23 November 2011

The Rule of Law

It so happened that while I'm reading about the topic of the rule of law in another context I came across a newly released article by Todd Zwicki who teaches at the George Mason School of Law. You can see an abstract for his piece here. Economic Uncertainty, the Courts, and the Rule of Law makes a persuasive argument that sudden executive, judicial, and even legislative changes in the background rules of law in times of economic crisis is counterproductive.

As others, including David Skeel have reported, the bailouts of Chrysler and General Motors did not preserve their values as going concerns; that would have happened anyway through straightforward Chapter 11 reorganizations/sales. The executive manipulations of the rules of bankruptcy simply took value that belonged to one set of creditors (bondholders) and give to others (unions) who were politically preferred. In the name of an economic emergency, the government ignored background rules of property laws for political purposes.

Zwicki traces the argument that emergencies can permit the executive to trump the law back to John Locke. But Locke--and Zwicki for that matter--meant emergencies in the national security sense, not economic and financial crises. Unfortunately, Zwicki traces the value of the rule of law back only as far as Friedrich Hayek although arguments for it go back much further.

Political manipulation of the law is ultimately counterproductive (if not simply wrong) because economic actors will avoid investing (or demand higher returns than otherwise) in countries where they fear the "legalized" loss of their property. Even the investment choices of resident citizens who cannot take their money elsewhere will be affected as the experience of countries with large black- or grey-market economies has shown (see Italy). As far as the political costs go, why not skip the middleman like the bankruptcy court and simply bribe the relevant public officials to reallocate property to the highest bidder?

In short, this is an excellent work and adds another (less philosophical) argument for the principle of the rule of law.

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