All Commentary
Tuesday, January 5, 2010

The Legal Foundations of Free Markets

The Legal Foundations of Free Markets, a recent book from the veteran British free-market Institute of Economic Affairs, brings together essays by nine leading experts in law and economics that delve into the interface between the legal system and the economy. The book blends historical analysis, economics, and legal theory, yielding many penetrating insights.

Each of the ten essays is an estimable work, but some are likely to be of particular interest to Freeman readers. I’ll focus on four.

At the top of that list, I would place Peter Leeson’s essay, “Do Markets Need Government?” Most free-market advocates assume that “the rules of the game” must come from and be enforced by the government. Leeson, however, argues that market participants may do a better job than the State, writing, “The long-standing existence of vibrant markets under conditions of real or quasi-statelessness suggests that private ‘rules of the game’ must be possible without  government.” In commercial transactions, he points out, the participants have a lot at stake in the performance of contractual obligations.

That led them to develop commercial law completely independent of government, as well as tribunals to adjudicate disputes. Those tribunals did not have enforcement powers, but the need to maintain a good business reputation minimized flouting of their decisions. Violators were apt to face ruinous ostracism. Adam Smith’s “invisible hand” worked remarkably well.

Leeson goes on to show that the spontaneous order of the market also devised mechanisms to deal with criminal conduct. After reading his essay, it’s evident that the Hobbesian notion that society would be chaotic violence without a powerful state is untenable.

Another particularly valuable contribution is the late Norman Barry’s essay, “Economic Rights,” in which he laments that “for most of the time, in all countries, economic rights have been at the mercy of legislatures . . .with little or no protection from the courts or written constitutions.” He attributes this unfortunate state of affairs to the abandonment of the Enlightenment concept of the unity of liberty. In this concept, economic liberty is integral to an overall concept of liberty; most modern thinkers, by contrast, conclude that some aspects of liberty are important and others are not. They say they can tell wheat from chaff, with property rights and economic liberty being chaff. “There is scarcely any recognition of the connection between economic rights and other, more fashionable notions,” Barry writes.

He concludes that nations would reap huge productivity gains if they would steer away from “welfare rights” and regulatory intervention, and instead allowed people to produce and trade as they choose.

Julian Morris also merits special mention for his essay, “Private Versus Public Regulation of the Environment.” He takes issue with the presumption that the State alone is capable of solving environmental problems: “The reader may be surprised to learn that many environmental problems have in fact been caused by governments, sometimes in spite of attempts by private industry or businesses to stop them.”

I’ll mention one more essay, Cento Veljanovski’s “The Common Law and Wealth.” In it Veljanovski looks at this intriguing question: What kind of legal system is apt to contribute more toward a nation’s ability to produce wealth—common law or civil law? He notes that Gordon Tullock, among others, has observed that common law tends to be “untidy,” with duplicative costs, inefficient methods of ascertaining facts, and great latitude for wealth-destroying judicial activism. Other scholars, however, such as Richard Posner, maintain that since common law is premised on the legality of the status quo, it places a restraint on the use of law to redistribute wealth. This is an interesting debate with no resolution in sight.

Scholars who are interested in the field of law and economics will want to have this book on their shelves, and professors teaching a variety of law, economics, and political science courses will find in it a good many supplemental readings to get sharp students thinking about questions that mainline textbooks almost always overlook.

  • George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy.