSTOR, www.jstor.org/stable/2265019.

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relationship between the legal system and the economy is definitely a two-way link and
“law and finance” even suggests that common-law systems are best of all at promoting
economic efficiency and growth.

Economics of law has a respectable pedigree. In earlier times it was common for
‘political economists’ (as economists were once known) to have had exposure to legal
training and to work on institutionally focused questions. It is only in recent years that
many economists have become narrowly technical and have tended to ignore
institutional questions. Following on the heels of the 2008 depression affecting Europe
and America, the excessively technical nature was widely criticized, even to the extent
of some economists writing a letter to the Queen making the criticism of the mainstream
profession, after the monarch had asked why so many economists appeared to have
missed accurately predicting the onset of the depression. It is a good time to increase
one’s institutional focus by studying law and economics.

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ECONOMIC ANALYSIS OF LAW6

The economic analysis of law unites two great fields and facilitates understanding each
of them. You probably think of laws as promoting justice; indeed, many people can think
in no other way. Economics conceives of laws as incentives for changing behavior
(implicit prices) and as instruments for policy objectives (efficiency and
distribution).However, economic analysis often takes for granted such legal institutions
as property and contract, which dramatically affect the economy. Thus, differences in
laws cause capital markets to be organized differently in Japan, Germany, and the
United States. Failures in financial laws and contracting contributed to the banking
collapse of 2008 in the United States and the subsequent recession, which was less
severe in Japan and Germany. Also, the absence of secure property and reliable
contracts paralyzes the economies of some poor nations. Improving the effectiveness of
law in poor countries is important to their economic development. Law needs economics
to understand its behavioral consequences, and economics needs law to understand
the underpinnings of markets. Economists and lawyers can also learn techniques from
each other. From economists, lawyers can learn quantitative reasoning for making
theories and doing empirical research. From lawyers, economists can learn to persuade
ordinary people—an art that lawyers continually practice and refine. Lawyers can
describe facts and give them names with moral resonance, whereas economists are
obtuse to language too often. If economists will listen to what the law has to teach them,
they will find their models being drawn closer to what people really care about.

6Baker, C. Edwin. “The Ideology of the Economic Analysis of Law.” Philosophy & Public Affairs, vol. 5,
no. 1, 1975, pp. 3–48. JSTOR, www.jstor.org/stable/2265019.

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METHODS OF LEGAL INTERVENTION

Enforcement Directorate7

Directorate of Enforcement is a specialized financial investigation agency under the

Department of Revenue, Ministry of Finance, Government of India, which enforces the
following laws:-

Foreign Exchange Management Act,1999 (FEMA) - A Civil Law, with officers

empowered to conduct investigations into suspected contraventions of the Foreign
Exchange Laws and Regulations, adjudicate, contraventions, and impose penalties on
those adjudged to have contravened the law.

Prevention of Money Laundering Act, 2002 (PMLA) - A Criminal Law, with the officers
empowered to conduct investigations to trace assets derived out of the proceeds of
crime, to provisionally attach/ confiscate the same, and to arrest and prosecute the
offenders found to be involved in Money Laundering.

The Directorate of Enforcement, with its Headquarters at New Delhi is headed by the
Director of Enforcement. There are five Regional offices at Mumbai, Chennai,
Chandigarh, Kolkata and Delhi headed by Special Directors of Enforcement.

Zonal Offices of the Directorate are at Ahmedabad, Bangalore, Chandigarh, Chennai,

Kochi, Delhi, Panaji, Guwahati, Hyderabad, Jaipur, Jalandhar, Kolkata, Lucknow,
Mumbai, Patna and Srinagar. These are headed by a Joint Director.

The Directorate has Sub-Zonal Offices at Bhubaneshwar, Kozhikode, Indore, Madurai,

Nagpur, Allahabad, Raipur, Dehradun, Ranchi, Surat, Shimla, Vishakhapatnam and
Jammu which are headed by a Deputy Director.

7 enforcementdirectorate.gov.in/index_home.html?p1=11910141573675453352, last accessed 31st

October 2019

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Regulatory Agencies8

A regulatory agency is a public authority or government agency which is responsible for

exercising autonomous authority over some area of human activity in a regulatory or
supervisory capacity. These regulatory bodies are set up to enforce safety and
standards.

These agencies also help in keeping a check on the malpractices that are anti-
competitive and can cause harm to consumers as well as the producers and the
economy as whole. They can also help in providing equal opportunities to different
individuals in the economy so they can also grow and help in the growth of the economy
as well.

In India, almost every sector of the economy has its own regulatory body. Some of the
major regulatory bodies in India are Reserve Bank of India (RBI), Insurance Regulatory
and Development Authority of India (IRDAI), Securities and Exchange Board of India
(SEBI) etc. These regulatory agencies also serve the purpose of facilitating the growth
and smooth functioning of the sectors they work in. These agencies have played an
important roles in the sound functioning of the Indian Economy.

Lately, many of these agencies have been targeted for flaws in their policies and have
been criticized and their working has been questioned time and again. Even when these
bodies are working, there have been cases of unfair practices, frauds, etc. For example,
the banking sector has drawn the attention of economists of the nation as the cases of
frauds, NPAs and negligent grant of loans of large amounts are being reported more
frequently. These cases are indicators of the mismanagement and corruption in the
banking sector especially in the Public Sector Banks. This can be harmful as these
incidents have enough potential to cripple the whole sector which is an important organ
of the Indian Economy.

8 https://archive.india.gov.in/sector.php#maincontent, last accessed 1st November 2019

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REFERENCES

Books Referred

 M.L. Jhingan, Microeconomics, Vrinda Publications, 2016

 M.L. Jhingan, Macroeconomics, Vrinda Publications, 2016
 M.L. Jhingan, The Economics of Development and Planning, Vrinda Publications,
2019
 H.L. Ahuja, Advanced Economic Theory, S. Chand Publications, 2018
 H.L. Bhatia, Public Finance, Vikas Publishing House, 2016

Articles Referred

 Baker, C. Edwin. “The Ideology of the Economic Analysis of Law.” Philosophy &
Public Affairs, vol. 5, no. 1, 1975, pp. 3–48. JSTOR,
www.jstor.org/stable/2265019.
 “Keynes’ Economic Theories Re-emerge in Government Intervention Policies”,
The Economist, 23 February 2009
 ALAN DEVLIN. “LAW AND ECONOMICS”. Irish Jurist, vol. 45, 2010, pp. 165–
197. JSTOR, www.jstor.org/stable/44027116.

Websites Referred

 Investopedia.com
 Brittanica.com
 Dictionary.cambridge.org
 Merriam-webster.com
 Economicsdiscussion.net
 Economicforum.ac.uk

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