[1] Fundamental Issues - The Rule of Law and the Economy

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(2) Anticapitalist economists and their misconception of the rule of law (part II) - continued from "[4] News from Absurdistan - Chörman Freedom".

The formulation and application of legislature by any power considered legitimate (i.e. nowadays, government approved by majority vote) is all that is required for the rule of law to obtain. This is the prevalent doctrine in the West.

Creating law(s) - or rather producing legislature - to adjust the economy to politically desired demands is in this reading a legitimate and highly important task within the framework of "the rule of law".

The German concept of a "soziale Marktwirtschaft" ("social[ly benign] market economy") follows this doctrine. According to it, it is incumbent on those enacting "[the rule of]" law to enforce politically willed constraints on the economy so as to create socially palatable (or politically approved) outcomes rather than accepting results that are not affected by intervention on the part of politically organized interests.

This position is based on a fundamental fallacy that distorts both economics and law, the latter having once been called "the science of freedom", to which status it ought to aspire again. Like practically all other branches of the social sciences, law and economics have taken their sight off their genuine subject-matter, becoming adjuncts of a political agenda. Their original subject-matter was the study of the conditions of self-generating order - not the second guessing, narrowly interested dabbling in such order.

However, properly understood, the rule of law is not a safeguard against capitalism (or if you will, unwelcome outcomes of the economic processes) - it is the very precondition of capitalism and all of its outcomes, irrespective of their being deemed unwelcome after the event by this party or another. After all, with respect to the realm of commerce, the purpose of the rule of law is to ensure that economic transactions are entered into under the condition that generally applicable rules of just conduct are being observed.

The concept of justice, more precisely the quality of being just, adheres uniquely to human conduct. It is meaningless and, indeed, very dangerous to apply it to outcomes divorced from or unrelated to the obligation to act in accordance with rules of just conduct. But such "divorced outcomes" are precisely what the roundabout processes of the economy add up to. We can and should act in a just manner when participating in economic affairs, but having acted in such a way, the economy, the sum of such action, can never be just or unjust.

An anonymous process, whose overall outcome has not been deliberately brought about by anyone, cannot be meaningfully said to result in just or unjust circumstances.

In the words of F.A. Hayek:

"Since the consequences of applying rules of just conduct will always depend on factual circumstances which are not determined by these rules, we cannot measure the justice of the application of a rule by the result it will produce in a particular case. In this respect it has been correctly said of John Locke's view on the justice of competition, namely that 'it is the way in which competition is carried on, not its result, that counts'...That it is possible for one through a single just transaction to gain much and for another through an equally just transaction to lose all, in no way disproves the justice of these transactions. Justice is not concerned with those unintended consequences of a spontaneous order which have not been deliberately brought about by anybody." (F.A. Hayek, Law Legislation and Liberty, Volume II, p.38)

An anonymous process cannot be said to "act" in a just or unjust manner.

As in a game, a player's conduct may be judged to be just or unjust, depending on his adherence to the rules, but the outcome, the loosing or winning of the participants, is an event divorced from the notion of justice or injustice. The game's final result is not and cannot be regarded to be his responsibility, unlike his observance and most advantageous use of the underlying rules.

"The rules of just conduct thus merely serve to prevent conflict and to facilitate co-operation by eliminating some sources of uncertainty. But since they aim at enabling each individual to act according to his own plans and decisions, they cannot wholly eliminate uncertainty. They can create certainty only to the extent that they protect means against the interference by others, and thus enable the individual to treat those means as being at his disposal. But they cannot assure him success in the use of these means, neither in so far as it depends only on material facts, nor in so far as it depends on the actions of others which he expects. They can, for instance, not assure him that he will be able at the expected price to sell what he has to offer or to buy what he wants." (item, p.38)

The point of the rule of law is to have (among other things) capitalism, not to fetter, truncate or meddle with it.

Ron Paul writes pertinently in "Freedom Under Siege":

"Total freedom of contract and association is what the "pursuit of happiness" is all about. Once this principle is violated, the gradual but steady erosion of our liberties can be expected unless the principle of individual rights is reestablished.

Free choice means that the incentive to produce is maximized, since
it's assumed that we can keep the fruits of our labor. In a free society, an
individual benefits from wise and frugal decisions and suffers the
consequences of bad judgement and wasteful habits.
The state should neither guarantee nor tax success, nor compensate those who fail.
The individual must be responsible for all of his decisions. Because some suffer from acts outside of their control, we cannot justify the use of violence to take from someone else to "help out." People in need are not excused when they rob their neighbors, and government should not be excused when it does the robbing for them. Providing for the general welfare means that the general conditions of freedom must be maintained. It should never be used to justify specific welfare or any transfer of wealth from one person to another." (Chapter 1, p.39)

By contrast, the doctrine of the soziale Marktwirtschaft which is practically unanimously held by Germans, from highly acclaimed professors of economics to the people you meet in a café, completely misses the link between justice and an economy that deserves to be called free.

A free economy is an economy as it unfolds in a free society. For a free society to persist the rule of law must prevail. The rule of law ensures that the behaviour of economic agents is in line with rules of just conduct. The rule of law requires that - beyond that - no intervention take place concerning the outcomes of the processes of economic activities in a society.

The German insistence to correct the market economy in order for it to become "social" has the disastrous effect (a) to preclude the rule of law and to replace it with arbitrary interventions largely dictated by the rule of the strongest (in the political arena) - i.e. the concept of justice has been abandoned and ousted by political correctness, i.e pressure from the politically dominant -, and (b) to weaken the economy severely.

Jurists in Germany do not understand that the rule of law is concerned with the same thing as economics is. Economists in Germany do not understand that economics is concerned with the same thing as the rule of law is. Both are concerned with the preconditions of a free society, a spontaneous or self-generating order as it emerges from the interaction of individuals whose personal liberty is protected by the law and whose commercial dealings are governed by generally applicable rules of just conduct. Generally, Germans do not begin to have a suspicion that capitalism (the economy of a free society) and the rule of law (the legal order of a free society) create a kind of self-organizing order that alone deserves to be called a civilization.

Instead, Germans are passionately distrustful of others and, therefore, accept the limitation of their personal freedom by mythical agents of collectivism. It is hardly recognized that it is this collectivism - representing an unbroken tradition since the country's inception - that gives them grounds to be distrustful of others. Tell them about self-generating order, and they shudder with fear of anarchy.

The authorities tell the Germans that they live in a Rechtsstaat (i.e. under the rule of law), and the people are convinced of its existence, proud to live under it and disdainful of peoples in other parts of the world who do not honour the rule of law, while in fact, we are facing a case of not just the emperor having no clothes on but an entire population running around nakedly.

And so, our nation building efforts in Afghanistan - bristling with guns - are designed to introduce a democracy that we no longer have and a rule of law that never existed in Germany.


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