Rules, Rubrics and Riches

The Interrelations between Legal Reform and International Development

Shailaja Fennell

• Publisher: Routledge-Cavendish
• Year: 2013
• Print ISBN: 9780415420358
• eBook ISBN: 9781135310325
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

Rules, Rubrics and Riches highlights the limitations of existing approaches to understanding the relationship of the law to the process of development. It interrogates neoclassical economic thinking that draws on the narrow rubric of self-interest to understand the acquisition of riches. It takes issue with both the traditional 'law and development' movement, that was unable to shake colonial overtones, and the more recent 'law and economics' school that continues to emphasise the centrality of rational man at the micro level and the superiority of linear models of economic progress at the macro level.

Written as an analysis of and commentary on the contribution of the law to international development, using legal cases and development trajectories in China, India and Malaysia, the book makes the case that individuals do not operate in a vacuum but rather within the social contexts of larger human structures such as family, community and nation. Rules, Rubrics and Riches is distinctive in the view that demanding equality for the individual is inappropriate if this occurs without looking at the broader context of the need for equity: within families, communities and nations. The book offers a new frame for 'law and development' thinking that point to a new set of rules, using a broader rubrics to ensure a sustainable accumulation of riches. It will be of interest to students and scholars working in the fields of law and development, development studies and international and comparative law.

1 The Market Economy, the Rule of Law and the Path of Development

This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all ages.

(Adam Smith 2002: III, 94)

Introduction

Adam Smith, professor of political philosophy and economy at the University of Edinburgh, was concerned with the inordinate extent to which the creation and possession of wealth was admired and even idolised at the end of the eighteenth century. If the glamour of being rich was palpable in the late eighteenth century, it has not reduced in the two hundred years that followed: rather, it appears to be even more mesmerising today. What is more, the capitalist world that was emergent in the eighteenth century has now established itself through a set of rules that ensure wealth accumulation and reinforce the virtue of the rich.

These rules are made by capitalist institutions that operate in a rubric that publicly regards the market as the main source of growth but covertly draws on the power that is generated and maintained by social hierarchies and the value accorded to rank and status. This rubric that takes Smith as its starting point has increasingly downplayed the social dimension of the market and increasingly uses a framework that sees the market as a force to advance value creation through increasing efficiency where social forces have ceased to have any influence. What has changed dramatically between the late eighteenth and twentieth centuries is that the world of god, gold and glory that Smith saw as inimical to economic advancement has been replaced by one that regards rules, rubrics and riches as the core of capitalist accumulation. It is in the separation of the social from the economic that capitalism today¹ is far removed from the world of Smith; for in that period of emerging capitalism the desire to truck, barter and exchange was regarded as a direct consequence of human speech and reason, yet such activities were not seen as devoid of sentiments, but rather as distinct from sentiments and often permitting a move away from the oppressive clutches of tradition and conducive to availing of rational thought and independent action (Rothschild 2001).

Rules

The particular international fascination at the end of the twentieth century is with the importance of a rule of law in creating a global market and ensuring free trade between nations (World Bank 1996, 2003). This is accompanied by a growing call for a world market that would permit ‘trade without borders’ on the premise that trade as a mechanism will ensure economic growth for all (Berg and Krueger 2003; Bhagwati 2002). There is also a greater demand among some national governments and various international agencies for using rules to make certain that markets can operate more independently of their social, domestic contexts, proclaiming that such policy is opening up the national economy to international competition.² While the emphasis of international financial institutions has been on changing the global and national rules of economic behaviour to ensure greater market access and more incentives to trade, there are other voices located in the worlds of academia, non-governmental organisations and even within some development agencies which advocate looking at the manner in which the changes in rules will modify social structures and institutions and how they will affect the everyday lives of people.³

The call for more rules to ensure the dominance of the market in ensuring economic development in economies around the world occurs at a time when economics as a discipline, as it is both taught in academic institutions and understood in the work of policymaking, regards the market as both supreme and infallible. This mainstream understanding of the market regards the possibility of imperfections in the market due to gaps or oddities in the economic system or excessive and undesired influence by non-economic factors as few and far between. For instance, in an auction where buyers choose to form a cartel and thereby keep down prices, the joint cartel interest is a market imperfection. This deviance in a perfect market is regarded as the consequence of a strong interest among market agents that has succeeded in manipulating the market. Such a strong manifestation of group interest is explicitly identified as market power. However such evidence of power in the market is seen as an exception to the perfect market where economic self-interest operates unfettered by these powerful feelings rather than acknowledging that the wielding of group power is very much part of market interactions.

