Just as at the time of Bretton Woods, international economic law is essential to discourage destructive national policies. But it is also vital to understand how law, regulations and institutions are located within a longer historical trajectory of colonialism, inequality and exploitation.

The Covid-19 pandemic and the climate crisis demonstrate how the world today is more connected economically, socially, politically and ecologically than at any other point in history.

Actions in one country have impacts, sometimes very serious ones, on the societies, environment and economies of other countries. The globalisation of economic markets and technological change affect how countries, companies and individuals conduct economic exchange, including trade in goods and services, capital investment and financial transfers.

These developments also accelerate the social and environmental costs of transnational economic activity. For example, while products, such as mobile phones, can be used in one part of the world, their production can criss-cross multiple other geographical regions. Similarly, raw materials can be extracted from one country to be manufactured into consumer products in another.

This means that the social or environmental costs of production 鈥� such as low wages, poor health and safety standards and/or air or water pollution 鈥� are not necessarily borne by the countries or communities where the final product is sold and used by consumers.

These changes underscore the critical importance of global collective action and international economic law 鈥� the set of global rules and institutions that regulate transnational economic transactions.

As discussion turns to how international economic law deals with contemporary global problems 鈥� such as managing global supply chains, settling trade disputes, overcoming sovereign debt crises and financing transitions to low-carbon economies 鈥� it is important to consider how the historical legacies of the current system can affect its capacity to do so effectively.

This will enable us to move beyond the economics discipline鈥檚 approach to international law, which is often limited to narrowly measuring the 鈥榚ffect鈥� of different laws and legal institutions on various economic indicators, such as growth, investment and poverty. Taking this approach will enable us to explore how law is itself developed in a colonial and imperial context, which may serve to reproduce and perpetuate colonial harms and exploitation.

The colonial context

The interdependence of countries was recognised in the aftermath of the Second World War. Post-war planners sought to set ground rules for cross-border transactions of goods, services and finance. The aim was to prevent a repeat of the self-interested policies that led to the Great Depression and to catalyse post-war reconstruction and development.

The trio of international institutions developed at the Bretton Woods conference in New Hampshire in 1944 鈥� the International Bank for Reconstruction and Development (later expanded into the World Bank Group), the International Monetary Fund (IMF) and the General Agreement on Tariffs and Trade (GATT, the precursor of the World Trade Organization, WTO) 鈥� remain the foundation of the architecture governing the world economy today.

This original system was developed to regulate trade and other economic relations among the 鈥榮overeign鈥� nations at the time and by the victors of the Second World War. Colonised states and other non-industrialised countries were mostly excluded from the initial agreements and entered into the system at later dates on terms already set by the colonial states.

The post-war planners and their industrialised country proponents did not envisage the system dealing with the specific conditions of newly independent and developing countries in the post-colonial period. Nor did they envisage the impact of these new states on their participation in the global economy.

Instead, there was an imperative to restrain the activities of these new participants in the international economic system in order to protect colonial geopolitical and economic interests. Without overt territorial control over post-colonial states, international law became a mechanism through which former colonial powers and their corporations secured access to natural resources and markets for the goods and services that they produced.

For example, the post-war international trade regimes, notably under the GATT and later the WTO, prioritise the liberalisation of economic sectors where industrialised countries have an advantage 鈥� industrial products, capital and money, services sectors and enterprises. There is far less emphasis on areas where developing countries can benefit, such as agriculture, labour mobility and technology transfer ().

International investment law, enacted through customary international law and , was developed to protect the property of foreign investors, overwhelmingly from developed countries. This was without corresponding restraint on their activities in host states, which were primarily developing countries ().

The asymmetries of international economic law have been laid bare in the aftermath of the global pandemic. The rules of international trade and investment regimes have been shown to have curtailed countries鈥�  while potentially , such as travel restrictions and business closures.

There are already  of foreign investors using the investor-state dispute settlement (ISDS) system to bring claims against governments for the public health and economic measures they undertook during the pandemic, which they claim cost them financial losses.

Meanwhile, the lack of adequate rules on finance and for resolving sovereign debt crises have led to worsening financial and economic crises in developing countries.  since records began, with developing countries shouldering the highest debt burdens.

This is, in part, due to the  that allows them to restructure debt in an orderly manner, including the growing debt owed to private creditors.

Imperial law

These global developments reflect 鈥榯he pathologies of international law鈥� that are inherited from its legacy of imperialism, which included the legitimising of colonial conquest on the basis of paternalistic grounds of protecting and improving the livelihoods of colonial populations ().

International law with its deeply Eurocentric roots has established what has been called a 鈥榙ynamic of difference鈥� 鈥� the gap between European and non-European cultures and peoples, with the former being characterised as broadly 鈥榗ivilised鈥� and the latter as 鈥榰ncivilised鈥� ().

This has allowed international law to be used instrumentally to justify the design and application of rules that privilege one set of countries and communities over others in the global economy. This 鈥榗ivilising mission鈥� of international law has been used to incorporate developing countries into the international economic order despite unequal terms, often under the guise of economic development and poverty reduction.

To be seen as genuine players in the global economy, developing countries had to 鈥榩lay by the same rules鈥� of the game or face exclusion from the community of 鈥榗ivilised nations鈥�. Within a historical context where the rules and institutions have been developed by one set of states, the narrative of 鈥榬ule of law鈥� has a powerful legitimising effect.

For example, the  even where they may come into conflict with community and environmental interests is seen as acceptable in the longer term because this legal security will provide incentives for further foreign investment for development.

Recent high profile decisions in arbitration cases such as  and  demonstrate that broad-based provisions in investment treaties continue to privilege foreign investors, finding host states in breach of investment law for revoking mining licences due to environmental and social concerns.

These decisions that require host states to pay significant financial damages can lead to 鈥榬egulatory chill鈥� as governments may refrain from enacting or enforcing public interest regulatory or policy measures that may lead to litigation from investors ().

In another example, we see developing countries continuing to repay their creditors even when they can no longer afford to do so. In other cases, they limit spending on essential services, such as healthcare and education, to service debt because international markets and donors look unfavourably on sovereigns that wilfully breach their contractual obligations.

Even where there are officially sanctioned mechanisms for debt relief 鈥� such as the Debt Service Suspension Initiative, G20-initiated debt payments moratoria and the G20 Common Framework for Debt Treatments 鈥� sovereign debtors had been reluctant to use them due to the risk of sovereign credit .

These debt relief initiatives have also not provided mechanisms to deal with the burgeoning debt owed by countries to private creditors who have not generally participated in official restructuring initiatives.

Rethinking international economic law

Understanding how international economic law is located within a longer historical trajectory of colonialism, inequality and exploitation is important in our efforts to reshape its future.

Whatever its past, it is clear that we need a set of clear and equitable rules and institutions to tackle global problems. The raison d鈥櫭猼re for international economic regulation at the time of the Bretton Woods conference 鈥� to prevent destructive, self-interested national economic policies 鈥� remains as relevant as ever.

As post-colonial countries entered into the world economy during the decolonisation period, they did  that would recognise, among other things, their sovereignty over natural resources in their territories, their right to development and a call for redistribution of global wealth.

Principles of intergenerational and intra-generational equity, common but differentiated responsibilities, special and differentiated treatment, and less than full reciprocity have been written into international agreements in recognition of the historical and contemporary circumstances of developing countries. The effects of these accommodations, while hard fought for, remain limited in the face of broader systemic developments in international economic law.

The problem remains that the circumstances of developing countries are viewed as exceptions to the norm that can be addressed through adjustments to the status quo rather than by a revision of the asymmetrical rules of international economic law.

And it is often difficult to secure agreement to invoke these so-called 鈥榝lexibilities鈥� in international law in the face of powerful states and corporate actors. For example, there was a long and fraught battle by developing countries to secure  to allow for more manufacturing of Covid-19 vaccines to address the lack of global supply and developing countries鈥� access to them.

