Law, the rule of law, and property: a foundation for the private market and business study
Description: |
The first and principal cause of making kings was to maintain property and contracts, and traffic and commerce among men.
|
|
-John Davies, attorney general of Ireland (early 1600s)
|
|
When before the United Nations Economic and Social Council, Michel Camdessus, the Managing Director of the International Monetary Fund, was emphatic: respect for the rule of law and a legal system that enforces property rights and honors contracts are “essential foundations of the environment for investment.”(1) Several months later in a speech at the Warsaw School of Economics the now former IMF director repeated his belief, identifying “the rule of law and respect for property” along with “an independent judiciary and court system that can enforce contracts and property rights” as “principles that can act as lodestars for all countries….”(2) During the same period in 1999, he spoke in Russia, urging a “social contract” under the rule of law that would provide a new era of economic prosperity,(3) and he also met with the IMF Board of Governors, stating to it that the generation of “high quality” economic growth depended “in particular [on] respect for the rule of law and an independent judicial system that recognizes property rights, enforces contracts and protects basic citizens’ rights.”(4)
|
|
As the century closed, the IMF chief was not the only one affirming that law and an adequate legal system are a necessary foundation for a modern economic system. Addressing the United States Chamber of Commerce, UN Secretary-General Kofi Annan observed that “without rules governing contracts and property rights
|
|
At the very time that there is growing international recognition of law’s centrality to the modern private marketplace, some uncertainty exists regarding the rule of law in business study in the United States. Is law merely one of several external “perspectives” on business theory and practice,(11) along with various other political, social, ethical, demographic, and global considerations, or is it inextricably basic to education about enterprise?(12) The concern is that the “external perspective” view of law as applied to business study does not grasp what about law is foundational to the private marketplace and condones a distorted exaggeration of law as a vast rent-seeking system unnecessary to the actual functioning of business.(13) This view fails to recognize how law defines the very existence of the private marketplace in the heterogeneous nation,(14) and why future entrepreneurs, owners, and managers–those who above all others will benefit most from the marketplace–should be educated about the central role of law in business and inculcated in the legal institutions and values that found the wealth of nations.(15)
|
|
This article emphasizes that law is the formal social ordering force of modern society, a force which is fundamental for business practice under conditions of heterogeneity found in the modern nation-state and, further, that property, a particular institution of law, provides the basis for the private market and modern business. It explains that social values support the rule of law and maintains the importance of teaching business students why their own belief in the rule of law protects the property-based private market system by helping to sustain a legal culture that respects law and legal institutions. Finally, it advocates the theory and institutional significance of property as an educational foundation for business study. The ideas presented in this article are asserted as broad conclusions, leaving to interested others the many articles of scholarship necessary to their entire support, but even in their current form, these ideas reveal a central organizing principle for the legal studies of business, and for this purpose they are offered.
|
|
I. LAW AS AN ORGANIZING FORCE IN MODERN SOCIETY
|
|
Until about ten thousand years ago, humans lived in small bands that likely did not exceed 150 individuals.(16) With the advent of agriculture, however, homo sapiens began to organize into larger groups, forming tribes, then villages and cities
|
|
In the increasing organization of populations during the last ten millenia, humans have relied on various social forces for the order to hold together nations. Historically, custom and tradition have successfully ordered highly homogenous populations where new ideas and ways of doing things have been slow to emerge, but where heterogeneity of race, religion, and culture exists and technological and social change is rapid in contrast to that in more static societies, law is a crucial formal force establishing social organization and holding together diverse societies.(18) The feature distinguishing law from the custom and tradition that provide values upon which rules are based is its conscious formality. Law is an essential addition to customary ordering forces under the conditions of diversity and heterogeneity found in modern nations because it is adopted, implemented, interpreted, and understood “with knowing
|
|
Expressed formally through language, law contrasts with custom and tradition in ordering heterogeneous populations. Although the new ways in which customs and traditions establish social order may be reduced to words that provide common understanding in some instances, e.g., by anthropologists or sociologists, the role of those forces is often not easily accessible to strangers to a particular society nor even well understood by those whom it orders. Because custom and tradition are habits of a population, rather than conscious rules, they also do not change quickly nor well-accommodate to rapid social developments. As a social force that may be consciously appreciated, whose ordering intent can be known to a relatively high degree of certainty, law is easier for diverse populations to grasp than are customary forces, accommodates its rules more quickly to change, and is understood more readily by everyone as being what it is–the intentional establishment of social order–rather than simply “the way we do things,” “the right way to act,” or “the way God wants us to act.” By its conscious formality, law rather than traditional values can also order more effectively trade and other economic developments in the highly interdependent but culturally diverse nations of the shrinking globe.(19)
|
|
As a social ordering force, however, law may be as useful to the benighted despot as to the most benevolent legislature, and the state can use law to enslave as well as free its populace. Both dictatorships and democracies employ formal legal rules to maintain order. As a result, a democratic populace will prefer the rule of law to the rule by law, the former denoting a system of generally and equally applicable rules that apply even to lawmakers and the latter referring to a system of law merely as the commands of the lawmakers.(20) When laws are generally and equally applicable they will tend to produce a beneficial social order because lawmakers cannot benefit themselves exclusively but only as they also benefit the populace as a whole.(21) Under a true rule of law, lawmakers will likely secure private property because it advances the lawmakers’ interests even as it advances the common good. As the next section maintains, it is the law of property that establishes the private marketplace and creates the foundation for business.
|
|
II. LAW AS A FOUNDATION FOR BUSINESS
|
|
That law is the primary conscious ordering force in modern nations explains why law is also a foundation for business.(22) If by business one means the activities of the private market, then law is a necessary foundation for the promotion of business because the rules of the state create the private market (hereinafter marketplace) in the modern nation.(23) These rules create the marketplace by establishing private property (hereinafter property) in the limited resources that are voluntarily exchanged through this system. As broadly defined here, property is a set of legal rights to exclude others from interfering with one’s acquisition, possession, use, and transfer of limited resources. It premises the marketplace in at least three overlapping ways.
|
|
First, property identifies and protects the set of tangible and intangible resources that can be transferred in the marketplace. Without the legal identification of resources as mine or yours, business enterprise based on numerous, large-scale, often impersonal exchanges could not take place. In the absence of property, Wal-Mart, General Motors, and Microsoft could never have come into existence. A state of nature is not adequate for production, distribution, and finance in the modern nation. The marketplace requires the ownership of resources that is the legal institution of property.
|
|
Second, property provides necessary incentive to owners to risk improvement to resources by ensuring that they will benefit from the improvement and that others will not deprive them of the benefit. In such manner property encourages owners to farm or build upon land and entrepreneurs to start new businesses. Property also enables wealth-creation through the voluntary exchange of valuable resources by securing to parties in the exchange the benefit of their bargain. Property in resource exchanges is secured through contract law, which establishes rules for enforceable transfer and establishes remedies for breaches of agreement. Within the framework of contract, owners become willing to exchange resources through executory promises, those that require not only future exchange of resources but often exchanges at different future times. Because a property exists in executory promises, contract provides a legal remedy if one party to an agreement breaches its obligations to transfer the resources that are promised. It is difficult to envision a functioning modern economy where agreements to transfer resources are not enforceable through damage awards or specific performance.
