The Great Degeneration: How Institutions Decay and Economies Die (7 page)

The theory of legal origins also has important historical implications for non-Western legal systems. We have already encountered Timur Kuran’s argument about the retarding effects of Islamic law on Ottoman economic development. A similar case can be made for China. As He Weifang has argued, in the imperial era Chinese government made ‘no arrangement whatsoever for the separation of powers’, so ‘the country magistrate exercised comprehensive responsibilities [including all] three basic functions, namely the enacting of rules . . . the execution of rules . . . and the resolving of disputes.’ Confucianism and Taoism deprecated lawyers and deplored the adversarial mode. Yan Fu, the Chinese translator of Montesquieu, fully understood the difference between the Chinese and the Western spirit of the laws. ‘During my visit to Europe [in the late 1870s],’ he wrote, ‘I once attended court hearings and when I came back, I felt at a loss. On one occasion, I said to Mr. Guo Songtao [the Qing ambassador to Great Britain] that, of the many reasons that make England and other European nations rich and strong, the most important one is the guarantee there of having justice done. And my view was shared by Mr. Guo.’
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Yet attempts to import elements of the British legal system to China were a failure. Although the imperial Chinese state sought to provide all kinds of public goods, such as defence, famine relief, commercial infrastructure like canals and the distribution of agricultural knowledge, its highly centralized bureaucracy was quite skeletal in relation to the population. Property rights were relatively secure insofar as there was little variation over time in (by Western standards) low rates of taxation, but there was no commercial code of law and magistrates were steeped in literary and philosophical learning, not in law. They sought ‘compromises rather than legal rulings’, leaving contract enforcement to private networks. When the late Qing state belatedly entered the commercial sphere, it did so in a counter-productive way, over-taxing merchants and delegating power to monopolistic guilds without effectively constraining itself or its agents. The results were rampant corruption and economic contraction.
²²

Law and the Victorians

The legal-origins hypothesis is not without its critics. After all, it is hard not to overlook the fact that for much of the modern era France has had a successful economy, including a large financial sector, despite not being blessed with the common law.
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Similar things have been said about Germany and Brazil.
²⁴
Another line of argument is that common law systems compare less favourably with civil law systems when measures of social welfare – such as infant mortality or inequality – are the dependent variables.
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Yet for me the theory’s weakest point becomes apparent if we look at the state of the English common law as it was in the period when, by implication, it must have done the greatest good: the period of the Industrial Revolution, when the English and their Celtic neighbours radically altered the course of world economic history. Here is a contemporary description of an English court at that time:

some score of members of the . . . bar . . . are . . . mistily engaged in one of the ten thousand stages of an endless cause, tripping one another up on slippery precedents, groping knee-deep in technicalities, running their goat-hair and horsehair warded heads against walls of words and making a pretence of equity with serious faces, as players might . . . the various solicitors in the cause, some two or three of whom have inherited it from their fathers, who made a fortune by it . . . are . . . ranged in a line, in a long matted well . . . between the registrar’s red table and the silk gowns, with bills, cross-bills, answers, rejoinders, injunctions, affidavits, issues, references to masters, masters’ reports, mountains of costly nonsense, piled before them . . . This is the Court of Chancery . . . which so exhausts finances, patience, courage, hope, so overthrows the brain and breaks the heart, that there is not an honourable man among its practitioners who would not give – who does not often give – the warning, ‘Suffer any wrong that can be done you rather than come here!’
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It might be objected that Charles Dickens was not being entirely fair to the legal profession of his day in
Bleak House
. Yet Dickens had started his career writing court reports. He had seen his own father imprisoned for debt. His biographers confirm that he knew whereof he spoke.
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And historians of the nineteenth-century English legal system largely confirm his account.

First, we must note the tiny size of the system. As late as 1854, the entire judiciary of England and Wales sitting in courts of general jurisdiction numbered just fifteen. These judges, distributed equally between three benches, sat individually to hear cases, either in London or at assize (sessions held in major provincial towns), for just two four-week terms a year. These same men convened as panels of three or four to hear appeals and then sat in larger panels (usually numbering seven) to hear appeals from the panels of three or four. Only appeals from the panels of seven would be heard by another institution, which was the House of Lords. True, the activity of the lower county courts increased as economic life gathered pace. But that was not true of the higher courts.
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Second, until 1855 there were severe statutory restrictions on the ability of entrepreneurs to create limited-liability companies, a legacy of the time when the promoters of monopoly firms like the South Sea Company had successfully pulled up the ladder behind themselves to boost the value of their own shares. As late as the 1880s, there were still only sixty domestic companies listed on the London Stock Exchange. So much for the benefits of common law for financial development. Third, in the single most important sector of the Victorian Industrial Revolution, the railways, modern research has revealed that ‘English common law and common law lawyers had a profound and largely negative impact.’ Solicitors were notorious as speculative railway-share promoters, judges were publicly accused of favouritism and the Parliamentary Bar ran a nice little racket, effectively selling statutory approval for new railway lines.
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What are we to make of this? Does history essentially refute the legal-origins thesis that the common law trumps all other systems? Not quite. For despite the evident shortcomings of the English legal system in the industrial age, there remains compelling evidence that it could and did adapt to the changes of the time, perhaps even in ways that facilitated the process as well as accommodating it. This point is best illustrated with reference to the 1854 Exchequer case (well known to law students on both sides of the Atlantic) of
Hadley
v.
Baxendale
. The dispute was between two Gloucester flour-millers, Joseph and Jonah Hadley, and Joseph Baxendale, the managing director of the London-based carriers Pickford & Co. The Hadleys had sued Pickfords for the full amount of their losses – including forgone profits – resulting from late delivery of a replacement hand-crafted mill shaft. It is no coincidence that Pickfords are still around today and the Hadleys’ firm, City Flour Mills, is not. For although the local jury decided for the Hadleys, the appellate judges in London reversed their decision. According to the American judge and legal scholar Richard Posner,
Hadley
v.
Baxendale
enshrined the principle ‘that where a risk of loss is known to only one party to the contract, the other party is not liable for the loss if it occur’.
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It was later said of the original assize judge, Sir Roger Crompton, that he ‘never recognized the notion that the common law adapts itself by a perpetual process of growth to the perpetual roll of the tide of circumstances as society advances’.
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That was certainly not the approach of the appeal judges, Barons Alderson, Parke and Martin, who – in the words of a modern commentator – ‘refashioned the substantive law of contract damages’. As Alderson reasoned, ‘the only circumstances . . . communicated by the plaintiffs to the defendants’ at the time the contract was made were that they were millers whose mill shaft was broken. There was no notice of the ‘special circumstances’ that the mill was stopped and profits would be lost as a result of delay in the delivery of the shaft. Moreover, it was ‘obvious [thus Alderson] that in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances’, the mills would not be idle and profits lost during the period of shipment, since most millers would have spare shafts.
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Thus the loss of profits could not be taken into consideration in estimating damages.