Although this is an exemption available under WTO rules, proposals by developing countries, led by India and South Africa, were opposed by the UK, the European Union and other developed countries until a compromise deal was reached in 2022.

Former imperial powers continue to dominate international law-making and global governance spaces. What鈥檚 more, they are reluctant to cede control and to reform international economic law in favour of developing countries and marginalised communities. Until we recognise that international law is part of the problem, it will not be part of the solution.

Photo: Mt. Washington Hotel听where the Bretton Woods conference took place in 1944. By photographer Carol M. Highsmith.

Celine Tan is Professor of International Economic Law at the University of Warwick.

This blog post is a part of the Decolonising Economics blog series.

Drawing realised by artist Pawel Kuczy艅ski for Serena Natile’s book

I came to the study of fintech as a feminist socio-legal scholar researching the gender dynamics of South-South migration. While doing fieldwork in Kenya for my PhD in 2012, I came across M-Pesa, a mobile money service used by locals as an instrument for transferring money from urban to rural areas. From the start of my research in 2011 to the completion of my PhD in 2016, ongoing studies on M-Pesa were mainly celebratory. It was acclaimed as an innovative instrument for poverty reduction, development, and gender equality and was enthusiastically supported by donors and international financial institutions such as the World Bank and the International Monetary Fund (IMF), as well as by tech entrepreneurs and corporate philanthropy. Its success story was so uncontested that I decided to change my research question to focus on the gender dynamics of digital financial inclusion, rather than on my initial interest, migration.

The key narrative of M-Pesa鈥檚 success in terms of gender equality was, and still is, that it facilitates women鈥檚 access to financial services, providing them with a variety of opportunities to improve their own livelihoods and those of their families, their communities, and ultimately their countries. In the specific case of M-Pesa, a basic-mobile-phone-enabled money transfer service is considered more accessible and available than transferring money via mainstream financial institutions such as banks, and more reliable and secure than informal finance channels such as moneylenders or the handling of cash via rotating credit and savings associations (ROSCAs). This claim is based on three assumptions: first, that women have less access to financial services than men have; second, that women would use their access to finance to support not only themselves but also their families and communities; and third, that digital financial services are better than informal financial channels because they overcome the limits of cash, ensuring traceability and security. These assumptions motivated advocacy and investment in digital financial inclusion projects and the creation of ad hoc programmes and institutions, all strongly focused on the question of how digital technology can be used to facilitate women鈥檚 access to financial services.

During the time of my fieldwork in Kenya, empirical research on M-Pesa was very common. (FSD) Kenya, an institution funded by Western donors and the Bill and Melinda Gates Foundation to contribute to Kenya鈥檚 financial development and address constraints to financial inclusion, was actively collaborating with local and international researchers and producing numerous studies on the uses and potential of mobile money for women. As I discuss in my , M-Pesa, unlike some development projects, was characterised by not a lack but an overproduction of data. However, none of the studies contextualised the story of M-Pesa within the broader historical and contemporary gendered structures and power relations that define and regulate the global economy and the international development project.

The individual and groups (chamas) of women using M-Pesa that I interviewed were all accustomed to being asked questions about how they benefited from mobile money. A general answer that was always reported in M-Pesa success stories was that mobile money allowed them to manage money more efficiently and to juggle different tasks such as housework and micro-entrepreneurship. For this reason, the increasing number of women using M-Pesa as a more accessible financial service was presented as a success story in terms of gender equality. However, on asking the same women different questions about their everyday lives it became clear that the equation of access to M-Pesa with gender equality was a lot more complex than it appeared. To use any financial service such as M-Pesa requires money in the first place, and women鈥檚 main concern was about not managing money but having money to manage. They wanted a regular and stable source of income, for instance via secure employment, to be able to pay for food and water, school fees, housing, healthcare, electricity and all other basic services, particularly in the absence of public social infrastructure and state support. This is the main reason why informal financial institutions such as ROSCAs remained essential in women鈥檚 everyday lives, even as the use of M-Pesa spread. In ROSCAs women put together resources to support their livelihoods based on a system of trust, solidarity and reciprocal accountability. Women鈥檚 strong awareness of global and local structural injustices urges them to create grassroots mechanisms to satisfy their immediate needs while continuing to protest and strike for their rights.

Beatrice Karore is the founder of (Grassroots Women) Initiative, and a community mobiliser and human rights defender in Mathare, Nairobi, Kenya. 

While M-Pesa did not replace ROSCAs, it was integrated into grassroots practices; for instance mobile money is used to facilitate small payments and store money in the M-Pesa e-wallet, despite the fact that mobile money is not designed or regulated for use as a savings account. The integration of a digital financial service such as M-Pesa into informal practices can be seen as a doorway to expanding capitalist logics into spaces previously outside the purview of capitalist markets, making such spaces vulnerable to value-extraction via fees and data. The women in my focus groups were well aware of these dynamics but had no power to change them, and often have no choice but to accept them or attempt to play the market鈥檚 game. Various products and services built on the M-Pesa platform target fundamental needs such as access to water, healthcare, electricity and education, providing credit-based flexible arrangements that allow small, irregular repayments. These products and services are funded via complex institutional and financial arrangements that involve public and private institutions including governments, donors, international institutions, the private sector, and corporate philanthropy. The arrangements are grounded in market logics and claim to create incentives for the private sector while contributing to social development. However, such initiatives do not improve access to increasingly privatised and marketised resources and services, and they make access to key services conditional on financial inclusion, creating further gendered problems such as indebtedness and generational vulnerability.

The gendered disadvantage in financial inclusion is perpetrated by the uncontested assumption that access to financial services leads to gender equality. This results in policies and institutions focusing on how to include the excluded rather than addressing the more important and complex question of why financial inclusion is gendered as well as racialised and based on class, socioeconomic and migration status, coloniality, and geopolitical location. In my research I consider this an essential question if we are to understand whether and to what extent new digital financial inclusion services such as M-Pesa can contribute to gender equality. Interrogating how unequal gender relations are embedded in processes of financial exclusion and narratives of inclusion involves using gender as an analytical and methodological tool to understand where inequalities lie in the global economic and legal order. Examining coloniality in this context, as the long-standing patterns of power that emerge in the context of colonialism (Mendoza, 2016), is not just a conceptual choice but is driven by the need to understand the gendered dynamics of financial inclusion and exclusion and why and how women have become the target of financial inclusion policies.

Colonialism created a situation which subjected people of the Global South to Western domination via the occupation of their land, extraction of their natural resources, and exploitation of their labour. Indigenous people found their norms and institutions erased or filtered (e.g. via the non-repugnancy clause: the requirement that colonial law be in keeping with the law of the colonisers鈥� home country) in the interest of Western economic interests and ideologies, and this is evident if we use gender as an analytical framework. As the Kenyan scholar Achola Pala Okeyo (1977) explains, while men and women under colonialism shared a similar subordinate structural position in relation to the dominant culture, colonial rules had differential impacts on them, shaping gender relations. The colonisers鈥� commodification of land and introduction of property law undermined more collective forms of ownership in favour of patriarchal relations that saw men as the household heads and holders of land titles (Manji 2006, Maathai 2008). The monetarisation of economic relations and introduction of the wage economy targeted men as paid workers (albeit in discriminatory and exploitative colonial settings) and the family breadwinners, relegating women to the position of secondary unpaid workers (Boserup 1970). This contributed to the framing of women as responsible for unpaid household and community labour, dependent on men for money and hence excluded from financial services. This also explains why women in formerly colonised countries are so predominant in informal employment and informal finance, because while excluded from formal economic institutions they had to be able to survive in a capitalist monetarised system built on that exclusion.

