I will start by saying I feel very confident that Law came before Economy or Business or anything approaching a “market.” As a matter of human evolution, before we could afford to have specialization and commerce, we lived in tribes and had to have security. Spears came before gears.
I’ve also long believed that Law has its origins in military or martial preparedness, from our earliest days. I don’t say this because I’m a military lawyer, either. It’s just hard for me to imagine that the earliest tribes didn’t develop their Law around security considerations first, even if it were just against nocturnal predators. Someone has to damn well sit watch and make sure the fire stays lit. Better if a couple of people can do it together. Those kinds of demands existed long before people were discussing where to get the latest trends in jade or pearl, or before human beings had even started using metal in the Bronze Age. I stumbled across an interesting article on the origins of western notions of law and the furthest back that records give us is to the Vikings, who passed on those considerations, in feudal form, to the Norman – from the word “Norsemen” or “Nortmen” – the name given to those Vikings who settled in the region that is today known as Normandy, France around the early 10th century. Their cultural influence would extend globally because of their conquests over most of the globe, including their repeated incursions across the English Channel that would culminate in the Battle of Hastings in 1066 AD.
Therefore, I’ll give “law,” in its most general sense, the deeper roots in our cultural traditions than economics and trade, but the reality is that security is what allows for the development of specialization by a people. Once there is adequate security, shelters are built, safety from the environment and other predators is assured, and then everyone can start working on their finest beads, or braiding or weaving or trading some coconuts for some of those yummy berries those other tribes living inland have.
Law, however, isn’t a necessary precursor to having commerce transacted. Deals, bartering, gambling, black markets in cigarettes and porn mags during war, are all an echo of the ancient military “customs” and mores of raiding that have been a part of the human condition, even when there is little law of which to speak. Of course, those examples presume some things outside of the system of the war itself, such as items with value to be traded, gambled, or bartered, but my point is merely to illustrate that as the article above indicates, you can have economies, even growing ones, even where there is not the “rule of law” as we know it, meaning the equal and just application of the law to all economic players.
Of course, markets have to have some “rules” to function, even if in their most primitive form. I’ve been to bazaars in eastern Afghanistan that are not too far from the ancient silk routes of the Khyber Pass. Even there, where some times it feels like you’ve stepped back in time four or five hundred years, there is a certain sense of business justice that tends to tamp down the worst of the excesses of sketchy merchants. It’s how ancient markets developed. You can only hope to fool people for so long with inferior goods or by conning them. Do it enough and people will eventually be waiting with pitchforks and a rope the next time you blow through town. In some sense, then, markets are built upon some “market propriety” in which you actually do have to produce a service or a good of a certain quality, for which people are willing to trust you for its quality if they’re going to exchange something of quality or value with you – and which you will have to trust that the person isn’t screwing you, either. Currency follows not long after, typically in the form of precious metals, or stones, or the like, and eventually reasonable disputes do arise as markets become more complicated. At that point, some cooler heads – usually business people interested in keeping the peace in the market, recognizing its value for their own livelihood and others – will assert themselves by either fiat or by consensus as you arrive at what I’ll call “market courts.”
Now, I should note that the foregoing is entirely based upon my own observations and some study of military history and law, but I’d not really done much research on the subject. I merely intuited/deduced it from observations of people and markets the world over in a variety of circumstances. In researching the subject while writing, however, I was pleasantly surprised to find that none other than Friedrich Hayek had written extensively about these self-same ideas in “Law, Legislation, and Liberty, Volume I: Rules and Order.” Ta-dah! As it turns out, Hayek discussed these concepts and tried to explain the emergence of Law from spontaneous human action, rather than from the imposition of some Law-Giver. A quick wikipedia search led me to the Lex Mercatoria, and while that article is certainly not complete nor comprehensive, it points to exactly what I have noted above: that merchant courts arose as a necessity of conducting business beyond the most simple forms of barter among tribes. As soon as specialization developed sufficiently for complex goods to be produced for trade, it would not be long before some portion of people would begin doing things like counterfeiting currency, making knock-off goods of inferior quality, etc. In short, one has to have lived only long enough to note that in any group of people, from your middle school gym class to law school, there will always be a few individuals unwilling to put in the effort required to succeed and, either as a result of weak character, shitty upbringing, or genetic disposition, who will think it better to cheat their way to success. This has been true since before the existence of the Holy Roman Empire or the Greeks or Egyptians and remains so through the housing crisis of 2008 and beyond. Some people will lie, cheat, steal to get ahead, including in commerce. As Paul Graham notes in the piece I previously linked to on Wealth
There are plenty of… ways to get money, including chance, speculation, marriage, inheritance, theft, extortion, fraud, monopoly, graft, lobbying, counterfeiting, and prospecting. Most of the greatest fortunes have probably involved several of these.