|
|
Third, property premises the marketplace by creating security for capital borrowing and investment. Capital generation is made feasible by secured borrowing, which turns fixed resources like land into mutable and liquid form, and only in a property system that adequately identifies and registers a property right are lenders willing to make loans while borrowers remain in possession of land, inventories, or other resources. The system allows lenders to establish secure and identifiable property interests in borrower resources conditional on the repayment of loans. Without the security of property, capital lending would entail such risks as to be excessively costly in most instances. Likewise, identifiable property in stocks, bonds, and other securities is necessary to investor willingness to put capital investments into large-scale business organizations. Property is a sine qua non of the world’s competitive marketplaces and the property system that enables capitalism, the most productive expression of the marketplace, to flourish.(24)
|
|
In Western intellectual tradition, two major conceptions explore the philosophy of property: natural law and utilitarianism. In natural law, property is envisioned as a right that precedes civil society and is independent of it, an inviolable first principle that the state cannot legitimately alienate.(25) John Locke, the natural law philosopher upon whose ideas the founders of the United States heavily relied, argued that God has given the world “to men in common” but has also “given them reason to make use of it.”(26) Property begins as each individual has “a property in his own person….”(27) Additional property comes into being as an individual takes something from the common realm, and mixing labor with it, it becomes “the unquestionable property of the laborer,”(28) who can now possess, use, and dispose of it to the exclusion of all others, including the state.
|
|
Utilitarianism, a philosophy that underpins neoclassical economic theory, provides the second major conception of property origin. Jeremy Bentham, an eighteenth century contemporary of Adam Smith, recognized the importance of property, but he viewed the natural rights version of its origin as “nonsense upon stilts.”(29) Bentham asserted that “property and law are born together, and die together. Before laws were made, there was no property
|
|
The widespread implementation of property under the rule of law is a development apparently unique to modern Western culture, but why is the institution of property such an effective human incentive in generating wealth and prosperity? The answer may lie in the significance of resource acquisition in our biological heritage. Arguably, “property” is deeply ingrained in the human evolutionary past as an evolved individual preference to acquire and possess needed resources and the territory that provides them,(34) a preference connected to mating and survival(35) that developed during the hunter-gatherer period, which accounts for perhaps ninety-eight percent of our history as a species.(36) We are naturally willing to work hard for what becomes “ours,” but we are reluctant to work without return to ourselves solely to enhance the resources of strangers. Capable of cooperative effort and the reciprocal sharing of scarce resources, especially within our genetic cohort or band,(37) which are often one and the same, we are inclined to resist strangers who take what we consider ours.(38) However, we will trade with them, exchanging resources for mutual benefit, when we feel secure that what is ours will not be coerced or tricked from us. Acquisitiveness, possessiveness, and territoriality precede modern civil society and suggest the strong thesis that when a heterogeneous, populous society does not adequately accommodate this natural preference by recognizing “property,” it will not flourish(39) because, as William James concluded, an “instinctive impulse drives us to collect property….”(40)
|
|
By substituting evolved human nature for the biblical injunction giving humans dominion over the natural world, we see that the acquisitive propensities of our species can be explained through a neo-natural property law approach, yet the utilitarian Bentham is also correct. “Property” is neither a sacred principle nor a psychological preference to acquire and possess resources
|
|
In the common law and civil law systems, almost all areas of the law radiate from the broad concepts of the property system,(42) including that narrow modern body of law called “property law,” which includes rules regarding property in land and other tangible and intangible valued resources. Such law is vital as a foundation for the marketplace within which business activities take place. For example, in Russia where adequate law does not secure valued resources the risks of economic activity become prohibitive in many instances, and the economy has stagnated or declined.(43) Likewise, in some developing nations where the adequate rules of property are largely absent, the population lacks both the incentives and certainty to undertake productive wealth-maximizing activities(44) and, again, the economies in those countries do not perform to the level which natural and human resources might otherwise indicate.(45) Studies reveal that the economies of countries that enjoy secure property under a rule of law, which is the condition often termed “economic freedom,” regularly outperform the economies where property is insecure or non-existent.(46)
|
|
Contract law concerns the transfer of resource ownership, specifically, the keeping of express and implied promises to transfer resources both now or in the future, and this important area of law radiates strongly from the property system,(47) acting as the legal mechanism that enables voluntary exchange of resources. Contracts arise in business whenever transfer of resources that are mine or yours occur, whether or not formal written agreements take place, and contract law undergirds not only the transfer of goods but the sale of services as well, a basic human resource in which sellers have property. Phillip Nichols identifies recognition of contract law as the most salient feature of an economy that is emerging into the global marketplace,(48) since without such recognition international business interests are reluctant to reach trade and investment agreements. Absent long-term, established relationships, and such relationships are often missing in heterogeneous modern business economies, knowledge of the formal legal effect of contract law facilitates the trust and certainty necessary to place one’s resources under the control of strangers.(49) In the final analysis, contract law substantially lowers the costs of transacting business
|
|
Tort is another of the property system’s radial spokes. Unlike contract law in which the transfer of property is voluntary, tort law concerns compensation for the noncontractual injury that one actor inflicts on another’s owned resources through intent or negligence. The concept of property so dominates legal thinking that even injuries to persons can be conceptualized as property-related inasmuch as everyone, according to Locke, “has a property in his own person …”(51) As tort law determines both when losses wrongful injury to owned resources occurred and who must compensate whom for such harm, it affects the distribution of limited resources, can be controversial to status quo interests, and leads to calls for “tort reform.”(52)
|
|
Property law, contract law, and tort law are major divisions of the common law, each of which concerns the property system, but other areas of law also radiate from this system. Thus, the law of business organizations concerns the types of firms permissible for ordering property, and agency law involves how one can represent another for the acquisition and disposition of property. Commercial law, codified in the United States through the Uniform Commercial Code, is entirely property-centered law, a variant of contract law. Though not dealing only with issues of property, criminal law certainly focuses in major fashion on how the state deters and punishes offenses against a person’s property and the property that is one’s person. Family and domestic law also concern the property system, especially the parents’ obligation to support children with their resources and the division of marital property upon divorce.
|
|
The regulatory rules of the state, a part of administrative law, play a significant role in defining property, enhancing resource use, limiting the abuse of resources, protecting resources from encroachment, facilitating resource transfer, and redistributing resources. One of the most noticeable legal modifications of the property system in the twentieth century has been a development of state agencies regulating (1) anti-competitive business structure such as monopoly, (2) general institutions like the securities market, (3) specific industries such as aviation, nuclear power, pharmaceuticals, and agriculture, (4) employment practices involving labor unions and discrimination, and (5) the environment. The power of law not only initially defines property but also can subsequently redistribute resources, and the inherent provocation to owners in redistribution has made regulatory law, along with tort law, the subject of controversy.(53) But the controversy over the control, limitation, and redistribution of owned resources in no way changes the conclusion that law, the state’s rules accompanied by an enforcement system, is fundamental to property, business activity, and the private marketplace.(54) Debate over the contents of rules or bodies of rules will always likely occur, but the issue for business actors in the marketplace should never be law/no law, only the wisdom of specific laws as they support (or fail to support) property and other social ends.
|
|
The property system historically explains even constitutional freedoms. John Locke had an expansive view of property as the right to exclude others from the use of anything that one might value, including one’s own person and the expressions of one’s faculties. Locke referred to “lives, liberties, and estates which I call by the general name property”(55) and Locke’s admirer James Madison asserted that property “in its larger and juster meaning … embraces everything to which a man may attach value and have a right…. [A] man has property in his opinions and free communications of them…. In a word, as a man is said to have a right to his property, he may be equally said to have a property in his rights.”(56) Used in this broad way, property provides not only the foundation of the private market, but also the individual’s relationship to government in a constitutional democracy. The individual freedoms enjoyed under the Constitution are not a collection of disparate rights but rather subordinate aspects of property, the legal exclusion of others (in the constitutional case, the government) from one’s valuable resources.