Rubrics

The prevalent economic rubric that deems that the market separates the social from the economic also sees no role for the moral or the affective in the functioning of the market. That the same player who has economic self-interest might also have other feelings such as love for others is not regarded as relevant for the functioning of the market. Such concern for others is regarded as an exceptional context where individual preferences such as altruism or trust might emerge but economic theory does not comprehend of the role of such feelings in directing economic activity. Consequently the love of others, truth and honesty in dealings, care for others as oneself are deemed as ‘other-regarding’ in economic analysis. The very limited acknowledgement within economics, of a broader range of human motivations, prevents it from explaining why individuals are ashamed to ask for help or to sell items that they own in transition economies or to comprehend that such sale is closely tied up with emotions of shame, even forms of economic motivation that are seen as morally reprehensible.⁴ It is the narrow purview of this economic rubric that has moved the focus away from Smith’s concerns with the moral and replaced it by a singular focus on self-interest. The rubric consequently regards all economic activity as being guided by a single objective of self-interest and precludes any role for groups or other social bonds to operate in the marketplace. It therefore has to regard any presence of the social, moral or affective as an irregularity in the economic system. So in an ironic twist of Smith’s original concern about the privileging of wealth, there is an emerging view in economics that the growing number of wealth-creating instruments has the ability to make people happier than before, even the happiest ever.⁵

Riches

While it is true that today there is more accumulated tradable wealth than ever before, these unsurpassed riches have also become the cynosure of all eyes and the object of their desire. The power of capital has not always been regarded as benign, and today the market is seen to have the ability to wreak untold havoc on national economies. The Marxian position is that accumulation of wealth is at the heart of the capitalist system and is based on a model of expanded reproduction that uses mechanisms to ensure growing profits that are concentrated with centralisation of capital in a few hands.⁶ Where there is huge concentration of tradable capital wealth, arising from expropriation resulting from unfair competition or monopolies, the inequality at global and national levels is regarded as a cause of violence and war.⁷ There are even those who see national governments as subservient, if not meaningless, in the face of advancing and mighty global market players.⁸ The reason for regarding national economies as subordinate to the global market players is that wealth creation is increasingly regarded as a consequence of international trade and international capital flows.⁹ The seeming ability of global commodities and capital flows to generate and develop new and better instruments for creation and transfer of wealth has generated paeans of praise for global capital investment. On the other hand, the evidence of accumulation of capital and resources by rich nations, both within their economies and in international markets, has also been the subject of sharp criticisms and harsher forms of antagonisms from groups and governments in the developing world.¹⁰

The rising importance of the richest indicates that the growing global market and the tools of its architecture, the rules and rubrics that have come to the fore in the two centuries of economic advancement, have within them both the solutions and the problems of economic development. Whether capitalism is a two-faced Janus, a force for good or a collapsing house of cards cannot be established by an even narrower examination of the market. It requires drawing from outside the central tenets of modern economics, using perspectives that lie beyond the realm of economic theories and the traversing of the more complex realm of human motivations, and the larger ethical and moral world within which realities operate. The power and ability of social norms that operate in the much larger world of human interaction, encompassing the social, political, moral and affective, to foster new rules for market operations and trade negotiations by influencing and refocusing the motivations and actions of individuals and groups in every corner of the world are no longer restricted to the predilections of a few isolated scholars of political economy. They press forward the need to reintegrate social science thinking to achieve the breadth and understanding that was evident in Smith’s analysis of capitalism by drawing on rules to show how rules and rubrics have created the riches of capital accumulation.¹¹

The Institutionalisation of the Market Paradigm

Economists consider the market to be the site of exchange of goods and commodities as well as the acquisition of inputs for production, such as capital, labour and land. Economic development takes place through expanding the basket of goods and reducing the price at which these are made available to the public.¹² The modern-day mainstream economic paradigm, that focuses on equalising the forces of demand and supply in the market to ensure stable economic growth, has been built on the foundations of the marginal analysis framework that was introduced by Alfred Marshall in the last decades of the nineteenth century. Within this paradigm the market pricing of goods ensures that the production of commodities and services follows the economic rule of least cost/maximum output.¹³ The place and time at which suppliers bid against demands from buyers and buyers agree to buy against offers from sellers is the site called market.

