Yves here. Some readers may object to a defense of the rule of law by depicting it as necessary for commerce, as opposed to necessary for a complex society to function well. But this framing is a counter to the libertarian mantra that freedumb is ever and always good, that government is ever and always bad, and we’d be so much better off if we operated in a supposedly no-restriction “free market”.
Many many many times, we have explained how “free markets” is an internally contradictory, incoherent construct. We’ll hoist one debunking from ECONNED:
Consider purchasing a computer in the neoclassical paradigm. The buyer has no way of being certain that the computer lives up to the vendor’s promises. So the consumer will have to bring an expert to test the computer’s functional ity at the time of purchase (does it really have the memory and chip speed promised, for instance?). The seller will need to be paid in cash, otherwise the buyer could revoke payment.
And what happens if the computer fails in a few weeks? Assuming the vendor has not fled the jurisdiction, the only remedy is litigation, or an enforcer with brass knuckles.
But even that scenario is too simplistic. It assumes the buyer can evaluate the expert. But in fact, if you aren’t a computer professional, you can’t readily assess the competence of someone who has expertise you lack. And even if the person you hired is competent, he might arrange to get a kickback from the seller for endorsing shoddy goods. The same problem holds true in any area of specialized skills, such as accounting, the law, or finance. Many people judge service quality by bedside manner, which is not necessarily a good proxy for the quality of the substantive advice. And as we will see later, one of the factors that helped create the crisis was the willingness of investors to buy complicated financial products based on the recommendation of a salesman who did not have the buyers’ best interests at heart.
Now to the main event.
By Robert Bird, Professor of Business Law & Eversource Energy Chair in Business Ethics, University of Connecticut. Originally published at The Conversation
Something dangerous is happening to the U.S. economy, and it’s not inflation or trade wars. Chaotic deregulation and the selective enforcement of laws have upended markets and investor confidence. At one point, the threat of tariffs and resulting chaos evaporated US$4 trillion in value in the U.S. stock market. This approach isn’t helping the economy, and there are troubling signs it will hurt both the U.S. and the global economy in the short and long term.
The rule of law – the idea that legal rules apply to everyone equally, regardless of wealth or political connections − is essential for a thriving economy. Yet globally the respect for the rule of law is slipping, and the U.S. is slipping with it. According to annual rankings from the World Justice Project, the rule of law has declined in more than half of all countries for seven years in a row. The rule of law in the U.S., the most economically powerful nation in the world, is now weaker than the rule of law in Uruguay, Singapore, Latvia and over 20 other countries.
When regulation is unnecessarily burdensome for business, government should lighten the load. However, arbitrary and frenzied deregulation does not free corporations to earn higher profits. As a business school professor with an MBA who has taught business law for over 25 years, and the author of a recently published book about the importance of legal knowledge to business, I can affirm that the opposite is true. Chaotic deregulation doesn’t drive growth. It only fuels risk.
Chaos Undermines Investment, Talent and Trust
Legal uncertainty has become a serious drag on American competitiveness.
A study by the U.S. Chamber of Commerce found that public policy risks — such as unexpected changes in taxes, regulation and enforcement — ranked among the top challenges businesses face, alongside more familiar business threats such as competition or economic volatility. Companies that can’t predict how the law might change are forced to plan for the worst. That means holding back on long-term investment, slowing innovation and raising prices to cover new risks.
When the government enforces rules arbitrarily, it also undermines property rights.
For example, if a country enters into a major trade agreement and then goes ahead and violates it, that threatens the property rights of the companies that relied on the agreement to conduct business. If the government can seize assets without due process, those assets lose their stability and value. And if that treatment depends on whether a company is in the government’s political favor, it’s not just bad economics − it’s a red flag for investors.
When government doesn’t enforce rules fairly, it also threatens people’s freedom to enter into contracts.
Consider presidential orders that threaten the clients of law firms that have challenged the administration with cancellation of their government contracts. The threat alone jeopardizes the value of those agreements.
If businesses can’t trust public contracts to be respected, they’ll be less likely to work with the government in the first place. This deprives the government, and ultimately the American people, of receiving the best value for their tax dollars in critical areas such as transportation, technology and national defense.
Regulatory chaos also allows corruption to spread.
For example, the Foreign Corrupt Practices Act, which prohibits businesses from bribing foreign government officials, has leveled the playing field for firms and enabled the best American companies to succeed on their merits. Before the law was enacted in 1977, some American companies felt pressured to pay bribes to compete. “Pausing” enforcement of the law, as the current presidential administration has done, increases the cost of doing business and encourages a wild west economy where chaos thrives.