|
|
In spite of the broad conceptual power of the term property in western civilization generally and the marketplace in particular, economic theory as taught in business schools has virtually ignored the foundational importance of law and the legal institution of property to private enterprise.(57) Historically, an assumption of standard economic theory has been that business activities take place in a world of zero transaction costs, and the famous Coase Theorem showed that in such a world no matter how property is assigned, voluntary negotiations between self-interested parties inevitably lead to arrangements that maximize wealth.(58) Under these conditions law is not fundamental to the marketplace and may be viewed as an excrescence that at its best merely recognizes economic preferences and at its worst thwarts efficient economic activity. However, the world of zero transaction costs is quite imaginary, and in the real world of business, the establishment of certainty, maintenance of trust, and minimization of risk in resource transactions entail substantial transaction costs. Securing something as mine instead of yours also involves costs as does the establishment of a mechanism for settling disputes involving transfer of what is mine to you. In his Nobel laureate address, economist Ronald Coase explained the real world of positive transaction costs and its significance:
|
|
If we move from a regime of zero transaction costs to one of positive transaction costs, what becomes immediately clear is the crucial importance of the legal system in this new world. I explained in The Problem of Social Cost that what are traded on the market are not, as is often supposed by economists, physical entities but the rights to perform certain actions and the rights which individuals possess are established by the legal system. While we can imagine in the hypothetical world of zero transaction costs that the parties to an exchange would negotiate to change any provision of the law which prevents them from taking whatever steps are required to increase the value of production, in the real world of positive transaction costs such a procedure would be extremely costly, and would make unprofitable, even where it was allowed, a great deal of such contracting around the law. Because of this, the rights which individuals possess, with their duties and privileges, will be, to a large extent what the law determines. As a result the legal system will have a profound effect on the working of the economic system and may in certain respects be said to control it.(59)
|
|
Coase went on to assert that due to the real world of positive transaction costs, the law should assign rights to those who can use them most productively and that through clarity the law should strive to keep low the costs of transferring rights. This result will obtain only if there is “an appropriate system of property rights.”(60)
|
|
Although it is possible to define law in positive terms as rules laid down by the state, the contents of laws, such as an “appropriate system of property rights,” necessarily implicate values. Law is fundamental to business activity predicated on private property, but business activity predicated on property is not fundamental to law. Instead, the support of the legal system for property is the formal expression of natural predispositions plus related social values that support acquisition, the individual, personal choice, and wealth maximization. As the next section on legal culture and business study argues, it is incumbent upon business academics to teach students how law, the rule of law, and property fundamentally enable the realization of these values.
|
|
III. LAW, THE RULE OF LAW, AND PROPERTY AS A FOUNDATION FOR BUSINESS STUDY
|
|
When the Soviet Union collapsed, those who would lead post communist-era Russia looked to the success of capitalism for ideas to reform their failed system. A decade later the dream of quick prosperity has shattered,(61) and the promise of a rising standard of living under the private market has not been realized. No one, however, suggests that Russia lacks the skilled labor, natural resources, or technological sophistication to develop a modern business system, leading to the conclusion that its failure has resulted from the lack of something else foundational to the private marketplace’s operation: Western-style legal institutions and a culture that embraces them.(62) Accounting for some of Russia’s problems is the fact that many state-controlled industries have never shifted to the competitive discipline of the marketplace, i.e., there has not been an appropriate legal conversion to a private property system.(63) Other problems have been caused by widespread corruption and an inadequate enforcement process to implement laws,(64) underscoring the need for a developed legal system to interpret and enforce rules and to settle disputes over owned resources.(65)
|
|
At a more deeply connected level, the core of business failure in Russia has been the lack of a legal culture possessing values that support the rule of law.(66) Without a legal culture comprised of persons who habitually comply with rules even when it is not always in their obvious or short-term interest to do so, the rule of law cannot order business or society
|
|
The Russian experience illustrates by negative analogy the significance of law, the rule of law, and property as a foundation for business study. Values underlie the legal culture that sustains a rule of law, and in law what Fredrich Hayek termed the “private sphere”(69) of property/personal liberty is expressed in rule-based terms that reflect cultural values. To understand, then, how these values are held together in a system of rules that constitute property, its protection, and the exchange of resources is foundational to any adequate program of business study. To appreciate that business activity is facilitated not only by business techniques but by deeply, perhaps naturally, held values that are formalized in the social order through the rule of law and property is vital to the understanding of how a successful private market functions in the modern nation state.
|
|
Business study quite properly has both foundational and applied areas. The applied areas involve the learning of skills encompassing bookkeeping, sales, personnel and consumer psychology, technology, and the raising and handling of capital. The foundational areas are law and economics, both of which explain and justify the private marketplace and both of which span entirely the business majors of accounting, finance, information systems, management, and marketing. Although economics is usually seen as scientific, involving study of principles of human behavior, and law is viewed as an institutional discipline,(70) each actually contains rhetorical elements that support the private marketplace with specific values.(71) Neoclassical economics, which is the economic approach generally taught in current business study, reflects utilitarian values that acting in self interest maximizes wealth and produces the greatest social good through the invisible hand of the marketplace
|
|
In the United States as in Russia, a legal culture must exist to support the values that underlie rules in order for law to secure successfully the private market, and business academics must not take for granted even in this country that our “appropriate” culture that supports the rule of law and property cannot deteriorate due to widespread ignorance regarding the institutional legal foundations of Western business success.(73) Formal education concerning the role and rule of law in society, therefore, appears imperative to support legal culture. Woodrow Wilson spoke eloquently to this point when he asserted: “Every citizen should know what law is, how it came into existence, what relation its form bears to its substance, and how it gives to society, its fibre, strength, and poise of frame.”(74)
|
|
What is true concerning education of the general population is even more so for business students: an understanding of the importance of the rule of law in modern nations and of law as a foundation of property and the private market should be fundamental for every student. Educating business students about the fundamental institutional role of law in the marketplace goes far beyond warning them of the sanctions that apply for disobeying legal rules. They must appreciate that property under the rule of law is the only framework for business activity in heterogeneous societies which best allows individuals to develop resources and at the same time to promote the maximum wealth of nations.(75) The basic utilitarian calculus applies not only to neoclassical economics but also in the rule of law and property that supports the marketplace. Students must also learn that acquisitiveness, possessiveness, and territoriality are somehow very basic to human nature and the wealth of nations but that these traits in order to cause societies to grow and flourish freely must be both encouraged and tempered by the rule of law and property as they establish the marketplace.
|
|
In part, law is a foundation of business study because, as Coase stated, the legal system has “a profound effect on the working of the economic system and may in certain respects be said to control it.”(76) Additionally, as significant as law is as a social theory necessary to the modern nation and to operation of the marketplace, it also has enormous practical implications for accounting, finance, information systems, management, and marketing: the applied areas of business study. The rules of law, arising primarily from the concept of property, permeate every facet of these areas, and although a course–or a dozen courses–is inadequate to teach every rule that impacts business, the framework and implementation of the legal system, along with enough understanding of legal rules to provide a vocabulary for communication about legal matters and an early warning concerning many legal pitfalls, can be taught in a few courses that provide a far more comprehensive and desirable way of learning about law than picking up rules concerning it in what frequently are costly employment or entrepreneurial misadventures. Law is fundamental to business study not only because the rule of law and property underlie wealth maximization through the private market but also because it interpenetrates actual business practice in every applied area.