The end of colonialism did not lead to the fair redistribution of resources and opportunities that the women fighting colonial power had hoped for. Nationally, many local elite rulers did not dismantle colonial gendered structures but used them for their own power and purposes. For instance according to Kenyan feminist scholars, the government used ideas related to 鈥楢fricanisation鈥� (a concept critiqued by Fanon (1961) as distinct from decolonisation) to discriminate against women (Nzomo 1993, Oduol and Kabira 1995, Otieno 1998, Maathai 2010). Despite women having played a key role in the struggle for independence from colonial rule, they were 鈥榙omesticated鈥� (Rogers 1980, Mies 1986), denied political power and access to wealth. For instance the second Kenyan President, Daniel arap Moi, encouraged women to join the Maendeleo ya Wanawake Organisation (MYWO, 鈥楶rogress for Women鈥� in Swahili) which was founded during the colonial era by a group of Western administrators and their wives who sought to improve the status of Kenyan women according to dominant Western values with the purpose of educating them to become good mothers and housewives (Oduol and Kabira 1995).

Women in formerly colonised countries found themselves at the lower end of the power distribution both nationally and internationally. The demands of anticolonial campaigns in the 1950s鈥�1970s from the Non-Aligned Movement, the (NIEO), and particularly of the invisible women鈥檚 grassroots movements (Basu, 1995) for a just international system based on reparation and redistribution were dismissed in favour of an order aimed at protecting Western economic interests and ideology. In this international order, and in the development narrative underpinning it, women in formerly colonised countries have been portrayed progressively as victims, as recipients of aid, and as icons of change invested with the responsibility for developing their communities and countries. Following Ester Boserup鈥檚 1970 report on women鈥檚 exclusion from economic development, first women鈥檚 inclusion () and later gender equality () became central in international development discourse. Despite this, the voices of women from formerly colonised countries remained excluded from official international fora, a space dominated by white Western men, and were often subordinated to Western women in alternative fora such as the (Oyewumi 1997, 2003). This meant that in practice they had no power to resist international policies such as the neoliberal structural adjustment programmes (SAPs) of the 1980s鈥�90s that pushed them to the lower end of the global income distribution.

, Hofburg Palace, Vienna, Austria, 1969

The negative impact of SAPs on women has been widely documented by feminist scholars (see for instance Elson 1989, 1991). Compulsory privatisation and reduced government spending on social services increased the burden of women鈥檚 unpaid labour. In the context of the SAPs the internationalisation of microcredit 鈥� small collateral-free loans to collectively-liable groups of women to start income-generating activities 鈥� became a common gender equality policy that replaced state funding and was perfectly compatible with neoliberal ideas of marketisation and entrepreneurship. However, in reality microcredit rarely allowed women to start a remunerative business that could change their socioeconomic status, as the micro loans only allowed micro-entrepreneurship, with which local markets were already saturated and for which there was limited demand. Very often microcredit loans were used to pay for essential resources and services that became inaccessible for many women at the lower end of the income distribution following the adoption of neoliberal policies. In other words, microcredit was offered as a market-based solution for exclusions caused first by colonialism and later by development, while taking advantage of established colonial infrastructure and power relations.

Private-sector-enabled digital financial services such as M-Pesa are no different. Fintech is presented as a solution to exclusions created by colonialism and development interventions, but is itself a product of coloniality. Fintech adds an additional layer of inequality to financial exclusion: technology. is embedded in unequal relations of power and wealth, with Western states and corporations having the resources to define the trajectory and purpose of technological development. In addition to issues created by microcredit such as over-indebtedness and gendered stigma and abuse (Goetz 1996, Rahman 1999, Kabeer 2001, Mayoux 2002), digital finance creates new possibilities for exploitation and extraction, (e.g. via fees and data), expanding the number of actors from digital providers to various private-sector actors who profit from creating new little-regulated mobile money products and services. For these reasons the argument I develop in is that fintech does not contribute to gender equality because it does not address any of the causes of gendered financial exclusion but rather enhances unequal power relations. Promoting the narrative that digital financial inclusion contributes to gender equality, creates problems that need highlighting.

First, this narrative does not recognise digital financial services as a product of global asymmetries of wealth and power that are embedded in and reproduce gendered inequalities. These asymmetries are evident at different levels of the system: M-Pesa was institutionalised via a public-private partnership between the aid branch of a former colonial government (the UK Department for International Development, now assimilated into the Foreign Office) and the UK-based multinational corporation Vodafone, which was enabled to expand and acquire African telecoms by the SAP鈥檚 requirement for privatisation of national industries; the intellectual property of M-Pesa was registered in the names of Vodafone and the UK-based tech company Sagentia, rather than that of the local provider Safaricom; the development of the M-Pesa platform has been left unregulated for years in order not to hinder technological innovation, resulting in the proliferation of extractive products and services built on its platform; and the M-Pesa platform is privately owned, with profits made by Safaricom, Vodafone and international shareholders. Specific gender-equality projects are funded via corporate philanthropy rather than investing the profits created by M-Pesa in public social infrastructure and support to address gendered disadvantage.

Second, the claim that digital finance contributes to gender equality removes attention from the actual causes of gendered financial exclusion and the need for serious local and international redistributive interventions. These would include regulating international trade, investments and finance in the interest of people rather than profit; establishing an international and national taxation system that funds universal social security; ensuring workers鈥� rights and living wages and salaries; and cancelling the external debt imposed on countries of the Global South with SAPs, allowing them public resources for welfare rather than forcing them to rely on conditional aid, philanthropy and exploitative investments. Such measures should prevent Western countries and corporations taking advantage of the global economy (e.g. through the use of cheap labour, materials and markets) with no contribution to the wellbeing of the global population.

Third, the logic of opportunity created by fintech results in an unequal distribution of benefits and risks between digital financial providers and users, with important implications for gender equality. The digital financial inclusion-gender equality nexus is based on the idea that women need to take advantage of the opportunities created by digital finance to improve their and others鈥� livelihoods; however, as feminist political economy and the concept of social reproduction teach us, this generates a further layer of responsibility for women: the responsibility for transforming opportunity into success without any support in the form of income, social security or social infrastructure; while for the providers, including all the actors involved in the fintech business, digital finance represents a secure source of profit via fees and data.

This analysis has shown that 鈥榙ecolonising fintech鈥� should be a contextual purposive action rather than a cosmetic claim. It requires historicising the analysis of the fintech infrastructure and its institutional arrangements with a clear commitment to building grassroots power to create anti-colonial futures, aiming to end socioeconomic injustice via a radical redistribution of wealth and power.

is a feminist scholar based at Warwick Law School, University of Warwick. Her research engages with socio-legal inquiry, international political economy analysis, and feminist methodologies to examine issues of coloniality, social reproduction, and maldistribution and, more broadly, the relationship between law and social (in)justice.

This post is part of the mini-blog series Decolonising for Whom? Recentring grassroots struggles and voices in the 鈥榙ecolonising fintech鈥� narrative and the ongoing blog series Decolonizing Economics.

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The trajectory of mainstream economics can be understood in terms of how the discipline historically responded to moments of crises by attempting to 鈥渢heoretically fix鈥� the understandings related to five core 鈥渜uestions鈥� of capitalist political economy 鈥� namely land, trade, labour, state, and legal-institutional framework. This involved legitimising improvements in land that led to the dispossession and the destruction of the commons, justifying free trade based on comparative advantage as opposed to mercantilist state intervention, reducing labour to a factor of production that was supposedly rewarded based on its marginal productivity and hence not being exploited, legitimising state intervention to stabilise capitalism and developing a legal-institutional framework to protect markets from popular democratic pressures. These 鈥渢heoretical fixes鈥� served to ideologically legitimise, preserve, and perpetuate the core content of capitalist social relations even as it corresponded with the modification of the surface-level appearances of capitalism.

