Law in Flatland

Last updated on: September 29, 2016 at 12:00 am by Peter Leithart

Law in Flatland 2016-09-29T00:00:00+06:00 Peter Leithart

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Thomas Friedman announced over a decade ago that The World Is Flat. It’s gotten flatter since.

Friedman focused on how technology had dismantled hierarchies in politics, business, production, and distribution. More recently, Gillian Hadfield argues, “Digitization on a global scale converts objects and actions and ideas into glimmers of magnetism or electricity— where they remain until brought to life in some place, some time, some context that possibly no-one contemplated or could conceive.” With information technologies worming into everyday life and every corner of the globe, our world is flatter than ever.

Law has not kept up. What we need, Hadfield claims, is a fresh set of Rules for a Flat World. We need to build a new “legal infrastructure” that meets the needs of today’s world.

I know what you’re thinking: Another tired defense of dysfunctional, statist global institutions, a brief for more of the same. Far from it. Hadfield thinks global institutions are the problem rather than the solution: “Today the rules are designed almost exclusively in top-down fashion by elected officials and civil servants, often with the ‘help’ of well-heeled lobbyists and the politically-connected.” Leaving rule-making to the monopoly of legal professions won’t work. Lawyers are smart and well-trained, but ”most of what these lawyers and law professors are expert in is: doing what our legal systems do now.” They aren’t trained to innovate.

Legal systems and procedures designed for a hierarchical world won’t work in Flatland. Ordinary people must contribute to the construction of the legal infrastructure of the future. Hadfield’s book is a brief for legal innovation, driven by competition among markets for rules.

There are some unusual assumptions embedded in that summary. One of them is that economies depend on legal infrastructures. Hadfield uses “legal infrastructure” because she’s not merely interested in rules and procedures and institutions, laws, judges and courtrooms. Legal infrastructure includes the actual behavior of people in legal settings: “formal legal rules and procedures matter. But formal rules are just so many inky squiggles on paper if the mechanisms for connecting people’s actual behavior with the rules are missing or ineffective or too expensive. The function of the legal infrastructure we’re talking about is to provide a reliable framework for interaction—which mere words on paper can’t be without a lot of other features being in place.”

These procedures are essential to prosperous economics. To maker her point, Hadfield conducts a thought experiment about starting a business: “the deeper you get into your venture the more you will find yourself, knowingly and unknowingly, relying on legal resources to make your business a success. You’ll be negotiating deals with your early investors to give all of you comfort about what share of the business each of you will own and how free you’ll be to manage it without interference and whether you can be ousted if and when you take the company public with an IPO. You’ll be counting on rules of contract and employment law you probably don’t know exist that allow you to lay off employees if you are overly optimistic about how fast your business will grow, or to stop them from moonlighting for your competitor.” And so on and on.

The best legal infrastructures foster trust; they save money, time, and energy, reduce stress, and diffuse tensions because they provide procedures for resolving disputes; they protect property. Hadfield acknowledges that law is ubiquitous in modern societies, but sees law’s omnipresence as a natural result of the complexity of our interactions. Law provides rules for the places where we intersect with other people, which are always places of potential conflict.

One of Hadfield’s recurrent complaints is that we don’t know much about how our own legal infrastructure works. Immense amounts of time and money are spent to examine the inner workings of our health care system in minute detail. Very little is devoted to examining how our legal institutions operate, how they succeed and fail.

Another unusual idea is that there can be competition among legal infrastructures. She points to the medieval commercial revolution both to illustrate the the economic importance of legal infrastructure and to help us imagine a world with competing sets of rules: “Feudal lords and church abbots put on fairs to attract merchants from across the known world and knew that an attractive regime for protecting the property and enforcing the contracts of merchants was an important competitive tool. European cities such as Venice sent consuls to establish legal rules and procedures to adjudicate disputes involving Italian merchants living or traveling in the far-off lands of the Byzantine and Ottoman Empires.” In thirteenth-century England, foreigners were tried before juries that were half foreign, in contrast to Ottoman courts that permitted only Muslims to serve on juries, even when Christians or Jews were on trial. All of these “different entities were operating in their sphere to develop legal rules, competing either for legal customers or, in the more systemic sense of competition, for success vis-à-vis other entities—other courts in the same town; merchants from other cities; rulers and abbots seeking to establish fairs in other parts of the realm; cities from elsewhere in Europe.” American federalism retains echoes of this medieval system: We have competition among legal systems at the state level, which creates incentives for innovation. Compare, say, the regulatory structure of Texas, to that of California.