|
|
John Adams observed that our republic is “a government of laws, and not of men.”(77) The rule of law has profoundly contributed to the United States’ development into the most productive and prosperous nation in the history of the world because here the law has most fully established the private sphere of “property,”(78) the extended metaphor representing our ownership of things but in addition connoting individual choice, personal liberty, and freedom from the coercion of others. In a world characterized by heterogeneity and diversity, yet at the same time by interdependence and the global village, the unreflecting bonds of custom and tradition cannot hold the social center and the centrifugal forces of rapid change threaten the stability of traditional societies. Modern nations require the order imposed by conscious rules to keep their populations from balkanizing and their social cohesiveness from disintegrating under the pressure of new knowledge, fresh possibilities, and, strange differences everywhere.
|
|
Not all legal rules promote the private market and freedom, and commands of the state can intrude upon as well as protect property in land, goods, and individual rights. When rules are detrimental to property as it promotes the common good, the law should arguably change, but the issue always concerns the appropriateness of particular regulations and not the primacy of law itself. Likewise, Western legal culture provides substantial support to property and personal liberties, and it is in the business community’s interest to obey laws and encourage compliance to the general rule of law.(79)
|
|
That business students in the United States appreciate the rule of law and the legal nature of property in sustaining the private market is fundamental to business education. For the 100,000 international business students,(80) especially those from developing countries, currently flocking to American schools from around the world to learn the secrets of Western business success, knowledge of law as the basis for prosperity and personal freedom is one of the most significant lessons they can take home with them. It is not adequate for them to understand only accounting, economics, finance, management, marketing, and technology. Many involved in the real world of business activity are increasingly convinced of the fundamental importance of law to development, efficiency, and wealth maximization. It remains now for academics to appreciate fully that law, the rule of law, and property are a foundation for the private market and business study.
|
|
(1) Michel Camdessus, Managing Director of the International Monetary Fund, Address Before the High-Level Segment of the 1999 Substantive Session of the UN Economic and Social Council (July 5, 1999), in M2 Presswire, July 7, 1999, at 4, available in LEXIS, News Group File.
|
|
(2) Michel Camdessus, Remarks Before the Warsaw School of Economics (Dec. 13, 1999) in M2 Presswire, Dec. 14, 1999, at 4, available in LEXIS, News Group File.
|
|
(3) IMF Chief Urges Radical Reform of Russian Economy, BUS. DAY (Thailand), June 17, 1999, at 1.
|
|
(4) Michel Camdessus, Address to the Board of Governors of the International Monetary Fund (Sept. 29, 1999), in M2 PRESSWIRE, Sept. 29, 1999, at 4, available in LEXIS, News Group File.
|
|
(5) Secretary General Kofi Annan, Address Before the United States Chamber of Commerce (June 10, 1999), in M2 Presswire, June 10, 1999, at 1, available in LEXIS, News Group File.
|
|
(6) Deputy Secretary General Louise Frechette, Address Before the Seoul International Conference of Non-Governmental Organizations (Oct. 10, 1999), in M2 PRESSWIRE, Oct. 14, 1999, at 2, available in LEXIS, News Group File.
|
|
(7) Charles Babington, Clinton Lobbies Two Nations, WASH. POST, June 6, 2000, at A1 (“In the first speech by an American leader to Russia’s parliament, President Clinton today urged the lawmakers to embrace a more open society that protects private property, free speech, religious expression and equal justice.” The president also said: “A strong state should use its strength to reinforce the rule of law, protect the powerless against the powerful, [and] defend democratic freedoms.”)
|
|
(8) Full Text of Statement Issued by G-7 Top Finance Officials, JAPAN ECON. NEWSWIRE (Apr. 15, 2000), available in LEXIS, News Group File (Group of Seven finance ministers and central bank governors urging “the Russian authorities to take action on critical economic challenges, such as establishing an impartial rule of law, including secure property rights and contract enforcement….”)
|
|
(9) Editorial, INVESTOR’S BUS. DAILY, Sept. 2, 1998, at A28 (stating that “U.S. stock markets owe their resilience to the underlying strength of the economic system here. Private property, contracts, the rule of law, and regular, free elections form the needed backdrop for economic growth and stock market advances.”)
|
|
(10) Henry T. Azzam, Arab States Urged to Liberalize Trade, Lure Investment to Bolster Growth, MIDDLE EAST NEWSFILE, Sept. 2, 1999, available in LEXIS, News Group File (Arab governments should enforce “contracts and property rights, clamping down on bureaucracy and corruption and implementing the rule of law” and put “in place an effective legal system with prudential supervisory frameworks that are rigorously applied.”)
|
|
(11) The external perspective view is that currently represented by the standards of the American Assembly of Collegiate Schools of Business. The AACSB’s “Business Accreditation Standards” state that “[b]oth undergraduate and MBA curricula should provide an understanding of perspectives that form the context for business. Coverage should include: ethical and global issues, the influence of political, social, legal and regulatory, environmental and technological issues, and the impact of demographic diversity on organizations.” See AACSB Accreditation at www.aacsb.edu/stand5.html (last visited Apr. 7, 2000). The “perspectives” are general in nature and presumably can be met by inclusion in various courses throughout the curricula. “Perspectives” differ from what the standards term “foundation knowledge” at the undergraduate level, which includes “accounting, behavioral science, economics, and mathematics and statistics.” Id. At the MBA level the standards refer to instruction in “core areas,” which encompass “financial reporting, analysis and markets, domestic and global economic environments of organizations, creation and destruction of goods and services, and human behavior in organizations.” Id.
|
|
(12) Historically, law has played a significant role in business education. At the very beginning of business education at the Wharton School, law subjects accounted for nearly a third of the coursework. See generally FREDERIC G. KEMPIN, JR., A HISTORY OF THE AMERICAN BUSINESS LAW ASSOCIATION (1974).
|
|
(13) For discussion of this exaggeration, see Penelope Eileen Bryan, Toward Deconstructing the Deconstruction of Law and Lawyers, 71 DENV. U. L. REV. 161 (1993)
|
|
(14) See, e.g., infra notes 43-46 and accompanying text.
|
|
(15) Basically, in a democracy cultural values are necessary for the adequate support of law and, therefore, the marketplace. If business students are not inculcated in the legal values that support the private marketplace, how can they, as subsequent members of the business community, defend the property system with social and political action? The interconnection of values and laws is discussed infra notes 62-73 and accompanying text.
|
|
(16) Nigel-Nicholson, Evolutionary Psychology: Toward a New View of Human Nature and Organizational Society, 50 HUM. REL. 1053, 1060 (1997).
|
|
(17) It is this interdependence, especially in the international arena, that makes the institution of law so vital to the twenty-first century. Stephen J. Coffey, Rule of Law and Regional Conflict, 19 WHITTIER L. REV. 257, 265 (1997) (stating that “[t]he fundamental norms of international law, public and private, are the key to stability and peace in an increasingly interdependent would”)
|
|
(18) In Western culture, law has been considered the primary social ordering force at least since classical times. Livy wrote: “Romulus called his people to a council. As nothing could unite them into one political body but the observance of common laws and customs, he gave them a body of laws….” TITIUS LIVIUS, THE HISTORY OF ROME 11 (Ernest Rhys ed. & Rev. Canon Roberts trans., J.M. Dent & Sons 1912). Of course, laws are usually based on custom and tradition. These different social forces are not necessarily antithetical, and in fact a culture of respect and obedience is necessary to effect the rules of law. See infra notes 62-73 and accompanying text. The formality of law, however, makes that social force more easily observed by the strangers with whom one must often deal.