The history of mainstream economics is closely tied to the history of capitalist development. However, the discipline of economics attempts to obscure this relationship, mostly by asserting its value-neutrality through a positivist approach. Despite criticisms, mainstream economics continues to retain its core postulates by reasserting the naturality and inevitability of capitalist social relations by dismissing questions of political economy. The outsized influence of economics in policymaking necessitates consistent critique and engagement with the assumptions and implications of mainstream economic theories and models. There is a wealth of literature that critiques different aspects of mainstream economics from different perspectives (see Chang 2015; Fine and Milonakis 2008; Kvangraven and Kesar 2021; Lee 2009; Mezzadri 2020; Reinert, Ghosh & Kattel 2016; Selwyn 2016). This essay contributes to this rich tradition of critique and argues that the trajectory of mainstream economics can be understood in terms of five core 鈥渜uestions鈥� 鈥� namely land, trade, labour, state, and legal-institutional framework.

While these are not mutually exclusive questions and economic thought did not evolve in a linear trajectory, I argue that the discipline of economics responded to moments of crises by attempting to 鈥渇ix鈥� the existing theoretical approaches that underpinned the prevalent understandings of capitalist political economy. These 鈥渢heoretical fixes鈥� served to ideologically legitimise, preserve, and perpetuate the core content of capitalist social relations even as it corresponded with the modification of the surface-level appearances of capitalism.

But since the logic of capital expands to all realms of society and leads to new contradictions that cannot be permanently overcome (Harvey 2014), new problems inevitably arise for economics as a discipline. Highlighting how these questions were fixed in mainstream economics provides a better perspective on how to challenge its supposed value-neutrality as well as its dominance in academia and policymaking. The purpose of this essay is not to provide a linear historical account of the evolution of economic thought, but to historicise economic theories by situating them in their political-economic context, which helps make better sense of why mainstream economics evolved the way it did.

The land question

Land played a central role in the capitalist transition and continues to remain integral to contemporary accumulation (D鈥機osta and Chakraborty 2017). The classical liberals wrestled with the question of how to organise land reserves as capital was getting globalised through colonialism. Locke 鈥渇ixed鈥� this question through his labour theory of property which argues that land gets improved and hence creates value upon the application of labour (鈥渁s much land as a man tills, plants, improves, cultivates, and can use the product of, so much is his property.鈥� [Locke 1690, 1980: 21]).

Thus, Lockean theory posited that private ownership of land even if concentrated in the hands of a few is much better than the 鈥渨astelands鈥� that are left unattended or held under common ownership (Whitehead 2010). This justified not just capitalist landlordism in England but also settler-colonialism. North America with its vast reserves of land and natural resources epitomized the Lockean state of nature that needed improvement. In effect, this legitimised the dispossession and genocide of indigenous people (the primitive accumulation of capital) whose ways of living were not compatible with the emerging capitalist law of value. The Lockean theory of property rights underpins the modernisation paradigm that continue to structure mainstream development discourse 鈥� where the protection of private property rights at all costs is equated with developmental progress.

The trade question

Capitalist trade was fuelled by both market competition and colonialism, and classical political economists rose to the defence of the emerging industrial order. As the physiocrats grappled with the questions of value-creation by agricultural labour, Adam Smith advocated for a greater division of labour that he believed to have spurred productivity in the pin factories of his time. Smith defended free trade orchestrated by a nascent capitalist class as opposed to the excessive involvement of the mercantilist state and aristocratic privilege. Though Smith was apprehensive of the adverse effects of the division of labour on the human intellect and argued for the public provision of education for all (Thomas 2018), his idyllic account ignored both the violence of capitalist origins (Marx 1976 (1867): 873-77) and the necessity of centralised state intervention to create capitalist markets (Polanyi 2001 (1944): 146-47)

David Ricardo鈥檚 comparative advantage theory continues to have a much more decisive impact in structuring international macroeconomics, for example, through the Heckscher-Ohlin model. A country has a comparative advantage if it can produce a commodity at a lower cost than other countries 鈥� focusing on comparative costs thus leads to more gains from trade and hence, development. But this not only ignores how global development was structured by imperialism (Patnaik & Patnaik 2016) but is also at odds with how actually industrialised economies benefited from active state intervention. This is not just true of Ricardo鈥檚 own examples – English cloth and Portuguese wine were both outcomes of capital-state relationships (Peet and Hartwick 2015: 48-49) but late industrialisation was steered by the developmental state that defied comparative advantage and market signals (Chang in Lin & Chang 2009). 

The logic of comparative advantage continues to underpin the developmental idea that labour must be cheap in labour-surplus economies 鈥� this forms the basis of 鈥渟weatshop economics鈥� that justifies the deprivation faced by workers in labour-intensive sectors like garment production (Mezzadri 2020). Nevertheless, classical political economists who were trying to understand the emerging capitalist social formation wrestled with the questions of value and distribution, the social relations of production, and the tendencies of crisis and stagnation in capitalism. Smith and Ricardo advocated for a labour theory of value, and Marx insisted that we pay attention to the historical specificity of the emergence of the capitalist value form (see Chambers 2018). The question of labour becomes important in this context.

The labour question

Militant trade unions in alliance with a vibrant socialist movement highlighted how capitalist profit is built on the exploitation of immiserated workers. This compelled mainstream economists to address and theoretically fixthe question of labour through marginalist models. Mathematical formalism was used to delineate the market economy as a sphere insulated from larger socio-political questions: under neoclassical economics, the economy was all about the allocative efficiency of factors of production in contrast to classical political economy鈥檚 focus on classes and distribution. Allocative efficiency was to be achieved in correspondence with the marginal productivity theorem 鈥� where each factor received a return corresponding to their marginal contribution to production that was to be derived using differential calculus.[i]

The neoclassical model of production and distribution was riven with measurement problems as highlighted by the Cambridge capital controversy. Moreover, treating capital and labour as perfectly substitutable factors of production justified the existing distribution of returns as natural market outcomes 鈥� this effectively erased the prospects of accounting for class struggle in the economic model (Dobb 1973: 172). Additionally, the neoclassical model ignores how pre-existing social differentiation shapes market outcomes and thus cannot account for inequalities within the labour market. Moreover, if an equilibrium of allocative efficiency was achieved through the market (which itself was coordinated by utility maximising actors), then there is neither scope for regulatory intervention nor prospects for social change as it does not improve total utility (Clarke 1991: 150).

In effect, the marginalists in contrast to classicals refuted the validity of the labour theory of value (value instead corresponded with subjective utility) and dismissed exploitation (as returns to labour and capital were based on marginal productivity), but just like classicals, accepted capitalist social relations and market outcomes as a natural development. Economics got redefined as the study of preferences and utility maximisation of individuals (the reference point here was the 鈥渕ale breadwinner鈥�) given scarce resources and unlimited wants 鈥� while the social construction of these microeconomic variables was completely ignored. Mathematical formalism assumed that the real world was an aberration from the neoclassical model and that expanding the market would lead to general equilibrium. But this untrammelled faith in market self-regulation faced a crisis during the 1930s, which necessitated a state-led response.

The state question

While the market liberals argued for less intervention during the great depression, Keynesianism argued for state-led counter-cyclical deficit spending to spur aggregate demand in the economy.  Public expenditure will have a multiplier effect that will lead to a virtuous cycle reinvigorating private consumption and private investment. This was not a mainstream idea, but it became the dominant economic paradigm largely because the threat of socialism and the harms of fascism demanded that economists reinvent the idea of state intervention.

Thus, the Keynesian model鈥檚 greatest contribution is to legitimise the macroeconomic interventions of the capitalist state; this provided a theoretical fix to questions about both instability and inefficiencies of capitalism.[ii] Business cycles were to be tamed by state regulation and cyclical unemployment was to be addressed through public investment 鈥� Keynes was the answer to all apparent contradictions of capitalism. The post-war economic order helped realise the capitalist welfare state in the global north, but this did not overcome the internal social differentiations based on gender, race, and ethnicity (see Harvey 2014: 164-184). In fact, New-Deal era housing policies explicitly promoted segregation through redlining by extending mortgages only to white families thereby accentuating racial inequality (Rothstein 2021).  These issues of exclusion persisted in the international order as well – despite the prominence of the Latin American feminists, pan-Africanists like Du Bois, and environmentalism in transnational networks and the ILO鈥檚 Philadelphia Declaration, the Bretton Woods conference marginalised the concerns of gender, race and the environment (Helleiner 2022).

