Three Assumptions About Law and the Economy

Three assumptions about law and the economy #

The three key assumptions sketched below are pervasive in court cases, in public policy forums, and in the media when people are debating and discussing the relationship between law and the economy. They run so deep that we often fail to notice them. The problem with these three assumptions–and a failure to treat them as such–is that they tend to view “law” and the “economy” as separate and distinct phenomena, instead of two aspects of social life that constitute one another. These assumptions draw our attention away from the central idea that economies and economic exchange cannot exist without some underlying legal rules or norms. What forms of economic exchange exist–and who benefits from those exchanges–are therefore determined in large part by those who shape the law and the choices they make.

Assumption #1: Free Markets are Natural – we often take as given that “free” market exchange is a natural condition of human societies, while accepting that regulation by government through law is an unnatural or artificial constraint on economic activity. This assumption is based on a taken-for-granted separation of the market from the legal system, where the former is assumed to be independent of and prior to the latter. To understand this assumption, we can draw a useful analogy to a natural watercourse (we will return to vividly to this analogy in Week 8. Rivers and streams might be “artificially” damned or the water diverted by human engineering. But while the river in this analogy might have very well have preceded any human intervention and therefore be characterized as “natural”, But are we right to describe a particular system of economic exchange in the same way?

Assumption #2: The Consequences of Market Competition are Neutral – if free market exchange is assumed to be a natural condition of human societies, it follows that the resulting distribution of benefits and burdens–of advantage and disadvantage–is itself a natural consequence of market competition. In other words, market outcomes are neutral to the extent that they remain free from “political” interference. This assumption of neutrality conceals the reality that creating or modifying legal rules involves the exercise of judgement, discretion and power, and that such decisions inevitably privilege certain interests and values over others.

Assumption #3: Our Current System of Economic Exchange is Necessary – of course, some form of economic exchange is necessary for human societies to function and flourish. But accepting this assertion is distinct from the idea that our actual, real-world economy in its current form is necessary, i.e. inevitable. As we will see throughout the course, the legal history of property is full of contingencies and real choices taken by real people–choices that were not at all inevitable. This means that difference choices, and therefore different distributions of benefits and burdens, were possible. Acknowledging this idea says nothing about whether the choices taken were right or wrong–only that they were in fact choices and not the predetermined result of a natural or neutral institution.