|
|
(19) In other words, the promulgation and implementation of law forces lawmakers to think about ordering society, thus conceiving the option of organizational social change in economic and other areas, a conscious act impossible to the often unreflecting habits of tradition and custom. Cf. RICHARD A. EPSTEIN, PRINCIPLES FOR A FREE SOCIETY 35 (1998) (asserting that custom finds “it difficult to adapt sensibly to rapid discontinuities in traditional business or legal environments”). Douglass North has observed that as important as traditional values are in the ordering of society “[t]he move … from unwritten traditions and customs to written laws has been unidirectional as we have moved from less to more complex societies and is clearly related to the increasing specialization and division of labor associated with more complex societies.” DOUGLASS NORTH, INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE 46 (1990). The burgeoning Chinese economy has been accompanied by a corresponding growth in law, lawyers, and law degree programs. Testimony of Minxin Pei before the House International Relations Committee, FDCH Congressional Testimony, Apr. 30, 1998, available in LEXIS, News Group File (“Legal reform has become one of the most important institutional changes in China since the late 1970’s.”). The total number of lawyers tripled in China between 1986 and 1996, private law firms grew from seventy-three in 1991 to 2,655 in 1996, and between 1985 and 1996 “the rate of professional legal representation increased seven-fold in civil cases and 24-fold in criminal cases.” Id.
|
|
(20) ROBERTO MANGABEIRA UNGER, LAW IN MODERN SOCIETY: TOWARD A CRITICISM OF SOCIAL THEORY 176-81 (1976). “[T]he rule of law is defined by the interrelated terms of neutrality, uniformity, and predictability. Governmental power must be exercised within the constraints of rules that apply to ample categories of persons and acts, and these rules, whatever they may be, must be uniformly applied.” Id. at 176-77. Cf. Robert L. Bartley, Thinking Things Over, WALL ST. J., July 17, 2000, at A35 (“The foundations of our free society rest on the rule of law, the principle that laws apply to both high and lowly, that this is a government of laws rather than men.”). The sources quoted supra, notes 1-9 and accompanying text, all call for a rule of law.
|
|
(21) Of course, even in democratic systems, lawmakers can and often do establish rules that favor special interests, thus abusing the rule of law. The complete rule of law is an ideal, rather than an accomplished fact, in even the most constitutional of societies. The point is that a democratic populace that is educated in the rule of law and is well informed will be better able to resist legislative infractions of the rule of law and to insist upon generally and equally applicable rules.
|
|
(22) Cf. Prepared Testimony of Federal Reserve Chairman Alan Greenspan for Delivery Before the Committee on Banking and Financial Services, FDCH Political Transcripts, Feb. 17, 2000, available in LEXIS, News Group File (describing the “rule of law” as one of the “basic characteristics of our economic system”).
|
|
(23) CASS R. SUNSTEIN, FREE MARKETS AND SOCIAL JUSTICE 384 (1997) (“Free markets are legally constructed instruments, created by human beings hoping to produce a successful system of social ordering.”). Specifically, the implementation of property through the rule of law creates the private marketplace. E.g., Milton Friedman, The Social Responsibility of Business Is to Increase Its Profits, N.Y. TIMES MAG., Sept. 13, 1970, at 126 (referring to a “free market resting on private property”). Thus, “when property is privatized, and the rule of law is established, in such a way that all including the rulers themselves are subject to the same law, economies will prosper and civilization will blossom.” TOM BETHELL, THE NOBLEST VIRTUE: PROPERTY AND PROSPERITY THROUGH THE AGES 3 (1998).
|
|
(24) If the wealthier economies of the world are those where property systems allow for the generation of the capital needed for development and growth, the poorer economies are those that lack an adequate property system to generate needed capital. HERNANDO DE SOTO, THE MYSTERY OF CAPITAL 6-7 (2000) (asserting that five-sixths of humanity lack the property systems needed to create capital: “They have houses but not titles
|
|
(25) Hume called the “three fundamental laws of nature that of stability of possession, of transference by consent, and of the performance of promises.” DAVID HUME, A TREATISE OF HUMAN NATURE 526 (L. A. Selby-Bigge & P. H. Nidditch eds., Oxford at the Clarendon Press 1978) (1740). These three laws are subsumed in this essay under the one concept of property. Property implies the protected right of private possession, use, and voluntary transfer, including transfer by executory promise. It is a broad concept that theoretically encompasses all rights to exclude others from interfering with one’s valued resources. As to the breadth of the concept, see infra notes 39-53 and accompanying text.
|
|
(26) JOHN LOCKE, SECOND TREATISE OF GOVERNMENT 18 (C.B. Macpherson ed., Hacket Publishing Company, Inc. 1980) (1690).
|
|
(27) Id. at 19. See also id. at 27 (“[M]an, by being master of himself, and proprietor of his own person, and the actions or labour of it, had still in himself the great foundation of property….”) (original emphasis).
|
|
(28) Id. at 19. Compare HENRY GEORGE, PROGRESS AND POVERTY 333 (Robert Schalkenbach Foundation 1929) (1879) (“There can be to the ownership of anything no rightful title which is not derived from the title of the producer and does not rest upon the natural right of the man to himself.”).
|
|
(29) Jeremy Bentham, Anarchical Fallacies, in NONSENSE UPON STILTS 46, 53 (Jeremy Waldron ed., Methuen 1987) (1791).
|
|
(30) Quoted in BETHELL, supra note 23, at 173. A hundred and fifty years before Bentham’s assertion, Henry Ireton was arguing much the same thing on behalf of the English parliamentary army. JOHN PHILLIP REID, CONSTITUTIONAL HISTORY OF THE AMERICAN REVOLUTION: THE AUTHORITY OF RIGHTS 30-31 (1986) (“The Law of God doth not give me property, nor the Law of Nature, but property is of human constitution. I have a property and this I shall enjoy. Constitution founds property.”). Most contemporary authorities agree. MANCUR OLSON, POWER AND PROSPERITY 196 (2000) (“There is no private property without government–individuals may have possessions, the way a dog possesses a bone, but there is private property only if the society protects and defends a private right to that possession against other private parties and against the government as well.”)
|
|
(31) LOCKE, supra note 26, at 69. In fact it should not be surprising that Locke and Bentham are in substantial agreement concerning the societal importance of property. Getting beyond their initial points of departure reveals much substantive concord. See, e.g., EPSTEIN, supra note 19, at 15 (“[U]tilitarian principle, broadly conceived, supports–even dictates–many of the categorical conclusions that natural law thinkers took for granted.”).
|
|
(32) Jeremy Bentham, Principles of the Civil Code, in PROPERTY, MAINSTREAM AND CRITICAL POSITIONS 39, 53 (C.B. Macpherson ed., Basil Blackwell 1978) (1692).
|
|
(33) ADAM SMITH, THE WEALTH OF NATIONS 767 (Edwin Cannan ed., Modern Library 1994) (1776).