Keynesian models are intrinsically based on a commitment to the territorial logic of the nation-state and a class compromise within these borders. For Keynes, this meant a defence of the interests of the British state that was facing a crisis of hegemony during the Bretton Woods negotiations for a post-war global order. But this also meant – as Patnaik (2017) argues in her study on profit-inflation and Bengal famine – that even though Keynes was a liberal humanist, his policies served the interests of British imperialism and had disastrous effects in colonies. Moreover, North-Atlantic Keynesianism cannot be divorced from its connection with war-related spending (the warfare-welfare nexus) and the subsequent boom that led to the prison-industrial complex (Gilmore 1999). Nevertheless, the Keynesian imagination served as fodder for national-developmental projects in both advanced capitalist countries and postcolonial developing economies, but even the limited gains of a section of the working class from this class compromise were only a temporary achievement.

The legal-institutional question

As regulated capitalism collapsed due to a crisis of profitability in the 1970s and capital re-subordinated labour, a host of economic ideas justified the emerging neoliberal social order and discredited Keynesian-style government intervention.[iii] Milton Friedman posited that monetary policy was more instrumental in shaping inflation and business cycles, and hence public investment had to be reined in. Governments were expected to abandon full employment goals and implement austerity measures so that private investment does not get crowded out (for a critique of this argument, see Patnaik 2017).

James Buchanan argued that the government and bureaucrats cannot be trusted as they act to further their own interests and engage in rent-seeking (for a critical account of Buchanan鈥檚 influence on neoliberalism and democracy, see MacLean 2018). Supply-side interventions 鈥� most notably through tax deductions – became the preferred way to attract private investment. The Laffer Curve (named after Arthur Laffer, who is closely associated with Donald Trump) advocated for reducing taxes to optimise revenue collection, which was used to justify unreasonable corporate tax cuts. As capitalism financialised and informationalised, Eugene Fama posited through the efficient market hypothesis that stock prices are accurate representations of their fundamentals and that maximisation of the shareholder value of the firm was the best way to enhance societal well-being (Davis & Kim 2015).  

This motley crew of economic ideas broadly called for redefining state regulation to benefit capital, but also provided a theoretical fix to the question of democracy under global capitalism (see Brown 2015). Neoliberals like Hayek, Friedman, and Buchanan were committed to protecting democratic rights broadly defined as the protection of the rule of law that safeguards individual liberties against state intervention. But they were apprehensive of expanding democracy beyond this definition and argued for placing constitutional limits on legislative authority so that popular pressure cannot upend the market order. This included basic reforms like minimum wage hikes, which mainstream economists propagated would cause unemployment – Buchanan said that arguing for the opposite is akin to physicists arguing that water runs uphill (The Wall Street Journal 1996).

As Slobodian (2018) argues, the neoliberals were anxious about the democratisation brought about by trade union action in the global north and decolonisation in the global south. But instead of resorting to naked market fundamentalism, they envisioned a world where markets were encased by a legal-institutional order that did not violate the rights of capital (Slobodian 2018).  The human rights of property owners were to be protected against the threat posed by the passions of the masses (Whyte 2019). Thus, the economic arguments for central bank independence and rules-based monetary policy, supply side interventions, subordinating the welfare state in the name of financial restraint, and financial market efficiency in principle laid the framework of a legal-institutional order designed to fix the threat that bottom-up democratic forces posed against capital. This has given rise to the 鈥渁nti-state state鈥� (Gilmore 2011) 鈥� where the repressive apparatus of the state has grown while welfare systems remain systematically underfunded.

Emerging questions

Despite the 2008 financial crisis and the ongoing Covid pandemic, neoliberal capitalism has proven to be surprisingly resilient. Mainstream economics has still retained its core postulates, even as it has expanded into studying irrational behaviour of individuals and incorporating Randomised Control Trials into studying poverty (for a critique, see Reddy 2012). Even models of 鈥渋mperfect competition鈥� gained relevance through comparisons with idealised perfect competition, thereby ignoring the real conflict inherent to capitalism (Shaikh 2016).

But a concatenation of different crises (what is now dubbed the polycrisis) is posing new challenges for economic thinking. For instance, environmental degeneration is seen as a market externality, for which the market-efficient solution is that environmental costs should be priced and traded among producers to incentivise the transition away from fossil fuels.  In contrast, there is a growing demand for a green new deal involving public investment in cleaner energies at a scale similar to what was done in the 20^th century for establishing fossil-fuel based infrastructure. But this necessitates a shift beyond the neoliberal world order.

The global capitalist slowdown has also posed political questions that economics can no longer ignore. The rise of global authoritarian capitalism has highlighted the disjuncture between neoliberal political philosophy (as professed) and neoliberal political economy (as practiced). This also highlights how the state-market binary is not useful to understand contemporary capitalism. While neoliberals argue for market-oriented reforms against government failures, interventionists argue for public regulation to safeguard against market failures. Both camps miss how the state and market are dialectically intertwined, and how state intervention can only mitigate but not eliminate the crises tendencies of capital. That these effects are compounded in the global south where industrialisation and formal employment is not the norm necessitates a paradigm shift beyond the core tenets of mainstream economics in academia and policy-thinking. The growing demand to decolonise and diversify economics holds immense promise in this regard (Kvangraven & Kesar 2021).

Concluding remarks

This essay emphasised that certain intellectual turning points in economics were theoretical fixes that corresponded with political-economic shifts in capitalism. 听This involved legitimising improvements in land that led to the dispossession and the destruction of the commons, justifying free trade based on comparative advantage as opposed to mercantilist state intervention, reducing labour to a factor of production that was supposedly rewarded based on its marginal productivity and hence not being exploited, legitimising state intervention to stabilise capitalism and developing a legal-institutional framework to protect markets from popular democratic pressures. This is not to say that all mainstream economists were dishonest and corrupt, but that the disciplinary postulates as well as the knowledge produced through the reconstruction of the core neoclassical models have served as an ideological justification of capitalism in its various forms.

By disregarding historical particularities, obfuscating relations of exploitation and domination, and naturalising social inequalities inherent in the market economy, mainstream economics education bolsters false consciousness regarding the workings of the world. If the principles of economics aligns with the requirements of the dominant social order, the various challenges to it from inside and outside the economy will be restricted to the margins. A situated history of the evolution of economic thought that pays attention to the political-economic shifts in society can thus demystify the discipline鈥檚 self-proclaimed value-neutrality and show how deviation from its core postulates is imperative in the context of a stagnant economies, rising social inequalities, and a political and environmental crisis. This necessitates a comprehensive shift in economic thinking that recognises that knowledge is shaped by power relations and that the capitalist order is neither natural nor eternal.

References

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2. Chambers, Samuel A. (2018): There’s no such thing as 鈥淭he Economy”: Essays on Capitalist Value, California, punctum books.
3. Chang, Ha-Joon (2015): Economics: the user’s guide, USA Bloomsbury Publishing
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[i] The concept of marginal product has no basis in reality even at the firm-level 鈥� a unit of a particular factor of production cannot be increased while holding other units constant (Moseley 2015: 107)

[ii] In reality, state intervention is not an anathema to any capitalist market. Neoliberals use this to distinguish themselves from laissez-faire economists (see Friedman 1951).

[iii] The antecedents of neoliberal economic governance can be seen during the inter-war period 鈥� this included not just international economic institutions 鈥渕eddling鈥� in domestic affairs of nation-states. (Martin 2022), but also economists advocating for austerity, especially in fascist Italy (Mattei 2017). ]

Aabid Firdausi (aabidfms@gmail.com) is a PhD student in the Department of Sociology at Johns Hopkins University. He tweets at .

Acknowledgement: The author thanks Alex M Thomas and Upasana Goswami for their comments. A preliminary version of this essay was presented at the Department of Economics, University of Kerala.

Photo: London School of Economics and Political Science

The structure of anti-trust laws is generally and neatly divided into ex-post enforcement and ex-ante regulation of market conduct and its participants. It is a matter of social and economic policy choice as to whether any regulation should precede 鈥榟arm鈥� or follow it, as is the construction of 鈥榟arm鈥� across statutes. For example, the requirement of a means to understand and assess the market impact of a merger. On the other hand, abuse of dominant position is an ex-post assessment once the dominance has set in, which may be in the long run. The determination of abuse is subject to a rule of reason and analysis by the competition authorities. Against this background, the question is what happens in the intervening period when an undertaking is slowly and surely inching towards domination, engaging in conduct which would be punished only once it becomes dominant ? What happens to the process of concentration of markets, along with the practices in concentrated markets? These questions are not borne out of academic interest alone and are not completely answered by a simple focus on anti-competitive agreements, as will be seen below. The analysis will zoom in on the Indian market conditions to make a case for questioning the timing of regulatory intervention and proceed to show that new economic methods may be required in this task.

The evolution of anti-trust action, a case study of India

The retail sector in India has been growing and constantly changing. A pertinent example of the risks that Big Tech entities present to such a market can be understood through Amazon鈥檚 along with Flipkart鈥檚 position in India. This analysis does not focus on the e-commerce platform as the market but the larger marketplace in which the platform occurs and competes with extant structures, including traditional businesses.

In India, two disputes, five years apart, against the same opposite parties, with largely the same issues have led to diametrically opposite outcomes on the anvil of 鈥榯erm鈥� based dominance. The Amazon and Flipkart entities have been embroiled in litigation in India since a long time, most notably due to the competition concerns they portends for the economy of the country. They are not only competing with other platforms but also with various myriad types of retail arrangements through deep discounts, exclusive offerings and a web of related companies which are the significant sellers on the platforms. These practices not only impact the other sellers on the platform but also the players in the value chain. As a digital and online intermediary or marketplace, a platform replaces other intermediaries such as retailers and distributors. This displacement of livelihood has led to calls for 鈥榗apital dumping鈥�^[1] to provide a discursive handle to a problem that arose due to such massive capital backing that erasure of alternatives is inevitable.

Since 2015, the competition regulator, Competition Commission of India (鈥淐CI鈥�) has due to their apparent lack of dominance in the market, as defined.^[2] It must be noted that this decision took into consideration the 鈥榮hort term鈥�, when e-commerce was just gaining foothold in the Indian markets. While the market practices did not draw the regulator鈥檚 ire then, within a short span of five years, they have by the CCI Directorate General,^[3] only to be , curious to understand this volte face by the CCI. The regulator concluded that it will investigate these companies for their market practices, but not for the dominance as they are jointly dominant, a conduct not punishable per Indian law ! In the long term, the share of Amazon has increased to 36% of all online commerce in the country, with Flipkart controlling another 53%.^[4] It has caused enough damage not only to the sellers on the platform but also to the other retailers in the offline channel of the market. While the leverage of a dominant entity to gain a foothold into a market is punishable if abusive, the conclusion of dominance is a technical one, often dependent on the delineation of a relevant market. The point is that given the narrow scope covered through the relevant service market of online retail, the judgements are largely devoid of any discussion about the disruption or the impact of the abuse on the retail market as a whole, especially for the offline mode of commerce.^[5] These omissions aggravate the tricky situation of striking the iron at the right time, lest the market be considered 鈥榙ynamic鈥� enough to not need any change or study.

A call for a new normative for markets

This is not to say that competition law is wont to miss out on this commercial movement, from treading the path of dominance to the abuse of it. For example, the conclusion of being incurred by an emergingly powerful entity, in its dealings with downstream players, can prevent resultant harm by the entity as it will become a dominant one. It halts dominance in its tracks, if the market conduct is anti-competitive though it may be restricted only to the platform as a market unless there are sufficient dealings between the online and offline channels. Further, the European Union is cognizant of the ills of the temporal determination and is discussing various measures to supplement its competition law and its application in the digital sphere. The key examples are the and the . These policy tools allow regulators to monitor market conduct of platforms, designate them as 鈥榞atekeepers鈥� and carry out regulatory intervention tailored to suit the needs of a healthy and fair economy throughout the period of such monitoring, beyond the strict boundaries of time based action and damage.

In light of these new beginnings, the question I wish to raise is, whether there are any economically rigorous tools that anti-trust authorities can use to decide such claims, even in the short run based on holistic predictions? This would change the wait for long run damage to set in as such predictive claims don鈥檛 fit within the neoliberal theoretical prescriptions, governing competition laws. With the economic sphere undergoing a significant churn due to digitisation, it is an opportune moment to invigorate this discussion. The aim is to devise means within the scope of law, think of the disruption the breadth of a market and account for its irreversibility once it is set into motion so that the loss of livelihoods is not perceived as a short run cost for development.

Notes

[1] Note that capital dumping is theoretically undersketched and hears calls from across the spectrum of voices. It is used by emerging domestic unicorns, funded by foreign funds to , big businesses like , but also the association of against all online commerce; domestic or foreign. 

[2] In Re: Mohit Manglani v. Amazon Seller Services Pvt. Ltd. and Ors. (2015)

[3] Delhi Vyapar Mahasangh v. Flipkart Internet Private Limited and its affiliated entities and Amazon Sellers Services Pvt Ltd. and it affiliated entities (2020)

[4] It must be noted that according to another estimate, both hold approximately 30% of the online commerce and that online commerce forms a small part of total retail, around 5% but it is .

[5] It has been decreasing, see and .

Anushka Mittal is an incoming candidate for the MSc. in Social Science of the Internet, Oxford Internet Institute. She tweets at .

Photo by .

The state has made a return with a vengeance in economic matters in the past decade or so. Mainly due to the success of the Chinese model and the 鈥� less permanent 鈥� strong economic performance of countries like Brazil and Russia, the erstwhile Washington Consensus of the superiority of markets over states as mechanisms of economic coordination has been put in serious doubt.

Scholars have picked up on this trend by increasingly referring to the term (new) 鈥榮tate capitalism鈥�. consider it an undesirable threat to the existing economic world order, while others show how states can effectively promote development and economic growth.

While the term state capitalism has been useful to into debates in political economy, the term itself is not unproblematic. Indeed, there is a risk that it perpetuates, rather than surpasses, the sterile debate about the state versus the market. Put bluntly: If there is such a thing as state capitalism, what does non-state capitalism look like?

The term 鈥渟tate capitalism鈥� implies that capitalism without the state is possible. While that certainly is what would argue and wish for, the historical reality is that capitalism only ever has existed when the state created the conditions for its existence, as a minimum by providing such as property rights and contracts. Similarly, while libertarians often invoke Hayek to the effect that markets are spontaneous orders, few people recognise that states have emerged equally spontaneously in human history and have since .

From this perspective, the phenomenon that the term 鈥榮tate capitalism鈥� seeks to describe is distinct from what we have observed at least since the 1980s (what many would describe as the neo-liberal model) – not so much in the sense that one is characterised by the presence and the other by the absence of the state -, but rather that the state plays a different role in the two ideal-typical models.

The broad term 鈥榮tate capitalism鈥� may lead us to neglect this nuance and focus on the wrong opposition of markets versus the state (the former cannot exist without the latter). What we should focus on is developing our theoretical tools that allow us to capture the changing role of the state in the economy and in economic development.

In a , we take up this challenge based on an in-depth case study of state-business relationships in Hungary. We use the Hungarian case to describe and analyse in detail how the role of the Hungarian state has changed from a poster child of post-socialist liberal transition praised by the OECD, World Bank and others, to an arguably outright authoritarian form of state not just in the political, but also in the economic realm.