It might be that this recognition about human behavior is why economics is called the “dismal” science. This fact, when you really boil it down, lies at the heart of the difference between modern day liberals and classical liberals. Modern day liberals believe that corporations and capitalists are all greedy and evil and therefore we need Rules and Law – all imposed from some central authority to ensure order. From this we will have “better” outcomes for the greater number of people in society, invoking a very Utilitarian and Populist justification for rules, as well as generally cloaking their claims in moral language. Classical liberals, however – and particularly classical liberal economists, beginning with Adam Smith and moving forward to the Austrians like Hayek, and Friedman, and Sowell, and others – have attempted to explain to anyone who will listen the failures of planned economies and of top-down, centrally controlled markets. These are not new lessons, yet modern day Progressives continue to point to China as being (their hoped-for) exception to the rule that the Soviet economy, or the Venezuelan economy, or the Cuban economy, or the Italian economy under the Fascists, or the German economy under the Nazis, (etc.) all prove: centrally planned economies inevitably fail. And when they do, they fail badly.
Additionally, modern day liberals ignore the massive human suffering that always attends these centrally planned economies. Why is it, one might well ask, that centrally planned economies always seem to be attendant to repressive, authoritarian regimes? For example, even in China, where most of the recent news has finally taken the shine off of the prior claims by many liberal economists, the recent arrests of enemies of the regime, from billionaires to booksellers in Hong Kong – once a British (capitalist) protectorate that turned over to the communists in 1999 – raises questions about just how much authoritarianism can be tolerated and still deemed “utilitarian” enough if the five year plans are “effective enough.” In other words, let us suppose that China’s economy wasn’t sputtering like it is now, would the Progressives still be praising the Chinese economy and talking about the end of capitalism as an economic philosophy, like they were even five years ago, while people are being spirited away in the night only to show up later on Chinese State television to confess to “crimes against the people?” Is that “A-okay” with liberals as long as their fantasies about the success of socialism are fulfilled? Is it okay to “break a few eggs” (and by eggs, I mean “human beings”) in order to make the utopian socialist omelet? And if so, why is that okay for thee, but not for me? That is, why is it an acceptable externality for socialist governments to kidnap, imprison, or murder dissidents (see Square, Tianamen), but it is unacceptable to have any kind of poverty or negative externality of capitalism (accepting hypothetically that these are in fact natural byproducts of capitalist economies)? None of these questions are ever answered in any kind of serious or systematic ways, nor even addressed, at least not until the recent downturn in China’s economy, including the devaluation of the yuan and what appears to be the pop of a Chinese stock market bubble; a bubble that looks, at least to some, to have been inflated by the exact same kinds of easy credit, money-printing policies that continue to be advocated here in the United States.
Bringing this back more directly to the Law, it is important to understand that while Law may have come first, it is not a necessary precondition to markets. That said, when markets approach the scale and scope of the size of a nation, they involve widely disparate market participants, and then the Law that applies needs to account for the circumstances of more all of these disparate participants. Underlying all of these rules are principles that are destabilizing to socialist – and even crony capitalist – regimes. The common law method of deciding individual cases, in accord with principles articulated by even the judges in a “lex mercatoria” system, eventually conflicts with the underlying principles in both socialist and other corrupt systems. People – and thus, markets, which are just collections of individual purchasing decisions – react badly to the uncertainty that attends unequal treatment. If, for example, a person does not know how he or she will be treated in a dispute between their own economic interests and the government’s – or even just some Party official’s – interests, the first thing that will happen is that market players will inevitably become aware of this unfairness or uncertainty and avoid market interactions that might put their own resources unnecessarily at risk. This doesn’t require any kind of sophistication or higher education to understand. If you save resources, or work to produce something, and find yourself in conflict with some player in that market and no matter the justness of your cause, nor the other side’s perfidy, the other side always “wins” because of its control over the courts or ability to intimidate the arbiter, people will simply abstain from interactions with that actor or from the system entirely.