To put it crudely, this was a ruling that favoured big over small business – but that is not really the important point. The point is that Baron Alderson’s reasoning illustrates very well how the common law evolves, a process elegantly described by Lord Goff in the 1999 case of
Kleinwort Benson
v.
Lincoln City Council
:

When a judge decides a case which comes before him, he does so on the basis of what he understands the law to be. This he discovers from the applicable statutes, if any, and from precedents drawn from reports of previous judicial decisions . . . In the course of deciding the case before him he may, on occasion, develop the common law in the perceived interests of justice, though as a general rule he does this ‘only interstitially’ . . . This means not only that he must act within the confines of the doctrine of precedent, but that the change so made must be seen as a development, usually a very modest development, of existing principle and so can take its place as a congruent part of the common law as a whole. In this process, what [F. W.] Maitland has called the ‘seamless web’, and I myself . . . have called the ‘mosaic’, of the common law, is kept in a constant state of adaptation and repair, the doctrine of precedent, the ‘cement of legal principle’, providing the necessary stability.
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I believe this gives an invaluable insight into the authentically evolutionary character of the common law system.
*
It was this, rather than any specific functional difference in the treatment of investors or creditors, that gave the English system and its relatives around the world an advantage in terms of economic development.

The Rule of Law’s Enemies

That was then. What about now? How good in practice is the rule of law in the West – and in particular in the English-speaking world – today? There are four distinct threats to it that I would identify.

First, we must pose the familiar question about how far our civil liberties have been eroded by the national security state – a process that in fact dates back almost a hundred years to the outbreak of the First World War and the passage in the UK of the 1914 Defence of the Realm Act. The debates after September 11, 2001, about the protracted detention of terrorist suspects were in no way new. Somehow it is always a choice between habeas corpus and hundreds of corpses.

A second threat is the very obvious one posed by the intrusion of European law – with its civil law character – into the English legal system, in particular the far-reaching effects of the incorporation into English law of the 1953 European Convention on Fundamental Rights and Freedoms. This may be considered Napoleon’s revenge: a creeping ‘Frenchification’ of the common law.

A third threat is the growing complexity (and sloppiness) of statute law, a grave problem on both sides of the Atlantic as the mania for elaborate regulation spreads through the political class. I agree with the American legal critic Philip K. Howard that we need a ‘legal spring cleaning’ of obsolete legislation and routine inclusion of ‘sunset provisions’ (expiry dates) in new laws.
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We must also seek to persuade legislators that their role is not to write an ‘instruction manual’ for the economy that covers every eventuality, right down to the remotest imaginable risk to our health and safety.
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A fourth threat – especially apparent in the United States – is the mounting cost of the law. By this I do not mean the $94.5 billion a year that the US federal government spends on law making, law interpretation and law enforcement.
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Nor do I mean the spiralling cost of lobbying by businesses seeking to protect themselves or hurt their competitors by skewing legislation in their favour. The $3.3 billion cost of paying nearly 13,000 lobbyists is in fact rather small in itself.
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It is the cost of the consequences of their work that is truly alarming: an estimated $1.75 trillion a year, according to a report commissioned by the US Small Business Administration, in additional business costs arising from compliance with regulations.
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On top of that are the $865 billion in costs arising from the US system of tort law, which gives litigants far greater opportunities than in England to seek damages for any ‘wrongful act, damage, or injury done wilfully, negligently, or in circumstances involving strict liability, but not involving breach of contract, for which a civil suit can be brought’. According to the Pacific Research Institute’s study
Jackpot Justice
, the tort system costs a sum ‘equivalent to an eight per cent tax on consumption [or] a thirteen per cent tax on wages’.
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The direct costs arising from a staggering 7,800 new cases a day were equivalent to more than 2.2 per cent of US GDP in 2003, double the equivalent figure for any other developed economy, with the exception of Italy.
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One may argue about such figures, and of course spokesmen for the legal interest reject them.
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But my own personal experience tells a similar story: merely setting up a new business in New England involved significantly more lawyers and much more in legal fees than doing so in England.

In their new book on the lessons for China of US legal experience, David Kennedy and Joseph Stiglitz cite three egregious defects of the rule of law in the United States today: