Tuesday, June 9, 2009

when playing by the rules doesn't necessarily mean treating everyone "fairly": a quick look at the legal foundations of capitalism

"Why Adam Smith Still Matters"

Note: I found this link via 3 Quarks Daily, but most of this post is tangential to it: these are my own reflections on the libertarian defense of Adam Smith and the beginnings of a legal critique of capitalism

The libertarian defenders of Adam Smith call the government out for intervening in what would otherwise be a free and unfettered system of markets. These critics argue that in a laissez-faire system of political economy, markets (including labor markets) operate at approximate efficiency. As the article states, we are appealing to our own self-interest and, through the process of trading by this rule, we are led through competition and by an invisible hand to create maximal benefits for society. If the government oversteps its boundaries (its sole responsibilities are seen as protection of property and a few public goods provisions), then its own visible hand gets in the way of the invisible hand, disrupting what was a natural order.

However, if we drop government from the picture our problems are not solved, even assuming the strict assumptions of perfect information and rational foresight. The legal system remains an important aspect of political economy. Laws are the rules of the economic game. When I play card games with my little brother, we play according to a very strict set of rules, if you know what I mean. Other configurations of the rules may lead to different results (such as me actually having the opportunity to win every now and then). The evolution of contract law in American history is one example of how the legal system itself (absent of any strict government intervention) can lead to different labor market outcomes: the rise of freedom of contract over indentured servitude led to less breaches over clauses such as those concerning the term of a contract. Another example comes from England: early statutes from the 14th century onward regulated regional wages, and these were eventually overturned as the economy evolved.

Furthermore, we do not need to talk about a "ruling class" to say that legal institutions serve certain interests over others, so they are clearly not distributionally neutral. Certainly my little brother will alter the rules in his favor but we can think of other games or other situations where the advantage is either arbitrary or based on some traditional principle (history), or maybe it even is particular to a certain culture or social system. Anyone familiar with the traditional Chinese game Go may recall the handicap system as one example of altering the rules of the game to reflect a certain position of the relevant players. All of these rules are examples of how one party may be favored from the beginning, due to some social climate or understanding of relative positions. What I aim for is anunderstanding of how the social context of capitalism creates conditions in the legal system conducive to economic development and class conflict.

The "rules of the game", theories of property and contract (for just two examples), are especially important in any discussion of capitalism because they define the extent to which my right to private property may conflict with another's basic rights (also to property, or liberty, life, etc.). Marx identified private property as the key to the success of capitalism precisely because of the monopoly rights a system of private property confers onto owners. Not only does private property foster a set of incentives conducive to efficiency (the degree to which this holds can be argued), but private property in contract law creates the social relations of production that produce surplus value which allows the circuit of capital to run.

However, I would not say that the legal system is an instrument of capitalism. It is for the same reason that I do not think we necessarily need the existence of a "ruling class" to show how inequality can be promoted in a legal system. The rule of law exists in theory as a means of weighing the interests of the different parties in question approximately equally. I argue that the culture of capitalism creates a commodification of labor power that promotes "efficiency" (high amounts of capital accumulation).

I mentioned at the beginning of this post that it had little to do with the link. This post was the beginning of my thoughts concerning the "imagining of history," specifically, the history of American capitalism. (I firmly believe that the best way of understanding historical phenomena is by imagining how it happened, in other words being able to visualize all that was going on.) However, I found the last paragraph of the article very intriguing and it may be relevant to the post:

Regrettably, Smith was unable to conclude the third large project that he had been working on throughout his life: a theory of government. In his "obvious and simple system of natural liberty", this is the only gap. It is not a small one. The answer to this question is fundamental for the current debate - in a situation where our Western civilisation seems to have come to a crossroads as more interventionist power is reclaimed for government, in which nationalisation and re-regulation are going unquestioned, and in which politics is generally gaining a new self-confidence. The question has to do with the natural harmonisation of interests. Is there any way in which the interests of government are spontaneously aligned with the interests of the governed? Is political action possible without destroying the checks and balances of the spontaneous order? Smith doesn't give us an answer. Maybe he had found that there was no such way.