When corruption grows, stable and democratic governments weaken, opportunities for terrorism increase and corruption-fueled authoritarian regimes, which oppose the interests of the U.S., thrive. Halting the enforcement of an anti-bribery law, even for a limited time, is an issue of national security.
Legal Uncertainty Fuels Brain Drain
Chaotic enforcement of the law also corrodes labor markets.
American companies require a strong pool of talented professionals to fuel their financial success. When legal rights are enforced arbitrarily or unjustly, the very best talent that American companies need may leave the country.
The science brain drain is already happening. American scientists have submitted 32% more applications for jobs abroad compared with last year. Nonscientists are leaving too. Ireland’s Department of Foreign Affairs has witnessed a 50% increase in Americans taking steps to obtain an Irish passport. Employers in the U.K. saw a spike in job applications from the United States.
Business from other countries will gladly accept American talent as they compete against American companies. During the Third Reich, Nazi Germany lost its best and brightest to other countries, including America. Now the reverse is happening, as highly talented Americans leave to work for firms in other nations.
Threats of arbitrary legal actions also drive away democratic allies and their prosperous populations that purchase American-made goods and services. For example, arbitrarily threatening to punish or even annex a closely allied nation does not endear its citizens to that government or the businesses it represents. So it’s no surprise that Canadians are now boycotting American goods and services. This is devastating businesses in American border towns and hurts the economy nationwide.
Similarly, the Canadian government has responded to whipsawing U.S. tariff announcements with counter-tariffs, which will slice the profits of American exporters. Close American allies and trading partners such as Japan, the U.K. and the European Union are also signaling their own willingness to impose retaliatory tariffs, increasing the costs of operations to American business even more.
Modern capitalism depends on smart regulation to thrive. Smart regulation is not an obstacle to capitalism. Smart regulation is what makes American capitalism possible. Smart regulation is what makes American freedom possible.
Clear and consistently applied legal rules allow businesses to aggressively compete, carefully plan, and generate profits. An arbitrary rule of law deprives business of the true power of capitalism – the ability to promote economic growth, spur innovation and improve the overall living standards of a free society. Americans deserve no less, and it is up to government to make that happen for everyone.
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Mutatis mutandis, a similar case can be made for international law. As the technology binding the world together becomes increasingly homogeneous, it can be argued that global contractual protocols will emerge. Digital currencies will eventually merge, and one can easily imagine contracts drawn up under a future framework of Internet protocol law. Opposing this trend will be fighting retreats by the millions of current territorial legal franchise holders. It is a matter of when, not if, international law displaces territorial law in the commercial domain.
Interesting comment. Perhaps an opportunity for the various entities, like the International Chamber of Commerce, who draft mediation rules, to expand into other legal areas. Libertarian wet dream.
In the domain of state-to-state action, international law has been delegitimized by 80 years of American imperialism. Just as is the case with the laws discussed in the post, equality before the law is a comforting fiction which obscures material inequality. There are many ways in which material advantages disrupt the equal application of laws, in the international arena having to do with the capacity for violence or economic coercion, domestically, most having to do with connections or with access, say, to better lawyers, or to the kind of war chest needed to exhaust legal opponents, including prosecutors. The disadvantaged, whether domestically or internationally, know from experience that the law, at its best, is an uneasy protection. Tenants, union organizers, and prisoners have won legal battles only for the decisions to be ignored. John Kiriakou wrote an article recently in which some of the hollow victories of the last category are detailed. Palestinians know well that another ingredient is required for law, namely force. Actual social practices adapt to an environment in which laws are sketchily applied or enforced. Some of this opprobrium at the lawlessness of the Trump administration seems a bit strange to us poors.
Um, no. There is no law without enforcement, and there is no legitimate enforcement without a single governing body for the geographic area in question: no world government, no world law …
Sorry for being childish just a moment but considering that the villain´s name in MATRIX is Smith 😉
You give me my phone call…
43 seconds
https://www.youtube.com/watch?v=_8vHZ3Lbq9M
(Despite some fundamental misgivings over the franchise´s contradictions of aesthetics vs. political message one must acknowledge it was made a couple of years before the 9/11 regime)
p.s. To a certain extent expropriations in Germany of businesses and ventures involved with Russian interests for 3 years now are already a sign of the deterioration of the rule of law. The latest of which concerns Nordstream 2 which by allusions made by the Merz administration shall not be used ever again.
