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 attorney generals, 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' attorney generals 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 even though you might have paid only $40,000 for your home 30 years ago 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.