|
|
(34) “[O]ur attachment for property is of an ancient biological order.” ROBERT ARDREY, THE TERRITORIAL IMPERATIVE: A PERSONAL INQUIRY INTO THE ANIMAL ORIGINS OF PROPERTY AND NATIONS 103 (1996). For a discussion of the biological nature of acquisitiveness, possessiveness, and territoriality in other species, in children, and in early human societies, see PIPES, supra note 30, at 64-90. Cf. DAVID M. BUSS, EVOLUTIONARY PSYCHOLOGY: THE NEW SCIENCE OF THE MIND (1999). As a consequence of the drive to pass on one’s genes, resource acquisition is very significant to both genders and not only because resources are needed for individual survival. The argument is that females require resources from males to help support slow-developing offspring, and in the mating process they evaluate cues that males will be able and willing to share such resources. These cues include male strength and athletic prowess, good health, ambition, social status, commitment, love, and willingness to invest in children, but the most important cue is actual male possession of needed resources. Id. at 106-23. See also JAMES S. CHISHOLM, DEATH, HOPE AND SEX: STEPS TO AN EVOLUTIONARY ECOLOGY OF MIND AND MORALITY 169 (1999) (“[P]erhaps the most determinant of men’s capacity to make a difference in their children’s lives … has been their access to the resources that women require for bearing and rearing children of high reproductive value.”). For purposes of this essay, the implication is that for both genders, the right of individuals to compete for scarce resources through the legal framework of property best accommodates in the modern nation the evolutionary behavioral preferences of acquisitiveness and territoriality by guaranteeing “mine” and “yours” but at the same time by setting limits on acquisitiveness. Because of ancient imperatives, humans today will be more productive and feel “freer” and better protected under a legal regime of property than under any other social system. Professor Epstein advances an evolutionary analysis that is similar, yet not identical to this one. EPSTEIN, supra note 19, at 16-25.
|
|
The particular view expressed here concerning why individual resources are significant to human history is acknowledged to be tentative and controversial. On the other hand, it explains well what should be today a less controversial conclusion, namely, that as a general rule the state’s protection of individual resources leads to national wealth and personal freedom.
|
|
(35) Id. See BUSS, supra note 34, at 104 (“The evolution of the female preference for males offering resources may be the most ancient and pervasive basis for female choice in the animal kingdom.”). In a study of thirty-seven cultures totaling 10,047 individuals, “[w]omen across all continents, all political systems (including socialism and communism), all racial groups, all religious groups, and all systems of mating (from intense polygamy to presumptive monogamy) placed more value than men [roughly twice as much] on good financial prospects.” Id. at 108-09. Since female resource preferences engender male competition for valued resources, however, resources are important to each gender, and it is these resources that are acquired, possessed, used, and exchanged within the legal framework of property. In society the law of property provides the delicate balance of protection, restraint, and incentive in the human acquisition of resources to mate, procreate, and perpetuate the genes. See also PIPES, supra note 30, at 71 (asserting that “the leading causes of human acquisitiveness [are] the need of territory and of objects with which to sustain oneself and to procreate”). For a related view of human mating, see GEOFFREY F. MILLER, THE MATING MIND 187 (2000) (maintaining that males attract females through “public displays of physical and mental fitness”). Physical and mental fitness is both a resource and an important cue to the potential for acquiring other types of resources.
|
|
(36) See PIPES, supra note 30, at 86 (“Hunting and gathering is a mode of subsistence that has characterized perhaps as much as 99% of humanity’s past.”). This percentage is calculated on the advent of agriculture about 10,000 years ago, which initiated the end of the long hunter-gatherer period. See Nicholson, supra note 16. The hunter-gatherer period began with the emergence of homo sapiens about 300,000 to 400,000 years ago. TIM MEGARRY, SOCIETY IN PREHISTORY 128 (1995).
|
|
(37) See BUSS, supra note 34, at 236 (“[G]enetic relatedness is a pivotal factor in the decision rules of resource allocation.”).
|
|
(38) See ARDREY, supra note 34, at 249 (“An innate compulsion to defend one’s property lies, of course, at the heart of the territorial principle….”)
|
|
(39) As used in this context, flourish refers to advancing maximally toward prosperity, efficient resource ordering, and individual freedom. The argument is that heterogeneous societies that do not adequately accommodate natural acquisitiveness with the legal framework of property will not be as prosperous (other things considered) as those that do. See BETHELL, supra note 23, at 341 (“[T]he widespread and secure ownership of property is the sine qua non of prosperity.”)
|
|
(40) 1 WILLIAM JAMES, THE PRINCIPLES OF PSYCHOLOGY 293 (Dover Publications 1950) (1890). James subsequently repeated his belief that individual resource acquisition and possession is innate. WILLIAM JAMES, THE VARIETIES OF RELIGIOUS EXPERIENCE 315 (Martin E. Marty ed., Penguin Bks. 1982) (1902). (“[T]he instinct of ownership is fundamental in man’s nature.”). Although evolutionary psychology considers human resource preference to be an evolved psychological mechanism rather than a rigid instinct, the implication both of James and of evolutionary psychology is that societies which systematically suppress the individual acquisition or development of physical, intellectual, and creative resources will inevitably become–other things being equal–less wealthy, less technologically sophisticated, less creative artistically, and, overall, less “free” than societies where the law of property enables such individual acquisition or development.
|
|
(41) Property is the necessary framework for the maximum encouragement of prosperity, personal freedom, and even intellectual and technological development because these things all flow from the resource incentives that property creates, i.e., the law of property “frees” the natural preferences of individuals, male and female, to acquire, use, develop, and exchange resources, which is impelled not only by survival but also by mating and the perpetuation of the genes, and hence, the species. The legal institution of property promotes individual self-interest, but through the “invisible hand” of the marketplace in which individuals exchange scarce resources to their mutual advantage, it also advances the common good. Such an institution helps all persons, born rich or poor, to maximize the resources they have in themselves, including especially the resources of intelligence, creativity, strength, and motivation. Cf. infra note 45 (citing the fact that property helps the poor even as it helps the wealthy).
|
|
(42) Cf. BETHELL, supra note 23, at 20 (“Since Roman times, property has been the most important subdivision of the field of law.”). If law is, in Justice Holmes’ words, “a seamless web,” then property lies at the web’s center, and the other branches of law radiate outwards from property. Property is certainly central to the private marketplace. OLSON, supra note 30, at 196 (A market economy can “reach its full potential only if all participants have secure and precisely delineated rights to private property.”). See also infra note 46.
|
|
(43) In the early days following the collapse of the Soviet Union, consider how difficult it was simply to get food from the countryside to the hungry of the Russian cities:
|
|
Who owned the food that was going to waste? Who had authority to harvest it? Who owned the harvesting equipment? Who owned the trucks to transport the food to the cities? … The mere fact that food is going to waste in the fields while people are hungry in the cities is not enough to get food actually moving from farms to urban pantries. The right people must first acquire the appropriate information and incentives. Under a system of clearly defined property rights, people with information about the situation would have strong incentives to acquire control of whatever resources were needed to move food from where it had no use to where it did. And within a system that allows for free exchange among property owners, the necessary resources will quickly and at low cost come together under the control of those who can put them to valuable use.
|
|
PAUL HEYNE, THE ECONOMIC WAY OF THINKING 75 (7th ed. 1994).
|
|
(44) Cf. SUNSTEIN, supra note 23, at 207 (“When property is unowned, no one has a sufficient incentive to use it to its full advantage or to protect it against exploitation. The creation of private property overcomes this problem.”). That some nations prosper with adequate property laws and other nations suffer economically with inadequate or no property laws does not suggest that the particular laws of prosperous nations should be imported in toto by poor nations. As North asserts, transferring the formal rules “of successful Western market economies is not a sufficient condition for good economic performance.” Douglass C. North, Economic Performance Through Time, 84 AM. ECON. REV. 359, 366 (1994). The enforcement mechanisms and “informal norms” that provide legitimacy to the rules are also vital. Id. See also Padma Desai, A Russian Optimist, CHALLENGE, May 1, 2000, at 5 (quoting Yegor Gaidar, former acting prime minister of Russia: “America had some features of a civil society before independence. It developed into powerful traditions of contract enforcement, rule of law, protection of property rights, and democratic procedures. If someone were to introduce the American constitution and American laws from A to Z in another society, he would fail miserably. The American model functions in America because of its history.”)