2 years and 9 months after explosion: Federal government declares Nordstream dead
June 30, 2025
https://archive.is/DPcxj
“(…)
The SPD drew a line under the Nord Stream chapter at its federal party conference in Berlin this weekend. The party spoke out “against the resumption of any natural gas deliveries from Russia through the Nord Stream 1 and Nord Stream 2 gas pipelines,” thereby opposing demands “from the CDU/CSU and the Republican Party in the USA.”
The decision marks a turning point in the SPD’s Russia policy, which had long relied on an energy partnership with Moscow. According to Greenpeace expert Karsten Smid, this commitment to Nord Stream ignored the interests of Eastern European states – a mistake that must not be repeated.
Meanwhile, the German government under Chancellor Friedrich Merz (CDU) is considering tightening the Foreign Trade Act to prevent a possible sale of the Swiss-based Nord Stream 2 AG and thus a reactivation of the pipeline. This is amid reports that Russian and US investors are seeking to repair the pipelines damaged by explosions in 2022.
(…)”
I would describe it as avulsion rather than erosion.
It’s gone.
Very important topic, and great intro and explanation of the fairy-tale of the “free market”. Right-wing, so-called libertarian ideology can be crudely summed up as: freedom for me, not for thee. It’s all about me, myself and I – Fk everyone else. An ideology for wealthy narcissists, egomaniacs and those drunk on power and greed. I don’t see any outcry from the right-wing/libertarian crowd about the current kleptocracy: tax the poor, subsidize the parasitical bribe-masters.
The rule of law – the idea that legal rules apply to everyone equally, regardless of wealth or political connections − is essential for a thriving economy. Yet globally the respect for the rule of law is slipping, and the U.S. is slipping with it
I do agree with the main points of the author here (although sometimes a bit naive and behind the curve), however: This of course is an idealized assumption that can never fully be put in practice by fallible humans, however we can at least try our collective best to achieve equal application of law and access to justice. And of course we must ask for a definition of “thriving economy”, thriving for whom? The financial oligarchy? Or the vast majority?
One could be cynical or critical and dismiss much of the “rule of law” as a cudgel to beat down the powerless and reward the powerful. Old-school leftists might dismiss the law as a system to protect private property and the interests of the bourgeoisie. After all, “access” to justice is extremely expensive, and we see the glaring injustice of the “justice system” daily. And what good is “the law” if it is simply ignored, or not enforced?
We must also have well-functioning, and somewhat honest political and financial institutions in order for society to work reasonably well. Alas, this is not the case, and has not been for years.
Congress, for example, routinely violates its own legislation: AECA (Arms Export Control Act) being one of the glaring ones. Violation of the UN Charter is also routine. As Judge Napolitano points out repeatedly, international agreements ratified by the Senate and signed by the pres. are the law of the land.
In recent years we have seen the basic foundations of law and democratic principles eroded, abused, and/or ignored.
The institutional corruption is so rampant and obvious that SCOTUS often make a mockery of the law. One of the most glaring is the now infamous Citizens United decision which formalized “unlimited political bribery”. When we have a formalized oligarchy, democracy becomes a sham and the rule of law an abuse.
And then we have a long list of exec branch criminality that goes back decades. Nixon/Kissinger carpet bombing of SE Asia; Bush Jr. regime fabricating transparent packs of lies that resulted in war, and the deaths of 100s of thousands etc. Obama regime destroying habeas corpus and deeming the TBTF financial criminals above the law and in effect rewarded for their crimes.
Almost all great powers destroy themselves through corruption and institutional rot. The US is well on its way, the rot has metastasized in all 3 branches of govt., there is no more “checks and balances”. Is it too late to reverse this trend? I’m too pessimistic to make an objective prognosis.
When the law is ignored, and the institutions of power are effectively above the law (TBTF financial sector, for example) When the US/UK and vassals denounce anyone who speaks out against funding genocide, and a whole raft of flagrant war crimes, they are dismissed, smeared, fired from their job, or worse.
Many thanks for the head note and the main article. One would think that people could get their befogged brains out of the poisonous smoke of libertarianism and U of Chicago economics. But no.
So this article has many important reminders:
To wit:
When the government enforces rules arbitrarily, it also undermines property rights.
When government doesn’t enforce rules fairly, it also threatens people’s freedom to enter into contracts.
