Where law is applied unevenly, exchange shrinks to what trust can carry

The argument

Proponents of this explanation argue that the decisive question is not who holds power or who owns what, but whether rules are applied in the same way to everyone. On their account an economy is a dense web of agreements between people who do not know one another, and those agreements are undertaken because each party expects that a breach could be remedied. Where the law is applied unevenly, so that the outcome of a dispute depends on the standing of the parties rather than the terms of the agreement, advocates hold that this expectation collapses. Supporters describe the consequence as a shrinking of the circle of exchange. If a contract cannot be relied on, people deal only with those they have personal reason to trust: family, neighbours, members of the same community, long-standing partners. Proponents argue that such dealing is perfectly rational and also sharply limiting, because the most valuable transactions in a developed economy are precisely those between strangers, at scale, over long horizons. On this account a country can be full of capable and willing traders and still remain poor, because the units within which trade is safe are too small. Advocates conclude that the rule of law is therefore prior to the other explanations rather than parallel to them. Secure property is a particular case of rules being applied predictably, and rewarding talent requires that agreements to pay for it be enforceable. Supporters hold that a state which is not pluralistic cannot supply this predictability, because where no group can constrain the most powerful, the law is whatever suits them in the case at hand.

Premises

Counter-arguments

Critics argue that extensive trade has flourished under legal systems that were arbitrary at the top but predictable in ordinary commercial matters, which suggests the two can be separated. They also note that private ordering through intermediaries, guarantees and reputation has supported large-scale exchange where courts were unreliable. A further objection is that the argument makes pluralism necessary for even-handed law, when some unitary states have administered commercial law with considerable consistency.

Rejecting the premises

[Rejecting P1] A great deal of economic activity happens inside firms and households rather than through arms-length agreements between strangers. [Rejecting P2] Uneven treatment at the political level often coexists with predictable routine adjudication, so the expectation of remedy need not collapse. [Rejecting P3] Intermediaries, guarantees and reputation systems extend trust well beyond personal acquaintance. [Rejecting C] Pluralism is not the only source of even-handed law, since professional bureaucracies and courts have supplied it under unitary rule.