Substance, Institutions, and the Real Value of Commercial Law Scholarship
As anyone who spends any time reading scholarship on contract law or commercial law can tell you, efficiency is a big deal. There are a lot of very smart people who spend a lot of their time worrying about whether this or that remedies rule is efficient or whether giving secured lenders complete priority in collateral is inefficient. I wonder, however, whether any of this stuff matters. What I am talking about is not the normal grumpiness that law and economics invokes in some — objections to the rational actor model, furious citations to Dworkin on the evils of efficiency as a normative criteria, or ritual invocations of various behavioral arguments — but rather the basic question of how much the content of the law matters. Imagine for a moment that you think that the primary goal of contract and commercial law ought to be the generation of wealth. Does the content of that law matter all that much?
In the context of American law this may seems like an odd question. After all, if we aren’t arguing about the content of the law, then what exactly would we be arguing about? The problem, it seems to me, is that the very success of American private law makes many of our discussions about it rather surreal. One can, of course, have lots of arguments about the extent to which the American markets that rely on American private law are efficient, or whether they would be made more efficient if we were to tweak this or that section of the Uniform Commercial Code. Yet, on the whole, it is difficult to deny that in the aggregate American markets are tremendously successful at creating wealth, indeed more wealth than has ever been seen by any society on the face of the planet ever in the history of the world. No small accomplishment that. On the other hand, there are places in the world where private law doesn’t seem to work particularly well, where whole societies are extremely poor, and the markets aren’t producing much in the way of wealth. My question, however, is the extent to which economic failure in such societies is a function of their substantive law or of their legal institutions.
Hernando De Soto, for example, has argued vigorously that what keeps the poor of the developing world poor is a lack of property rights. (See The Mystery of Capital) De Soto waxes philosophical — almost mystical — at times about the importance of property being able to live a secondary life as capital for a business, but at the end of the day what he is talking about are the sorts of substantive rules contained in Article 9 of the Uniform Commercial Code. His argument is that while the poor have de facto possession of quite a bit of property, none of it can be hypothecated or otherwise used as capital due to the substantive law of the countries where the poor live. The solution, so says De Soto, is to unleash the wealth-creating potential of the property in the hands of the global poor by changing the substantive legal rules so that they can use their property as collateral to get access to capital.
It is a wonderfully appealing story: Empowering the poor! Economic development through indigenous entrepreneurship! The rise of self-sustaining markets to save the global South! It even has the added allure of being cheap. The capital outlays of changing the property rules in one’s statute books is relatively low compared to say providing universal education or basic vaccination. In other words, efficient substantive law will save us, and will do it on the cheap!
Here is the problem: Giving the global poor clearer title to their property frequently has the main effect of making it easier to steal from them. Sadly, in some of the countries where De Soto’s ideas have been tried this seems to have been exactly what happened. As soon as the substantive property rules were changed to make the property in the possession of the poor economically valuable, it was almost immediately stolen by local elites. The elites, in turn, were able to steal from the poor because while the substantive law was actually pretty good, it was being administered by basically corrupt (or easily corruptible) institutions.
I suspect that at the end of the day, the difference between the current UCC and a UCC filled with the sort of efficiency enhancing rules that lawyer economists might find probably doesn’t matter all that much to those who need properly functioning markets the most. This is true, I believe, even if the lawyer economists are correct about the inefficiency of current law. My hunch is that whatever marginal benefit you get out of having slightly more efficient commercial law is likely to be utterly swamped by the effect of corrupt institutions. Better to have honest courts administering commercial law whose substantive provisions would make Richard Posner shudder than to have optimally efficient law administered by kleptocrats.
It is depressing, however, to realize that most of what you say about your area of the law is probably useless to the billions of people who would most benefit from the improvement of its administration.