Does law help or hinder the market? In order to grapple satisfactorily with such an open-ended challenge, this discussion will survey a wide spectrum of critical analyses from legal and economic standpoints examining the relationship between the law and the market.
For the purposes of this discussion, the definitions of market and law will be necessarily broad. ‘Law’ will essentially comprise commercial law in all its global and local permutations, including its components (common law, civil law, legislation) and practitioners (lawyers, judges, legislators). The impact of the law in general (beyond commercial law) will also be touched on. ‘Market’ refers to the practices of those engaged in any significant trade of goods or services, from small businesses to multi-national corporations, and will even encompass illegal markets.
The discussion will begin by posing two questions. Does law help the market? Does law hinder the market? It will then move on to consider the surprising thesis that rather than helping or hindering, the law’s impact on the market is in fact negligible. Finally, the discussion will attempt to draw together the arguments and pass some kind of judgement on whether law in fact should help or should hinder the market.
‘Law is multi-faceted and contradictory,’ writes McBarnet. She could easily be referring to the market, as well. In attempting to glean patterns and trends about the interaction of such complex, diverse organisms, this discussion will inevitably sacrifice detail for breadth. Hopefully, however, a general picture will emerge about the relationship between the law and the market.
DOES LAW HELP THE MARKET?
From the layman’s perspective, law would seem to help the market. After all, the purpose of the law is to create order and justice within society as a whole. It would be fair to assume that commercial law offers a framework that facilitates trade by promoting efficiency and trust and discouraging dishonesty and corruption through means such as contract law and trade practices legislation. This section will examine some of the arguments of those who contend that law helps the market.
Fundamentally, without an impartial legal system, the market would either descend into chaos or splinter into self-regulated, and inherently inefficient, corrupt factions. Although both outcomes have been disputed, there remain some staunch defenders of formalism, the ideal that a precise, rational, universal legal system will offer the greatest advantage for the market. In specifically contrasting the efficiency of the law to that of ‘group norms’, internal, ad hoc rules and customs, Posner argues that the law is ultimately more beneficial:
He argues that judges and legislators, who are presumably unbiased by the whims and pressures of the market, are far better placed to examine it objectively and determine overarching control mechanisms:
While the position of law’s superiority to customs has been supported by some, others have argued that the strength of law is in supplementing custom. Law doesn’t hinder the market, but is only really helps indirectly. Rose writes that the law is
It is worth noting that Benson similarly acknowledges the symbiosis of law and custom:
His point is that the strength of commercial law derives not from its objective standpoint towards the market, but rather because it grows from it and therefore is directly relevant.
An alternative strand of commentary arguing for the value of law for the market focusses on lawyers, and their ability to act as transaction cost engineers. According to Gilson and Mnookin,
Gilson’s work examining the importance of lawyers as facilitators, advisers and dispute resolvers within the market has been adopted by many commentators and used specifically to analyse the high-tech Silicon Valley computer industry. Lawyers were vital for the growth of the embryonic industry back in the late 1980s, not only because they offered vital legal services (contract, intellectual property) but because they brought with them ‘... elementary advice about such matters as record-keeping for tax and accounting purposes, and such basic legal services as the drafting of partnership agreements and secured financing documents.’ Furthermore, they could act as ‘all-purpose intermediaries, as links between entrepreneurs and financial sources, as well as between business and government agencies at all levels’. Likewise, Bernstein has isolated the factors why lawyers can have such value, especially for Silicon Valley:
Like most commercial lawyers, ‘[t]he Silicon Valley lawyer... thinks of himself as... a legal engineer... [H]is job is to solve problems: to take a principle, a task, and "engineer" it legally, showing how it can be done, or done best’. Although the lawyer could be considered a help to the market, if his ultimate goal is to circumvent an obstacle – the law – can law truly be said to help the market? This leads onto the next question.
DOES LAW HINDER THE MARKET?
While Gilson illustrated the ways in which lawyers could add value to the market, the prevailing perspective is less optimistic:
Likewise, Rose writes that lawyers
And to further belabour the point:
The common refrain is that lawyers are ultimately leeches, parasites who suckle at the artery of commerce; in other words, a hindrance. Kostal’s study of law and the railway industry in 19th century England illustrates how the legal system essentially crippled the railways commercially. The majority of railway cases brought before the courts resulted in a finding against the railway, no matter what the facts of the case were. ‘The ability of the companies to marshal formidable legal firepower in virtually every lawsuit was not enough to alter the unmistakable and remorseless anti-railway drift of the law’. Unsurprisingly, lawyers didn’t miss the opportunity to take advantage of the circumstances:
From 19th century England to contemporary United States, it is clear that little has changed:
And it isn’t just private individuals, represented by lawyers, who hinder the market,
These comments are echoed by McBarnet:
The prime concern of lawyers employed by businesses is in avoiding the law, finding loopholes, settling rather than litigating, avoiding the courts. ‘The legal system,’ Hedley writes, ‘is not necessarily the solution to business disputes; it is in large measure part of the problem, and knowledge of the legal system is used to limit that problem’.
McBarnet discusses in detail the ways in which the law is malleable, and how talented lawyers manipulate it to their clients’ advantage. Tax avoidance is an industry unto itself. She also argues that not only is the law easily circumvented by the market, but it is fundamentally flawed from the beginning, ‘an inadequate compromise riddled with exemptions and loopholes and lacking the teeth to give it any chance of success... law is just too slow to keep up with the pace of changing social and economic reality’.
Furthermore, according to Watson, lawmakers have little incentive to make the law more helpful for the market. After all, lawyers
On the balance of the arguments examined so far, then, it could be said that the law helps the market only in infrequent and limited ways. At the same time, aspects of law have a negative impact on market behaviour and tend to cause far more problems than they solve, with lawyers as the beneficiaries.
However, with so much effort spent in avoiding the law and minimising its impact, the sheer complexity of much of commercial law, and the difficulties of enforcing it, how much impact does the law truly have on the market?
DOES THE LAW NEITHER HELP NOR HINDER THE MARKET?
A popular school of thought argues that law’s impact on the market is essentially insignificant. ‘The overwhelming preponderance of evidence,’ Gava writes, ‘suggests that the law plays a minor role in market transactions’.
A touchstone for the study of non-use of the law by the market remains Macaulay’s research. Conducted initially in the United States during the 1960s, Macaulay discovered that ‘[n]ot only are contract and contract law not needed in many situations, their use may have, or may be thought to have, undesirable consequences’. The contracts used by the businessmen that Macaulay interviewed were frequently contradictory and often unenforceable, there was a widespread dependence on mutual trust and non-legal sanctions for breach. Their use of law was mainly restricted to the kind of supplementary role discussed by Rose earlier.
Further inquiries have demonstrated that Macaulay’s findings aren’t necessarily merely symptomatic of the specific era and circumstances in which he conducted his research. The non-use of law – especially contract law – has been illustrated in research of markets ranging from railway companies and suppliers to the US chemical industry.
White’s research into the latter is empirical, informative, and supportive of Macaulay’s thesis. ‘Contract law,’ he writes, ‘is a much less significant determinant of commercial behavior in complex transactions that the typical... lawyer dares believe’ White uncovered
Palay’s study of railway companies and suppliers provided similar results, demonstrating a wide-spread dependence on trust and non-legal sanctions, and a reluctance to ‘exploit short-term advantages if it would lead to harm in the long-run relation’ As Deakin puts it,
In other words, it is clear that non-legal customs and norms wield considerable influence from throughout markets. And when custom guides market interaction, then clearly the law’s influence is diminished. Hedley elaborates on how a trust relationship yields such custom:
In some cases, the trust relations and customs of some markets have spawned miniature legal systems that have virtually eclipsed the law. Bernstein’s research into some of these private legal systems (NYC diamond traders, the cotton industry) proves to be particularly interesting, and illustrate how self-contained and effective such independent mechanisms can be. Likewise, studies of markets as diverse as the New York Stock Exchange during the 19th century and Maghribi traders during the 11th century further illustrate the extent to which markets can self-regulate.
ILLEGAL MARKETS AND THE LAW
Illegal markets, by definition, operate outside of the law. Therefore, examining their relationship with the law is particularly fascinating, and directly relevant to the question at hand. Although buyers and sellers alike can face criminal punishment if caught engaging in illegal trade, the benefits of trading in prohibited markets are so high that for many, the risks are a minor consideration. In a perverse way, then, law may be seen to help illegal markets – by prohibiting goods or services, whether alcohol, narcotics or gambling, the law immediately creates a profitable market. That the production and distribution vacuum is invariably filled by organised crime is inevitable.
Much of the adult entertainment industry was illegal during the early 1960s, when Sturman started out, and it wasn’t long before he was indicted for the felony of distributing obscenity.
Sturman operated a complicated system of Swiss bank accounts and Canadian business fronts that effectively allowed him to remain in business for decades. The point is clear; the law was nearly powerless to stop Sturman from taking advantage of an illegal market, circumventing the law to his own advantage, and eventually becoming ‘... the wealthiest man in the state of Ohio’. If the law is unable to effectively control illicit markets, how can it hope to regulate legitimate ones?
SHOULD LAW HELP OR HINDER THE MARKET?
Law, then, seems to have only a minor impact on the market. Irrespective of the quotidian reality of the law/market relationship, a vital question remains. Should law affect the market? If so, should it help it or hinder it? Is a market unrestrained by the law a good thing?
Those who believe that law should help the market generally argue along the functionalist, anti-formalist lines of Llewellyn, that commercial law should derive from market custom and practice rather than from an abstract, objective legal standpoint. Brownsword argues for a ‘dynamic market individualism,’ that ‘reflect[s] the practice and expectations of the contracting community (particularly the business community)’ and continues to evolve along with market practice. As White puts it, ‘lawmakers must be more willing to make the law conform to the sensible practices of business and to accept the fact that the law is incapable of changing those practices except at great cost’.
However, there are detractors from the functionalist standpoint. Firstly, there are those who argue that custom is so idiosyncratic that ‘even if courts did have the capacity to identify custom there is no useful business custom for it to discover’ Nor is custom flawless, it ‘sometimes harms efficiency by excluding new entrants from trading or by achieving price collusion... [and] can overflow into criminal violence’.
Gava offers a particularly convincing case against functionalism, and essentially argues that law should hinder the market. Although specifically discussing contract, his comments are applicable to the wider commercial law:
The epitome of this can be seen in Bill Lerach, a lawyer in the United States who made his fortune bringing class-action lawsuits against large corporations, and recently made the headlines when he sued Enron. Toobin writes that up until now,
Although the work of Lerach and class-action lawyers like him is inherently self-serving (and obscenely lucrative), it nonetheless serves on the front-line of reining in the excesses of turbo-capitalism.
Whether one thinks that law should help or hinder the market is, of course, largely dependent on one’s perspective. Lawyers, judges and business operators will all be swayed by their own career interests. However, based on the arguments surveyed here, it seems clear that a market monitored carefully by an objective legal system will offer society at large more benefits than a legal system with the market’s interests at the forefront of its concerns.
Any conclusions drawn from this discussion must be pre-empted with a caveat. Attempts to synthesise a coherent ideology out of the diverse body of critical literature examined is nigh on impossible. And, ultimately, the market and the law are too complex in their interactions to make anything but broad generalisations about them. Gava poses a question that deftly summarises the quandary:
However, in examining whether law helps or hinders the market, common themes have clearly emerged. Firstly, despite the claims of a few detractors, traditional law is limited in its ability to help the market, and in many ways can be seen as a hindrance. However, in the broader scheme of things, the law’s impact on the market is more muted that common perception would suggest, and much effort is expended in avoiding and circumventing the law. In terms of whether the market should be helped or hindered by the law, the law should adopt a cautious attitude towards pro-market judicial activism and regulate business in a way that benefits broader society’s best interests.