We describe the different mechanisms that an increasingly authoritarian government has used to push the boundaries between the public and the private and thus redefine the role of the state. Our findings highlight how the Orb谩n government on the one hand decreased the state鈥檚 autonomy by centralizing state control, creating state dependencies for economic actors through regulation, drastically changing the formal structures of interest representation and raising the share of public procurement contracts in some sectors to over 50 percent. On the other hand, we discuss, how it gradually increased state intervention by three interrelated processes. First, it created markets dominated by a new economic elite and national champions. Second, it extracted private rents from the economy by using the state as a tool – through institutionalised corruption. And third, it introduced what we call 鈥榓uthoritarian shareholding鈥� via predatory nationalisations of certain sectors and the forced buy-outs of independent, private firms.

The nature of these mechanisms leads us to classify Hungary after 2010 as a case of 鈥榓uthoritarian capitalism,鈥� which we argue should be distinguished from other cases of state-intervention economies. Indeed, focusing on the extent of state intervention in the economy alone, leads us to define categories such 鈥榮tate capitalism鈥� which are too broad and analytically not very helpful. Focusing on the precise nature of the state and the mechanisms that the state uses to control the economy or businesses allows us to distinguish cases of 鈥榓uthoritarian capitalism鈥� from the broader category of 鈥榮tate capitalism.鈥�

The 21^st century will almost certainly not be the century of the free market. Neither will it be the century of the state.听 Rather, it will be the century of a new synthesis of states and markets, where the former more confidently shape how the latter work and indeed use them to promote either collective goals or the goals of the elite in control of the state apparatus. Scholars of comparative political economy need to focus more on the mechanisms and struggles over the control of the state and the economy, rather than primarily focusing on the tools of state capitalism, such as state ownership of firms. Current authoritarian trends in many countries around the world provide an important empirical field to study these questions. Doing so will allow us to better understand the trends of our times.

Gerhard Schnyder is Director of the Institute for International Management (IIM) at Loughborough University London and Research Associate at the Centre for Business Research (CBR), University of Cambridge, UK.

听is Assistant Professorial Lecturer at the Department of Management, London School of Economics and Political Science (LSE).

Photo: The听.

Transaction costs due to distributional conflicts, political settlements, and weak enforcement capacity have important implications for the implementation of property rights in developing countries. While critical analysis of these factors is missing in the mainstream economics approach to property rights, it is obvious that incorporating such analysis will be crucial in designing policies to minimize transaction costs that hinder an efficient functioning of property rights. Specifically, there is a need for an alignment of interests among powerful political and economic interests if property rights are to be more efficient at reducing transaction costs.听

A fundamental limitation of contemporary property rights theory is its inability to incorporate factors that might reduce property rights from solving transaction costs, particularly in developing countries. This piece reviews the mainstream explanation of the relationship between property rights and transaction costs and then evaluates factors that can inhibit property rights from reducing relevant transaction costs, which include distributional conflicts, costly enforcement capacity, political settlement, and measurement problems. Major emphasis is placed on social conflicts and organization of power which are missing from the conventional analysis of property rights.

In this respect, the political settlements framework developed by SOAS economist Mushtaq Khan can enrich our understanding of the operations of property rights in developing countries. Khan () defines political settlements as 鈥渟ocial orders characterised by distributions of organizational power that together with specific formal and informal institutions effectively achieve at least the minimum requirements of political and economic sustainability for that society鈥�. In short, political settlement means the distribution of power among different groups.

The origins of the mainstream view of property rights听

It is widely believed that John Locke was the first great thinker on property rights, owing to his influential work, Two Treatises of Government, which made a passionate argument for inalienable rights to life, liberty, and property, as well as the limited but crucial role of the state in the enforcement of such rights. However, Locke failed to critically appreciate significant transaction costs associated with the operation of these inalienable rights, such as the cost of getting people to agree on the allocation and outcomes of property rights and the cost of their enforcement. This systematic relegation of the role of critical factors that create transaction costs within the context of property rights seems to resonate with the assumption of zero transaction cost in neoclassical economics. For instance, in the world of Robinson Crusoe, it is assumed that agents can interact in markets to exchange at zero transaction cost due to well-defined property rights ().

New institutional economics (NIE) theorists introduced the role of transaction costs and property rights into economic analysis, especially with regards to the analysis of externalities and market failures (). This new strand of literature also led to advancements in the economics of property rights, exploring how the structure of rights affects not only the workings of a market system but also influence the allocation of resources and economic performance historically (; ). At the heart of this literature is the belief that private property rights eliminate transaction costs associated with primitive communal ownership of assets by solving collective action problems such as free riding, moral hazard, and tragedy of the commons.

Why Are Property Rights Thought to Reduce Transaction Costs? Unpacking the Theory

In the conventional theory developed by Demsetz () and Alchian and Demsetz (), property rights are assumed to spontaneously emerge as a result of interacting agents responding to new or different forms of technologies and market opportunities that create social benefits and costs. Further, it is posited that the likelihood of adopting a different property rights system depends on the relative costs and benefits of internalization of relevant externalities such that the higher the costs, the lower the prospect of achieving property rights change (). This theory of property rights is outlined in Demsetz (), using anthropological findings from the New Continent, as follows.听

In the ancient Montagnes society in Quebec, the hunting of beaver was for consumption purposes with no significant overkilling that would deplete the stock of beavers in the forests. However, in the 18th century, commercial trade in fur opened up, which increased the relative price of beaver fur leading to overhunting among the native Montagnais because their communal ownership system lacked the incentive to ensure sustainable hunting practices. Eventually, rights on land became institutionalized, which motivated the Montagnais to internalize their externalities and consider social consequences of their activities. Therefore, establishing property rights solves the inefficiencies associated with communal ownership.

However, it is worth noting the inherent assumptions about transaction costs that form the cornerstone of the above theory. Most importantly, Demsetz () assumes that communal ownership cannot be relied upon to solve externalities problems due to prohibitive transaction costs associated with it 鈥� for example, the costs of organizing the community members to agree on an efficient hunting regulation, enforcing contracts, and monitoring to ensure adherence. In other words, reaching an agreement based on a collective communal decision will involve significant ex-ante and ex-post arbitration and monitoring costs, and Demsetz found it 鈥渄ifficult to see how the existing communal ownership can reach an agreement that takes into account of these costs鈥� (: 355).

The most desirable solution, therefore, is the enactment of exclusive private rights that eliminate such transaction costs and allow individuals to make quick, efficient decisions about their assets. There are several ways in which property rights are thought to function to reduce transaction costs, thus driving efficiency and growth (). First, property rights tend to enable investors to have security over their assets which incentivize them to make crucial decisions over long term horizons. With low expropriation risks to asset owners, optimal decisions can be made at negligible transaction costs, thus avoiding the tragedy of the commons and inefficient use of scarce resources. Second, Coase theorem proposes that property rights can facilitate the efficient transfer of assets via voluntary exchange. When rights are well-defined, agents can easily negotiate terms of trade and assets will be allocated to their highest valued use irrespective of the nature of the initial allocation of rights (). A potential problem with this claim is that the nature of the assignment of property rights can influence the outcomes of exchange, often involving transaction costs which inhibit optimal resource allocation (). This appears to indicate that some costs have to be incurred before reaching compromise among interacting parties, which is often prevalent in developing countries. Moreover, the Coasian proposition would breakdown in the absence of compulsion to enforce an efficient transfer of properties among individuals.