Hell, we’re talking about the kind of stuff in the Code of Hammurabi. We’re talking about the kinds of things listed in the Twelve Tables of the Law in the Roman Republic. Basic measures, basic contracts, basic descrptions of social relations.
https://en.wikipedia.org/wiki/Twelve_Tables
Plenty have argued that the law precedes and creates markets. The mention in the Twelve Tables that fruit from a neighbor’s tree that falls into your courtyard is still the neighbor’s fruit is basic and precedes markets.
Further, U.S. libertarians and their fantasies always skirt uniform weights and measures — a constant in ancient law codes. Then there is standardized coinage and establishment of mints, famously in the Temple of Juno in Roma. (Which likely tells us who really paid the bills and managed the money.)
Yet in the U S of A, the law-making branches of government — U.S. Supreme Court, but especially the Congress — are living a free-market brain fart. The U.S. Congress simply does not want to govern.
Which is why the U.S. economy no longer functions for the populace. See Gini coefficient.
I don’t think the construction industry would like the Code of Hammurabi much:
The Book of the Covenant, which is a “school exercise” reworking CH, implicitly rejects the reciprocal retribution of section 230 that is so shocking to the modern ear. It’s the good old goring bull case rather than a collapsing house, but it’s the bull’s owner that dies if a son or daughter is killed. (See Exodus 21:28-32) The much later Ezekiel 18 explicitly confirms the principle:
Arc of justice, perhaps? Doesn’t seem to have much application to Gaza, huh?
Did you ever drop by the Oriental Institute to see its copy of the stele? The Akkadian is written sideways which makes it even more fun. “Summa awilum…” I took my little Franklin Park parish down there for a personally guided tour, and got down on my hands and knees, turned my head sideways and read a few sections.
Henry Moon Pie: Franklin Park, Illinois?
Holy crap. I grew up in River Grove.
Drove through there many mornings taking my spouse to work and school at Rosary (now Dominican) and the kids to the Lutheran School in Oak Park. I took the Metra to Union Station, then walked across the Loop to catch the bus to Hyde Park when I was going to school.
I also saw various cars with a black driver stopped by the River Grove cops on many a morning.
The parsonage was on 25th Ave. a block north of the Metra station. With O’Hare, the Franklin Park railyards, the Metra, the crossing bells and the trucks on 25th, sleep could be hard to come by. Conversations outside were next to impossible.
Hammurabi, Twelve Tables… great historical context DJG! With a few thousand years of experience, one should think that we would learn. But we don’t need no history books apparently, we prefer blissful ignorance and the Memory Hole.
Let’s just make bananas in the US!
All white people being well-paid to safely grow and make everything white Americans need!
Kudos to the propogandizing that has convinced a bunch of goober we can do that tomorrow and also prices will go down when we do.
My reaction may seem a bit cynical and reactionary, but, after the able introduction citing specific analytic considerations, I was disappointed to encounter the hollow rhetoric of a business school professor preaching anodyne abstractions. The appeal for “smart regulation” absent any institutional prescription was just the icing on a bitter cake for me.
I really do not know what he means by “arbitrary”. Effective regulatory frameworks sometimes rely on simple, “bright-line” rules that exclude the kind of discretionary judgment that invites bribery or litigation or regulatory capture. Is that “arbitrary”? Appeals to the idea of using legal frameworks to “reduce uncertainty” sounds good to businessmen in the abstract. But, the public purpose of business regulation is to increase the risk and liability associated with the expedience of “cutting corners”, of shading salesmanship into fraud, hiding negligence and so on and imposing those costs on sellers instead of unwary buyers. Doing the right things in business are often hard and costly, the law should be putting burdens on the scales of competition by defining cheating and punishing it.
Great post!
The heart of the matter, which not just libertarians but all of neoclassical economic theory fails to understand, is that markets are not a fact of nature but institutions. They are not impeded by regulations; they depend on regulations. Indeed, they are constituded by regulations. The was never a time when human societies depended on barter; modern markets depend on myriad state legal institutions, the most fundamental being legally-enforceable contracts, property, and money itself (as the many MMT-savvy readers here already know).
There was never an “age of barter.” Humans are not and have never been rationally maximizing individuals. The entire premise of neoclassical economic theory is a fiction invented to make their mathematical models work. Societies are composed not of individuals but of people born into relationships bound by institutions, from the family on up.
There is so much good academic writing on this that neoclassical economics (a form of speculative metaphysics masquerading as social science) simply ignores. Two accessible reference points that speak directly to Yves’ point are:
Both can be accessed for free online via sites like libgen, sci-hub, or annas-archive.org.