|
|
(45) An implication of the fact that appropriate property law can benefit developing nations is that the institutionalization of such law helps the poor as much or more than it does the wealthy. Principally, property enforcement by the state protects the resources of the poor and weak from the predations of others, providing a secure base for resource accumulation and capital development. See BETHELL, supra note 23, at 202 (“[I]f property laws are applied equally, they will work above all to the advantage of the poor.”)
|
|
(46) See generally 2000 INDEX OF ECONOMIC FREEDOM (Gerald P. O’Driscoll, Jr. et al. eds., 1999). In this annual index four of the ten categories measuring economic freedom relate specifically to legal conditions, including property guarantees, in the 161 measured countries. The remaining six categories (e.g., a securities market) are meaningful only when adequate property law is in place. Overall, the index showed a strong positive correlation between growth and the legal framework for economic freedom. Accord JAMES GWARTNEY et al., ECONOMIC FREEDOM OF THE WORLD: 1975-1995 (1996) (stating that nations with the largest increases in economic freedom, defined by the core factors of personal choice, protection of property, and freedom of exchange, registered 2.7% annual GNP growth from 1980 to 1994, whereas nations where the index of economic freedom fell the most averaged 0.6% annual GNP declines during this period)
|
|
(47) BETHELL, supra note 23, at 85 (“The emergence of free markets was in many respects synonymous with … the emergence of such institutions as contract in which the state enforced agreements to exchange property on terms that were agreeable to both parties.”)
|
|
(48) Nichols asserts that as economies emerge into the international business arena, they move from property transactions based on relationships to those based on contract, which are more formal and legal. Philip M. Nichols, A Legal Theory of Emerging Economies, 39 VA.J. INT’L L. 229, 233-34 (1999). The movement from relational economies to institutionally formed (legal) economies fully supports the argument of this article that law is a necessary foundation for business and business study under conditions of heterogeneity such as exist in international business transactions.
|
|
(49) Id. See also John Humphrey & Herbert Schmitz, Trust and Inter-Firm Relations in Developing and Transition Economies, 34 J. DEV. STUD. 32, 45 (1998) (“The law [including contract law] supports trust by reducing uncertainty.”). Without the certainty of contract, trade is generally limited to a relatively small group. Joseph E. Stiglitz & Lynn Squire, International Development: Is it Possible? The Frontiers of Knowledge, ASAP, Mar. 22, 1998, at 138, available in LEXIS, News Group File (“If there is no accepted recourse in the event of failure to honor a contract, business relationships will remain confined to family members and close acquaintances, resulting in lower levels of investment and less efficient allocation.”). Cf. OLSON, supra note 30, at 185 (“Without the right institutional environment, a country will be restricted to trades that are self-enforcing.”).
|
|
(50) See supra notes 7-8 (quoting the presidents of Indonesia and Nigeria).
|
|
(51) LOCKE, supra note 26, at 19. Thus, he is “proprietor of his own person.” Id. at 27. If the use of property in this context seems extraordinarily wide, consider that the word conceptualizes the legal exclusion of others from one’s valuable resources, and the exclusion of others from harming the resources of one’s person seems appropriate when discussing the relationship of tort to property. Remember also that the purpose of this article is to show that law provides a fundamental principle underlying modern business, which principle is the institution of property under the rule of law. A certain reductionism is therefore appropriately heuristic.
|
|
(52) Discussions of tort reform can be found in the articles cited supra note 13.
|
|
(53) As far back as the eighteenth century, Adam Smith complained of the Duke of Cornwall’s tin mining regulations that the “sacred rights of private property are sacrificed to the supposed interests of public revenue.” SMITH, supra note 33, at 196. A system of private property does not end disagreement over the distribution of resources. How “voluntary” an exchange of resources is, whether one’s use of resources interferes with another’s property interest, the appropriateness of taxation, and society’s responsibility to its weak, young, old, and sick members are but a few resource issues that ignite disagreement and require a legal system for their resolution. The actual setting of limits to resource acquisition, use, and exchange, however they are conceived, will also implicate law and the legal system.
|
|
(54) It is difficult to overemphasize this point. Without an adequate education in the role of law as it supports the economic system, business students may all too easily dismiss the significance of law, lawyers, and the courts, conflating their disapproval of particular rules and features of enforcement with a rejection of the legal system.
|
|
(55) LOCKE, supra note 26, at 66. Around the time of Locke, others were making similar expressions. See HOWARD NENNER, BY COLOUR OF LAW: LEGAL CULTURE AND POLITICS IN ENGLAND, 1660-1689 36 (1977) (quoting Sir Matthew Hale that “Every man hath an unquestionable property in his own life and in his own self” and William Petyt that British subjects “had a right and Property in their lives and Estates”). For the general implication of this expansive view of property, see PIPES, supra note 30.
|
|
In Western thought during the seventeenth and eighteenth centuries it [property] acquired a still more comprehensive meaning to include everything that one can claim as one’s own, beginning with life and liberty. The whole complex of modern ideas connected with human rights has its source in such an extensive definition of property.
|
|
Id, at xii (emphasis added). Accord C. B. Macpherson, Introduction to Jeremy Bentham, PROPERTY, MAINSTREAM AND CRITICAL POSITIONS, supra note 32, at 7 (maintaining that “in the seventeenth century, the word property was often used … in a sense that seems to us extraordinarily wide: men were said to have a property not only in land and goods and in claims on revenues from leases, mortgages, patents, monopolies, and so on, but also a property in their lives and liberties.”)
|
|
(56) Quoted in PIPES, supra note 30, at xii. Indeed, it is no exaggeration to assert that the Revolutionary War was fought over property issues:
|
|
[V]irtually every grievance identified by the colonists could be defined as either the endangering or the loss of a property right. Not only was taxation levied by a parliament in which the Americans claimed not to be represented an invasion of property, but so too was any apparent limitation on the right to be tried by a jury of one’s peers. At every stage in the controversy to 1776 and beyond, Americans claimed to be defending property rights.
|
|
P.J. Marshall, Parliament and Property Rights in the Late Eighteenth-Century British Empire, in EARLY MODERN CONCEPTIONS OF PROPERTY 533 (John Brewer & Susan Staves eds., 1996). For a detailed argument of how freedom of speech from colonial times to present depends upon the concept of property, see John McGinnis, The Once and Future Property-Based Vision of the First Amendment, 63 U. CHI. L. REV. 49 (1996).
|
|
(57) A survey of ten general economics textbooks published since 1995 shows only one that recognizes law and property as central to understanding economic activity. See ROBERT B. EKELUND, JR. & RICHARD AULT, INTERMEDIATE MICROECONOMICS–PRICE THEORY & APPLICATIONS 12-25 (1995)
|
|
(58) Coase asserted this result about the zero transaction cost world prefatory to observing that it is not the real world. See infra note 59 and accompanying text. The fundamental reading is Ronald H. Coase, The Problem of Social Cost, 3 J. LAW & ECON. 1 (1960).
|
|
(59) Ronald H. Coase, The Institutional Structure of Production, in NOBEL LECTURES IN ECONOMIC SCIENCE 11, 17 (Torsten Persson ed., 1997) (emphasis added).
|
|
(60) Id. (emphasis added)
|
|
(61) According to a 1999 United Nations report, the GNP of the Russian Federation fell by forty-one percent between 1990 and 1997. Cited in DE SOTO, supra note 24, at 215.
