Leiden Law Blog

“New economy –  new challenges for the practice and science of the law?”

“New economy –  new challenges for the practice and science of the law?”

According to Beinhocker and Hanauer we have to “redefine capitalism”. Capitalism has increased prosperity, but we have been mostly incorrect in identifying how and why it worked so well. The economy is a complex dynamic open and nonlinear system – in a sense it is like an ecosystem. It is able to self-organize and to “produce” emergent results. This different (aggregate) emergent level of acting greedy individuals is the basis of economics as Smith - the first complexity thinker - envisioned. The complexity view, in which the economy can be considered as a giant network, is the essence of economics. This essence was implicit in the “old” economy, but it is more explicit in the new. The economy is not in a stable equilibrium searching for ways to make the world more efficient, but it is on the move in searching new ways to create value.

In this constantly evolving, interacting and changing (at an accelerating rate) network the focus of how and why markets work shifts from their allocative efficiency to their effectiveness. “The essential role of capitalism is not allocation – it is creation.” Capitalism contains incentives for solving human problems and makes these solutions widely available. It is an evolutionary system for finding solutions. The essence of the firm in this perspective is (re)configuring and reconsidering its position in the value chain. The firm is not an enduring organization, it is more like a temporary project. Due to complexities the existence of a firm cannot be assumed, it can only be earned. So business experimentation and business failure (like Popper’s falsification) is the norm, not maintenance and existence of firms and/or value chains.

What are the consequences for the economic demand of law services? In a provocative article Hadfield looks at some trends within the law services markets. The legal infrastructure  - the legal resources available to individuals, organizations, and regulators to help govern relationships - has not kept up with the economic transformations. In principle law performs diverse functions, but for me, the primary function is shielding or protecting (e.g. the firm or property). So in a sense law preserves the present order, it sustains “what is”. This cannot easily be reconciled with a system which is in a state of flux. Hadfield discusses underlying trends, causes and solutions to the mismatch of the economic demand for law and the law infrastructure. I will discuss the trends and will derive some challenges for the science of the law.

Hadfield identifies the following distinctive features of the economic demand for law in the new economy: 1. Firm boundary-crossing: the number of contracts will increase and will become more diverse and less standardized, 2. Jurisdictional boundary crossing: many relationships cross jurisdictional boundaries, this increases complexity and uncertainties, 3. Rapid depreciation and obsolescence of legal solutions: this shifts the relative value of adaptable as opposed to fixed solutions, calling for greater emphasis on dynamic as opposed to static legal analysis, 4. Increased differentiation of demand: specialization and the greater degree of heterogeneity implies a more differentiated demand for legal solutions – legal documents or regulations, 5. Lower tolerance for legal transaction costs due to global competitive pressures, 6. Greater demand for integration of legal and business expertise: a lawyer who designs a contract for a novel or niche setting needs to understand the specific economics of this relationship and the incentives. He acts like a risk manager.

From these trends a few challenges for the science of the law can be derived:   

  1. Law in principle preserves the present order, so it is rather static. In a dynamic and uncertain world we are in need of flexible law, but this can conflict with the principle of legal security.
  2. The pressure to reduce legal costs conflicts with the increased diversity and shorter life of customized legal solutions.
  3. The new economy becomes more complex. But so is the law system. Is law adding or reducing complexity?
  4. The new economy becomes more complex. But is it robust? Has law a function in making this world more robust?
  5. Firms not only create solutions, but also create problems and difficulties. What do we tolerate as society? We have to be aware that limitations on new economic ways of creating value (e.g. the share economy) protects the old established firms, and can undermine new developments. Shielding and protection favours existing solutions to (economic) problems.

The legal infrastructure is a “men’s shaped system” that makes use of the insights of legal scholars. So all our accumulated (legal) knowledge is “On the shoulders of Giants” (Newton). However as Einstein once remarked: “We cannot solve our problems with the same thinking we used when we created them”. Legal scholars feel uncomfortable with the famous quote of Groucho Marx: “Those are my principles, and if you don’t like them… well, I have others”. Changes in the law infrastructure - law regulations, documents or other solutions - can undermine the order preserving shielding and protecting functions of the law and the principle of legal security.

In essence the “law infrastructure” is a complex (multileveled) adaptive system. It adapts to changing circumstances; due to economic, institutional and political forces. Law is too important to be left to lawyers/legal scholars, isn’t it?

Want to read more? See, Gillian K. Hatfield, Law for a flat world: legal infrastructure and the new economy, University of south California law school, 2010.

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