So, I end this "beginning" with the following thought: knowing what we do now concerning the nature of the legal system and its relation to economy, what political institutions are most effective at achieving whatever goals a group of people has, in the face of capitalism? For example, can democratic ideals of majority rule exist side by side with capitalism, a system which (as we've seen above) can be reflected -- through various channels, including the legal system -- in power and authority? Much more will be said about this in the future!


  1. Dan 2 things with the following:
    "The rule of law exists in theory as a means of weighing the interests of the different parties in question approximately equally. I argue that the culture of capitalism creates a commodification of labor power that promotes "efficiency" (high amounts of capital accumulation)."
    1. Can you elaborate a little on your perceived link between commodification of labor and capital accumulation.
    2. The idea that the rule of law being able to weigh the interests of different parties equally is the most dangerous kind of statement. It both presupposes that "equality" under the law is possible, and that it is possible to reach a "right" outcome of a legal question in society. The law (in this country) is an institution created, maintained, and perpetuated by a certain class. The idea that any situation other than a bourgeois vs. bourgeois legal matter could be settled equally is impossible even in theory (not to mention practice). And in practice equality under the law cannot happen even when a legal question is contained within a certain (any) class. All legal outcomes will be shaped by factors that have not been considered in the abstractions that lead to law making.

  2. Hi James,

    Thanks for your comments. In reviewing this post I realized there are some strong statements made that are not adequately supported. I could do entire posts based roughly on each paragraph here. I'll try to address your points but future posts will draw on my arguments here as well.

    1. One of the defining characteristics of a modern capitalist economy is its emphasis on markets as a means of growth and distribution. Through creating "markets for everything", capitalism works to maximize efficiency (the equation of supply and demand) in all aspects (markets) of an economy. We see this in the political emphasis from both left (to a slightly lesser extent) and right on laissez-faire product markets, financial markets, etc.

    Labor markets are possibly the most important in capitalism. This is definitely the case for Marx, since he sees this "sphere" as the source of surplus value. And this is where the link between commodification of labor and capital accumulation is made. If modern capitalism thrives on efficient marketization, then commodification of labor in the labor market is one very important step towards making that market more efficient. In other words, the ideal labor market for capitalism is one in which labor power is traded just as easily and freely as any other commodity such as apples or iPods. This happens through commodification, i.e., the contractual definition of labor as an exchange of private property rights over labor.

    Now, you may ask for some historical englightenment. The evolution of free labor is an important part of this story: by the early 19th century in the U.S., labor contracts were seen as an agreement freely entered into by both parties (worker and boss) where either side can leave at will. This is different from how we normally see contracts, or how the history of contract since Aristotle has been perceived: that is, as an equal exchange of goods (property) between two parties. Thus, as we diverge from this egalitarian (what was indeed seen as "just" in legal doctrine) view of contract to one much more defined in terms of the worker and boss and freedom to breach "at will", labor power is commodified and the result is a greater extraction of surplus value than what was possible under earlier, more egalitarian systems of contract.

    2. I empathize with your view of the legal system as an instrument of the bourgeoisie but the evidence doesn't entirely support it. (One of my favorite quotes from Franz Kafka, a 20th century modernist writer, addresses something along the lines of, "The law is what the nobles do." Let me know if you're interested in the short story this comes from, it's actually very interesting from a bureaucratic/capitalist perspective of analysis.)

    So, first of all, my statement about the rule of law is preceded by "in theory", so I do realize I’m walking on thin ice to begin with. Second, could you not argue that the working class has been able to make significant advances for themselves through reforms in labor legislation? This seems to be a direct refutation of your claim that the legal system is an instrument of the bourgeoisie. Of course, it also implies that the legal system has become the instrument of a different class, and by no means am I arguing that at times, the legal system is an instrument of some class or another.

    Now, perhaps you're arguing a slightly different point on which I would agree with you. That is, the legal system is only one part of the social system by which capitalism is defined. In this case, the legal system is working within a society that is inherently unequal. But, I already say as much in this post when I assert that the legal system is not necessarily distributionally neutral. I think we agree here.

    Thanks again for your comments! As I said at the beginning, I plan on elaborating on a lot of the points made here. Hopefully this is a good start.