This isn’t some kind of capitalistic economic notion, either. It’s simple survival. The poorer you are, the less able you are to afford a “bad beat” from an outlier (e.g. corrupt) decision. Black markets are one example of this specie of phenomenon. Market participants (drug dealers and drug users) opt out of the governing system (the state and federal courts) and take their business “elsewhere” – outside of legal channels. Prostitution is the same thing. We jokingly call it the “oldest profession,” while simultaneously demonizing it, both morally and legally, sufficiently to marginalize market participants. This, ironically, has the effect of making both market participants more vulnerable to crime.
I had this once again brought home to me when I got selected for jury duty last week. Against all odds, and after telling both the prosecutor and defense attorneys (and the judge) in the case that I had been both a prosecutor and criminal defense attorney myself, I was empanelled to sit as a juror in a criminal case. The details of the case are unimportant, but one of the crucial aspects of the case revolved around the credibility of the putative victim. She was undoubtedly engaged in prostitution, yet could not admit that because it carries both a stigma and would have subjected her to criminal indictment herself. The police officer her arrived on the scene to take her statement about the claimed robbery even asked her point blank if she was “a working girl.” (We got to see the cop’s body camera footage and it was clear within 30 seconds that the cop didn’t buy her story). It was obvious to EVERYONE in the jury room that she was lying about what she had been doing, yet we had to factor in that obvious lying in the context of the larger story in making a determination of guilt about the defendant who, remarkably, ALSO took the stand in his own defense. And guess what? It was also obvious that HE was lying because the fact that the Law makes prostitution illegal means that from the start, both parties are now “criminals” from the start, and if something else criminal happens – an assault, a robbery, or whatever – neither party can avail themselves of courts (to the Law) for redress without lying.
This is not my only experience with these issues. When I was the Regional Defense Counsel for one of the Marine Corps’ three regions (I can’t remember which because I served in all three capacities at one time or another: WestPac, West, and East), we started to see more sexual assault allegations coming out of Afghanistan and Iraq. Interestingly, many of them – and I mean A LOT – all had the same kinds of fact patterns. There was some kind of consensual relationship between a male and female Marine that eventually culminated in some kind of sexual encounter, after which there was some passage of time – and THEN an allegation of rape after the sexual encounter became widely known throughout the unit, including to the significant others of both the male and female involved. Now, how the hell does this have anything to do with economics, you ask? Well, in Iraq and Afghanistan, there were standing General Orders that made it a crime to have sex while in country. Yes, you read that correctly. Some General Officer (who need not be named) made it a violation of a “General Order” for 18-22 year old men and women to have sex while deployed. This, we were told, was going to solve problems. (For the record, possession of pornography was also made a crime, though I don’t recall seeing very many prosecutions for that one alone. It was, however, frequently a throw-in charge to ensure that the accused could be convicted of something, and thus encouraging plea bargains, lest the accused have a federal conviction even if he chose to fight the underlying more serious charge and won).
In any event, the fact that sex was a crime meant that even in a consensual encounter, the woman was incentivized to claim rape because if she did, she would not be prosecuted and was, by statute and rule, entitled to “victim” status and thus, immune from prosecution. In fact, she was entitled to a victim advocate and to be moved from her unit solely based upon a sexual assault claim. While I blame these young women for false rape allegations – because if being an independent moral agent means anything, it means taking responsibility for such a serious failing – I also blame a system that creates such mal-incentives in the first place. Incentives matter. Making sex illegal immediately puts both parties in the position of having to lie about what occurred, much like it did in the case in which I was recently a juror.
On a final note about Law and economics, I should point out that the Law itself is filled with these kinds of “economic” considerations and we do a terrible job as a profession of understanding them and the affect they have on people’s lives. When I first showed up to Okinawa, Japan, in 1999, as a brand new defense attorney and Judge Advocate, I had no idea about what the local “market” was for any particular case. For example, I had a client charged with garden variety assault (at least as far as a Marine punching out another Marine at the Enlisted Club on a Friday night while drinking can be considered “garden variety”), and the evidence looked good enough that a plea/deal was likely. The prosecutor came to me soon after I got the case and offered a “great deal” if my guy would quickly accept it, waive certain rights, and take his lumps in front of a certain judge. Immediately, I had questions: “How do I know if it’s a ‘great deal’ or not? What is the ‘going-rate’ for a simple assault? Is the judge I’m going in front of likely to give my guy something close to ‘market rate’ or is this judge particularly harsh on sentencing?” Of course, I turned to other counsel in that jurisdiction to get answers.