|
|
(62) In his 1993 Nobel lecture, economist Douglass North asserted: “We cannot account for the rise and decline of the Soviet Union and world communism with the tools of neo-classical economic analysis….” North, supra note 44, at 366. North goes on to observe: “It is the admixture of formal rules, informal norms, and enforcement characteristics that shapes economic performance.” Id. “Formal rules” are laws
|
|
(63) Michael A. Heller, The Tragedy of the Anticommons: Property in Transition from Marx to Markets, 111 HARV. L. REV. 621, 623 (1998) (stating that current private property in Russia is not structured so that any individual has “a bundle of rights that represents full ownership of scarce resources”)
|
|
(64) Virginia Postrel, Low Fidelity: Russia’s Pretend Capitalism, 30 REASON 4 (1998) (citing a study of economist Daniel Kaufman stating that “[b]ribes cost $30,000 a year for a small entrepreneur in Russia….”). See also Andrew Higgins, EBRD Says Dispute Tests Russian Legal System, WALL ST. J., Mar. 1, 2000, at A12 (stating that foreign investors frequently are frustrated by Russian courts which are “tainted by allegations of corruption”)
|
|
[O]ne reason why many societies have a lot of corruption in government is that they prescribe outcomes that all or almost all private parties have an incentive to avoid, and no one in the private sector has an incentive to report violations to the authorities. Moreover, when caught in violation of the rule, those on both sides of the market have the same incentive to persuade or bribe the officials not to enforce the law. Essentially, all of the private-sector incentives are on the side of undermining the rules.
|
|
Sooner or later, the government becomes corrupt and ineffective.
|
|
(65) The need for law and adequate legal systems is endemic to developing nations. See Lan Cao, Law and Economic Development: A New Beginning?, 32 TEX. INT’L L.J. 545 (1997) (“As transitional economies in Eastern Europe, Africa, and Asia adopt measures to loosen the monolithic hold the state once exerted on the economy … the relationship between law and economic development is becoming all the more urgent.”).
|
|
(66) Symposium, Constitutional “Refolution” in the Ex-Communist World: The Rule of Law, 12 AM. U. J. INT’L L. & POL’Y 45, 62 (1997) (“Finally, there is a long-term problem not just for Russia, but even more so for other post-Soviet states, of building, or to be more accurate, `growing,’ a legal culture supportive of rule of law institutions.”) (statement of Robert Sharlet)
|
|
(67) Bentham says, “[N]o habit of obedience, and thence no government–no government and thence no laws–no laws, and thence … no property….” Bentham, supra note 29, at 53.
|
|
(68) Even in the West a legal culture or social consensus is required to support the rule of law. E.g., Barry R. Weingast, The Economic Role of Political Institutions: Market-Preserving Federalism, 11 J.L. ECON. & ORG. 1, 26 (1995) (“The critical feature for England and the United States is that the success of constitutional constraints promoting the rule of law depended on the emergence of a social consensus about the appropriate limits of the state.”).
|
|
(69) HAYEK, supra note 47, at 139.
|
|
(70) To say that law is an “institutional discipline” means that it is a vast body of knowledge, compounded of historical material, modes of textual analysis, and various philosophical concerns. It is a formal inquiry into our behavior and ideals that proceeds essentially through language. It is a humanistic study — both as a body of material wrought of words and a set of analytic skills and procedural claims involving linguistic mastery.
|
|
A. Bartlett Giamatti, American Public Needs to Learn More About the Law, LEGAL TIMES, Nov. 29, 1982, at 8. As an institutional discipline, law provides the foundation for business, a recognition both implicit and explicit in the economic study of institutions. See NORTH, supra note 19. North describes institutions as “rules of the game” and the “constraints that shape human interaction” and “structure incentives in human exchange.” NORTH, supra note 19, at 3. Although informal values also comprise institutions, many institutions that North focuses on are legal ones such as “the United States Constitution” and “the common law.” Id. at 4. These institutions found business because “institutional constraints result in particular exchange organizations [e.g., businesses such as corporations] that have come into existence because of incentives embodied in the framework and therefore depend on it for the profitability of the activities that they undertake.” Id. at 8. Cf. Coase, supra note 59, reminding economists “that what are traded on the market are not … physical entities but the rights to perform certain actions and the rights which individuals possess are established by the legal system.” The institution of property establishes the basis for trade.
|
|
(71) See generally Donald N. McCloskey, The Rhetoric of Law and Economics, 86 MICH. L. REV. 752 (1988). Economic historian McCloskey suggests that economics is “misused” when it is “represented as a nonmoral science like meteorology.” Id. at 766. He adds: “If the noble science of the economy is to have an effect on the noble science of the law, it must not achieve it by a specious rhetoric of authority, arguing that economic reasoning is especially scientific or objective or some other word from the philosophical ruminations of sophomores.” Id. Samuels argues that law and economics are not “distinct spheres” at a deep level and that the values of law and economics merge. Warren J. Samuels, The Legal-Economic Nexus, 57 GEO. WASH. L. REV. 1556, 1558 (1989) (defining “the legal-economic nexus” as “the sphere of what is really going on at the deepest level of social existence”).
|
|
(72) From 1751 to 1763 when Smith was formulating the ideas that make up The Wealth of Nations, published in 1776, he held the position of Professor of Moral Philosophy at the University of Glasgow. SMITH, supra note 33, at vii.
|
|
(73) One can point to resource redistribution trends in the United States that began with progressive income taxation, land use regulation, and the New Deal, as evidence of a deterioration of the values supporting a legal culture committed to property and laws of general and equal applicability. See, e.g., BETHELL, supra note 23, at 293-309. Whether this evidence overstates the case for deterioration is arguable, but that the populace generally and business students in particular need to appreciate law, the rule of law, and property as the institutional basis for understanding economic prosperity seems indubitable and incontrovertible. In falling to understand the property foundation of capitalism, “there always remains the possibility that the West might damage the source of its own strength.” DE SOTO, supra note 24, at 8.
|
|
(74) Quoted in O. LEE REED ET AL., THE STATUS OF LAW IN ACADEMIC BUSINESS STUDY: 1998 REPORT OF THE PRESIDENT’S TASK FORCE 11 (1998). A former president of Yale University, who is not a lawyer, more forcefully expressed the need for education concerning law: “I think America’s ignorance about the law is neither inevitable nor trivial. I also think it is a scandal.” Giamatti, supra note 70, at 8. He also stated: “I think … the first responsibility to educate about the law lies with the centers of education.” Id.
|
|
(75) Cf. NORTH & THOMAS, supra note 30, at 1 (stating that the “affluence” of the West is “a new and unique phenomenon” and a “unique historical achievement” dependent upon the incentives created by “the establishment of institutional arrangements and property rights”).
|
|
(76) Coase, supra note 58.
|
|
(77) 4 JOHN ADAMS, THE WORKS OF JOHN ADAMS 106 (Charles Francis Adams ed., Little Brown 1850) (1774). Compare Marbury v. Madison, 5 U.S. 137, 163 (1803) (Marshall, C.J.) (“The government of the United States has been emphatically termed a government of laws, and not of men.”).
|
|
(78) The basis for this business productivity was foreshadowed by de Tocqueville, who wrote: “In no country in the world is the love of property more active and more anxious than in the United States
|
|
(79) Cf. HAYEK, supra note 47, at 159 (“Yet few beliefs have been more destructive than the idea that the rule is binding only if the beneficial effect of observing it in the particular instance can be recognized.”).
|
|
(80) In 1997-98 there were 100,395 international students studying business and management in the United States. INSTITUTE OF INTERNATIONAL EDUCATION, OPEN DOORS REPORT ON INTERNATIONAL EDUCATION CHANGE 64 (Todd M. Davis ed. 1998).
|
|
O. Lee Reed, Professor of Legal Studies, Terry College of Business, University of Georgia.
|
|