Before there was the University of Chicago’s law and economics movement, there was Max Weber. The sociological relationship between law and the economy permeated much of Weber’s work. “The England Problem” refers to what some see as a discrepancy between Weber’s theoretical work on law and economics and his historical accounts of the rise of capitalism. According to critics such as David Trubek, Weber argued that rational capitalism required a formal rational legal system so economic actors could calculate their actions with a certain degree of certainty. While continental legal systems provided this, the English common law, with its decentralized and ad hoc decisions, was not “rational” as defined by Weber. Despite this, England was also the birthplace of modern rational capitalism. How can this be?
Richard Swedberg argues that there are three ways to resolve this discrepancy. Either 1) Weber argued that capitalism took off in England despite the lack of legal rationality, 2) Weber never argued that legal rationality was a requirement for economic calculation, or 3) England’s legal system was actually a lot more rational than people think. I think (2) is the most likely candidate, but there still remains much confusion given that Weber puts so much emphasis on legal rationality in his work. Hayek, for example, thought Weber’s conception of law as consisting only of a formal rational legal system was “wholly useless and rather characteristic of a widespread confusion” since it didn’t leave any room for spontaneous orders such as the common law.
Regardless of arguments surrounding what Weber actually said, his insight that the main benefit of law (broadly defined) is that it serves to enable economic calculation among economic actors is genius. The best enumeration of this insight can be found in Ludwig Lachmann’s aptly titled book The Legacy of Max Weber. “An institution,” according to Lachmann, “provides means of orientation to a large number of actors. It enables them to coordinate their actions by means of orientation to a common signpost.” In this way, institutions are a form of embedded knowledge which creates order. These institutions can the result of both purposeful planning and spontaneous ordering of individual action.
More recently, Robert Higgs has put forth a much underappreciated theory of “regime uncertainty” which he applies to the Great Depression to explain its persistence. Higgs argues that business leaders avoided new investments because of “pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns.” It was not so much FDR’s leftist policies that scared them per se, rather the fact that they didn’t know how far the administration would go. From other accounts of FDR that I’ve read, I don’t think he knew either. I’m not sure if Higgs is familiar with Weber or Lachmann’s work, but the idea of regime uncertainty complements them well.
I’ll end with a question: How much of our current economic situation can be attributed to regime uncertainty? How does simply being uncertain about the prospect for more stimulus funds, major healthcare changes, or housing market supports affect decision-making among economic actors?
- Josh McCabe
Insofar as sizeable economic actors, previous to the current economic situation, had spent, invested and leveraged their resources within an institution which they had felt confident would cover their risks and their capital, their current resistance to continuing this approach makes sense. The privileged position given to those risking capital by market-based regulatory institutions, at least for a brief, hand-wringing period, IS uncertain. And since the contradictions made plain by having the public sector, whose milquetoast regulatory attempts were picked apart and dismissed, cover their bets has created a frothing public, those who previously might have invested will wait it out. Until public resources are clearly going to be made available as deposit and investor insurance for the private sector, a corporatism in which this country had slowly been drowning, there may be little to expect in the movement of any capital.
So yes, uncertainty is the factor.
Uncertainty is certainly the key issue, though I’m not sure it’s regime uncertainty. The uncertainty is really about consumer consumption. As long as businesses don’t expect that to increase, they would be risking a lot by investing in increased production. I suppose this could be labeled regime uncertainty since government (apparently) has the power to produce the huge stimulus packages that can have a dramatic effect on business and consumer confidence and therefore lead the way back to normal levels of employment and consumption.