This is a reality in criminal courts all across the country every day, by the bushel. I was able to dig up a rather scholarly look at these issues, though I haven’t read it fully yet to see if I agree with its thesis. Instead, I’ll just offer my own experience to be compared with the paper for either conformity or contradiction.
As I moved up the ranks and became a more seasoned trial practitioner, I had a fairly refined sense of what the judge’s in any jurisdiction would give on a host of crimes and under various circumstances. In the military, unlike most civilian jurisdictions or the feds, judges are merely filling a billet. They are not life tenured, nor even forever committed to being a judge. I’ve had friends that became judges and I’ve had to practice in front of them. Later, they left the bench and worked in other capacities, in which I might been have been senior to them by billet.
This means that in any jurisdiction there is a constant influx of new judges and thus the “market rate” for cases occasionally changes and has to be “reset” or re-evaluated by the market players, themselves only there temporarily. Notwithstanding all of this fluidity, in my career, I saw several occasions where new judges came to the bench who were “hardliners,” and imposed draconian sentences compared to what the “market rate” had previously been for the same or similar offenses. Inevitably, these were always met with the same response by defense counsel and defendants: opt out of the plea bargaining system. Everything became a contested trial with the concomitant need for jurors (members as we call them in the military justice system). Everything.
As one can well imagine, in short order, the system becomes bogged down. Wait times for disposition of cases increases. More motions get filed. This means more disruption to deployment schedules for the accused, victims, witnesses, and jurors – and eventually senior officers start asking, “Whisky Tango Foxtrot, over?” I’ve always found these moments rather humorous and illuminating – and part of why there was a need to create an independent defense bar within the Marine Corps (as an aside). Judges, convening authorities, and prosecutors who don’t understand the necessity for plea bargaining and negotiated settlements by market players inevitably are baffled by how this all happened. But it is exactly the same principle I’ve been discussing above with market courts – and the difference between top down planning and more market-based solutions. Those who believe they will enforce their own sense of morality or justice from the top down, without any consideration of the local “market” conditions, will inevitably force people to seek alternative venues – that is, through trials by jury. “It follows, as the day does the night” that the entire system is then crippled with extraordinary wait times for more trials, which eventually leads to loss of evidence, witnesses memories fading, diversion of police into court more and more often, and ultimately both victims and defendants both being denied a seasonable “day in court.” It also leads to ever more miscarriages of justice.
Ultimately, Law is a tool whereby market participants look for certainty in transactions and some guidance as to how they can and cannot behave within the market. People – particularly socialists – have a tendency to argue that “free markets” are really “unfettered” markets where the strong prey upon the weak, but as Hayek and many others have discussed – and I’ve been fortunate enough to witness firsthand – markets have a way of self-correcting. Predatory lending, for example, blamed for the housing crisis in 2008, is only viable where those lenders – as market participants – have an expectation that they are above the normal correcting processes of the market. “Too big to fail” proved them right. Those banks behaved horribly (in many cases) – but so did the government guarantors like Freddie Mac and Fannie May – and yet the very same people – liberals – who wail about such predatory practices were right there arguing that WE (the very people who were victimized by those practices) needed to step in and provide billions and billions of taxpayer loans and grants to save those same predatory lenders from their own malfeasance… or else something terrible would happen. It is always the spectre of some horrible hypothetical that hasn’t happened that justifies more and more intervention – which was exactly the cause of the market distortion in the first place. And yet, forever and always, it’s these (supposedly) “free” markets that are to blame. Perhaps not surprisingly, the lack of “Law” is also cited (i.e. Regulation) and used to justify ever more regulation. The Federal Register, which was first published in 1936, was 2,620 pages. As of 2013, it was over 80,000 pages. And yet, Progressives and liberals insist that what we really need is just more regulation to make the US economy “work right.” Perhaps it’s time to admit that these bureaucrats have no idea what they’re doing, especially when it comes to both Law (in the form of rules) and Economics.