Though market exchange is regarded as an instantaneous transaction which does not have coordinates in time or space, this ‘perfect’ market is neither instantaneous nor able to provide complete coverage of all possible bids and offers. The imperfections that mar are said to arise through the presence of externalities of production and/or asymmetry of information between producers and consumers.¹⁴ In these cases the market is no longer able to ensure that an efficient pricing mechanism will fulfil the least cost/maximal output criteria that exist at the heart of Marshallian analysis.¹⁵ Where the buyer and seller do not have the same set of information regarding a future transaction, the market price may not be the consequence of equal play between buyer and seller but may be closer to the price which the player with most information wants. The power of the invisible hand is considerably reduced where there are externalities and information problems, and the market is unable to fix price in the most ‘efficient’ manner. Such shortcomings can be overcome by repeated actions of market exchange where the habitual activity creates its own set of norms to ensure symmetry of information; and the exchange gets regarded as an infinite set of rounds in a game, and this motivates individuals to cooperate in conforming to norms of market exchange.

The analogy of the instantaneous transaction seems ill-conceived for the act of market exchange, as it seems more akin to a procedure emerging from rounds of bidding that are continually underway in a market. In each round buyers bid for what is offered for sale, with the highest accepted bid denoting the maximisation of price. The quantity of each type of product contracted for and value of exchange becomes available in the form of information available to traders in the market.¹⁶ Markets also generate information which helps companies plan their bids against future offers by estimation of demand and supply and expected return on their purchases in the market. Thus market exchange appears to be the consequence of the working of a pricing mechanism, whereas the market is actually a site for acquiring and accumulating market-specific information.

The allocation of resources depends on information regarding the supply and demand of commodities and services and the activities of competitors in the market. The maximal output/minimum cost combination is obtained through ensuring an efficient allocation of resources where the last unit of any input is placed so that the marginal return on it would be equal to the marginal cost of using it. The ability of economics to allocate resources in relation to costs and returns in this clear-cut and direct manner is the major attraction of the economic framework.¹⁷ There is no requirement, at this level, for bringing in the larger domain of societal relations or prevailing moralities, or placing liability on the State for unmet needs.¹⁸

If economic exchange in the market is located within a sphere generated by the axes of location and time, the success of exchange would require the completion of three activities, namely search, negotiation and monitoring. These activities are required for (a) the identification of a potential agent with whom to exchange, (b) the decision of what price to agree on and (c) ensuring that the product delivered matches that which was offered in the bidding process.¹⁹ The process of exchange requires the recognition of rights and liabilities of the exchanging parties, for which enforceable market rules are necessary, implying cost-effective obedience to rules through brokers, rather than costly enforcement of rules through courts of law. The ability of the players in the market to effectively ensure efficient exchange depends on a smooth operation of the separate acts, of search, negotiation and policing, that do not necessarily telescope into a moment in time and space called completion of exchange.

The importance of economic instruments to trade-risk so as to buttress economic exchange, has been at the heart of recent trading on national and international financial markets in financial derivatives.²⁰ The addition of these new features of capitalism such as capital derivatives, which has occurred in the last decades of the twentieth century, is regarded as the rise of new forms of capitalism. In the case of futures markets there is the need to protect against risks of loss through hedging against the future by investing in a financial instrument which is unlikely to rise or fall in value along with the futures instrument. Late twentieth-century capitalism is seen as a natural progression from the early decades of industrialisation where the market mechanism was supreme, and it may well continue to be the unvanquished hero. The financial crises of the 1990s are regarded variously as the misdemeanours of some rogue traders or some crony capitalists rather than symptoms of malaise in the capitalist system and in some quarters have given voice to calls to protect mechanisms of capitalism from the capitalists.²¹

Introducing morality into economics ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Contents
• List of illustrations
• Preface
• 1. The market economy, the rule of law and the path of development
• 2. All in the family: gender and identity within the household
• 3. Group rights, distributional conflicts and the making of unequal identities
• 4. National and sub-national institutions
• 5. The interface between the global and the national
• 6. Dissonances and discordances: from deaf ears to inclusive development
• 7. Reclaiming law and development: ensuring equitable rules, inclusive rubrics and sustainable riches
• Bibliography
• Index