The rise of the nation-state in late seventeenth-century Europe brought an end to this competition. Nations offered “exclusively and comprehensive legal authority throughout a geographically defined region,” a “relatively recent phenomenon” in European history. At the same time, law became politicized, monopolized by government. Hadfield makes the true but startling observation that this politicization was not inevitable; the rise of the nation-state and the political monopolization of law were distinguishable historical processes.

Nation-states simplified a complicated legal patchwork. In the medieval period, “to know what law someone followed in any setting, one needed to know a great deal: what faith, what allegiance, what city of origin, what recent upheavals in the balance of power between distant kings, nobles and ecclesiastic officials, what the current mood of local landlords, barons and burgesses.” In the modern nation state, it’s much easier to achieve a near-universal knowledge of the operative rules.

For Hadfield, then, the nationalization and politicization of law brought economic benefits: “a shift to orderly rational planning, centralized in the nation state, generated a productive platform for the economies of the nineteenth and twentieth centuries. Comprehensive and high quality organization—of legal rules, of court processes, of legal training and practice—promoted a great set of standards on which the emerging mass-manufacturing economy could be built.” It also imposed costs. Political monopolization of law “relied heavily on top-down problem-solving: rules crafted in bureaucracies, discussed in committees, and voted upon by elected or appointed officials; finely-wrought analysis by highly trained judges supplied with evidence and arguments assembled by highly trained lawyers and legal scholars; educational standards and ethical rules developed in committees and adopted by state supreme courts and bar associations with exclusive power to decide who can and who cannot practice law.” That bureaucratization has the potential to inhibit economic activity.

In spite of the dramatic changes associated with globalization, our legal systems still look like they did in the nineteenth century. Meeting the legal-economic needs of today’s world means a move back to the future, a shift to something more like the medieval competitive market in rules: “where we can create competitive markets for the production of legal infrastructure, we can harness the power of markets to drive investment and innovation in legal infrastructure design. We can build up specialization in the knowledge of how legal infrastructure works and how it can be made to work better. We can get that information transmitted widely and systemically.”

Hadfield devotes a couple of chapters of her book to examining the effect of outmoded legal infrastructure on the “bottom of the pyramid,” the billions of people who do not live in societies with advanced legal systems. Many of the poorest poor are outside the law. They have no birth certificate or other documentation to establish legal identity. They can’t prove ownership of their assets, and hence cannot use assets as collateral for commercial loans. They don’t have the resources to navigate the complex process of registering a business, and don’t know the rules in any case. They operate in the “informal economy” by necessity, because the “formal economy” is the one founded on a legal infrastructure. They aren’t “entrepreneurs” but survivors.

Hernando de Soto and others have demonstrated that “the legal ordering of economic relationships in the informal economy is a critical step on the path to real economic development.” But that correct insight often goes off track because everyone makes the “mistake of assuming that this means coaxing, cajoling, and threatening the governments of these poor countries into enacting formal laws and building formal legal institutions.” We end up with a comic mixture of legal institutions that have little relation to the nation or its history, where Cambodia adopts a legal system based on “Japan’s civil code (itself based on the sophisticated German civil code), Australia’s property law, and Canada’s commercial court system.”

Poor people need legal infrastructure, but imposing the legal infrastructure of advanced nations on these rising economies does more harm than good. Poor countries have poor governments. Poor countries often have the highest costs for starting businesses. Haitians earn on average $1750 a year; starting a business costs about $4000. There’s a causal link here: Costs are high because the governments are poor. It’s expensive to streamline and simplify rules: “Simple, intelligent, and yet effective regulation is an expensive undertaking,” and poor countries cannot afford it. Top-heavy legal institutions are very expensive, affordable for wealthy countries but crippling for poorer countries.

Drawing on the example of ancient Athens, she insists that solutions will come from bottom up, from ordinary people who should be given freedom to form innovative, experimental sets of rules to govern their economic lives. Microfinance is one area where “ordinary individuals with a shared interest in enforcing a set of rules” has established a small-scale legal framework. Loan agreements are enforced not by formal law or courts, but in face-to-face meetings that exert social pressure to follow the rules. Expanding the scale of micr-initiatives is a huge challenge, but Hadfield thinks we can put technology to work for us, creating victual networks of borrowers that can function beyond the scale of a village.

Hadfield challenges the “taken-for-granted assumption that, by definition, what it means to have law is to have the set of legal institutions of the modern nation state. The assumption leads us to prescribe to ailing countries a remedy they can’t afford—and won’t be able to afford until they are healthy.” Here is one area where our knowledge is woefully inadequate. The “problem of figuring out what the people living in poor countries really need from law is probably one of the most complex the world has ever seen. And yet we invest almost nothing in trying to solve this problem, assuming that all it takes is the paraphernalia of modern law.” Perhaps Hadfield’s impassioned, compelling, highly readable book will inspire some attention to discovering rules for flatland.

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