Third, according to Alchian and Demsetz (), property rights can reduce transaction cost by diminishing incentives for freeriding or shirking within an organization, leading to efficiency and productivity growth. This view suggests that creating exclusive rights to specific actors (residual claimants) within a firm will lead to faster decision making, as well as create incentives and compulsion for efficient monitoring of workers to tackle shirking in a team, thus raising the productivity of a firm. But a deep problem related to this theory is its lack of convincing explanation as to how team members will collectively agree on a residual claimant 鈥� obviously, significant transaction costs will be incurred in getting members to agree on who will become a residual claimant and on terms of the distribution of benefits. Similarly, it ignores the possible transaction costs of re-negotiating the terms of the distribution of output that might come about overtime between workers and residual claimants due to factors such as changes in relative prices or external competition. It seems implausible to assume that voluntary arrangements formed within team production will last forever without any transaction costs arising from demands for higher wages or renegotiation of contracts by the workers.听

An Alternative Approach: The Importance of Political Settlements

Khan () argues that the above explanation is fundamentally inadequate because transitioning from communal to private ownership systems can also involve substantial 鈥渢ransition鈥� costs and such a transition is not that simple. Specifically, creating new rights or modifying existing rights will involve winners and losers who will organize themselves to block any new innovations through difficult and costly negotiations or violent contestations, thus involving significant transaction costs (). In addition, there can also be considerable transaction cost associated with monitoring the enforcement of private property rights which is assumed away in the theory by Alchian and Demsetz.

The above issues, among others, underline the importance of political settlement (distribution of power) in property rights. While Khan () introduced political settlement as a framework to analyze property rights, his analysis focused on the growth-stability trade-off relating to the governance of efficient property rights regimes in developing countries. He argues that when there is an asymmetric distribution of power among disparate groups, the associated transaction costs cannot be simply overcome by property rights. For example, consider the case of recurrent clashes between sedentary farmers and herdsmen in Nigeria despite it being clear that the farmers have property rights over their land and should be free from incursion by the herdsmen. This long-standing tension has resulted in an enormous loss of lives and properties, and complex negotiations at different levels ().听

What explains the inability of property rights to reduce transaction cost here is partly the relative organizational power of herdsmen over the farmers, both in terms of physical resources and ability to mobilize support to defeat the farmers in most conflicts. Moreover, it appears that the herdsmen have extensive patronage from some Nigerian Fulani elites (such as traditional rulers and politicians) who block the passage of a legislative bill to establish ranching area as a solution to the recurrent conflict. Thus, political settlement can get in the way of making property rights work efficiently to reduce transaction costs.

Unlike the conventional theory, the political settlements framework embraces the role of the state and other non-state enforcement actors, which are not only crucial to the emergence of property rights but can also involve significant transaction costs in their own ways. For instance, if the interest of the enforcement agency is not aligned with the creation of growth-enhancing property rights or if it is being influenced by parties opposed to the institution of rights, then property rights might be created but transaction costs would remain high. On the one hand, transaction cost might take the form of wasteful use and allocation of resources (for example acquisition of physical resources to undermine rights or resources channeled to bribing the enforcement agency) by those groups who would lose out due to property rights. On the other hand, parties who would benefit from property rights would also incur costs in their bid to secure their rights through an unproductive commitment of resources for personal protection or for lobbying the agency to be efficient in enforcing property rights.听

The political settlements perspective is also permeable to issues of human identity as it is not entirely predicated upon cost-benefit analysis of a rational agent as assumed in the conventional theory. According to Alchian and Demsetz (), once gains from exchange are high relative to the costs of exchanging, agents will willingly give up their property rights over assets in exchange for something at insignificant transaction costs. However, this simple view ignores some fundamental issues regarding identities and human nature that can make the transfer of assets very difficult even when property rights are well delineated. A good example is a fierce resistance by powerful indigenous landowners and peasants to attempts at land grabbing or reforms, resulting in transaction costs that can transcend far beyond material losses to killings and social uprisings (). Research has shown that a large number of the people who take part in resistance do so not because they don鈥檛 appreciate the compensations on their lands or assets but because they are simply unwilling to surrender those assets due to historical ties, cultural significance, and degree of holding power.听

References

Alchian, A. A., & Demsetz, H. (1972). . American Economic Review, 62(5), 777-795.

Alchian, A. A., & Demsetz, H. (1973). . Journal of Economic History, 33(1), 16-27.

Coase, R. H. (1960). . Journal of Law and Economics, 3, 1鈥�44.

Demsetz, H. (1967). . American Economic Review, 57(2), 347鈥�359.

Hall, R., M. Edelman, S.M. Borras Jr., I. Scoones, B. White, and W. Wolford (2015). 听The Journal of Peasant Studies, 42(3鈥�4), 1鈥�22.听

Khan, M. H. (2009). . London: Department of Economics, SOAS University of London.

Khan, M. H. (2018).听 , African Affairs, 听117(469), 670鈥�694.

Libecap, G. D. (2004). The Effects of Transaction Costs in the Definition and Exchange of Property Rights: Two Cases from the American Experience. In E. Colombatto (Ed.), (pp. 108鈥�129). Cheltenham: Edward Elgar Publishing.

Milanokis, D., & Meramveliotakis, G. (2013).. Review of Radical Political Economics, 45(5).

North, D. C. (1981).听. London: W. W. Norton 7 Company.

Salihu, M., & Guariso, A. (2017). (Economics Working Paper Series No. 29). Lancaster.

Starr, R. M. (2011). . New York: Cambridge University Press.

Abdulrasheed Isah is an Assistant Lecturer in Economics at Nile University of Nigeria, Abuja.

Since the announcement of the Dakota Access Pipeline (DAPL) in 2014, which was planned by Energy Transfer Partners for the transport and access of the Bakken oil fields, it has gained traction as a controversial initiative because of its environmental impact, the threat it poses to water supply and its effect on Native American sacred lands. Since August 2016, a group of protestors have been organizing on the Standing Rock Indian Reservation petitioning against the U.S. Army Corps of Engineers and protesting at the actual site of the pipeline (). While the violence surrounding the pipeline is within itself shocking, the media coverage has been extremely polarized on the issue. Often falling along partisan lines, 鈥渓iberal鈥� news sources oppose the pipeline on humanitarian grounds and 鈥渃onservative鈥� sources support it, but both forms of media glean their conclusions about the pipeline from uncritical understandings of the conflict. Both sources ignore that, at the heart of the issue, are issues surrounding what private property is and the consequences of our chosen definition. Instead of taking for granted colloquial definitions of property we can see the underlying distributional inequality inherent to the pipeline by critically assessing how property and law interact.

In contemporary capitalism there is a distribution of property that is reflected in jobs, income and opportunity. In the mainstream Law and Economics (L & E) perspective, the free market is conceptualized as a natural entity. Like biology or physics, the market is observed according to its own internally defined rules and a laissez faire policy naturally follows. On the other hand, the Critical Legal Theorists (CLT) critically engage with the way the market is formed through law. At the core of debates regarding the distribution of property are these theories of how markets are conceptualized. Beginning with the core insights of , , and Joseph Singer ().

Putting the absence of historical analysis in the L & E theorists鈥� methodology aside, Hale provides a comprehensive argument for the internal incoherence of the mainstream theoretical framework. The L & E perspective views society as free of all coercion and unequal power dynamics which describes as 鈥渁 scheme that has the appearance of exposing individuals to what little coercion at the hands of the government and to none at all at the hands of individual groups鈥� (p. 6). In the L & E view, the only location of coercion and power is in the government. Hale argues, however, that this coercion that L & E theorists identify within governmental structures exists with equal force in the economy. Coercion and unequal power dynamics arise within the market at the fundamental level of the law, not under a 鈥渘atural鈥� distribution of labor. As Hale puts it in his analysis of the coercive relationship between the property owner and laborer, 鈥渢he law compels people to resist from consuming the products of the owner鈥檚 plant鈥�, even if the products are the fruits of their labor (p. 5). Without the security through law that workers are forbidden from consuming the products they are producing, the distribution of labor is maintained by allocating a disproportionate amount of rights onto the 鈥渙wner鈥� of the plant. The 鈥渇ruits of labor鈥� argument, as often cited in , quickly breaks down beyond anything but the simplest interactions (p. 9).

In all capitalistic business ventures, coercion is actively being created and mediated by the law. Essentially, argues that the statesman is always there. The only way to resolve conflicts over property is to present the conflict to a court established by law that will subsequently enforce a legally chosen framework. When deconstructed, conflicts over property are fundamentally regulated by the state (p. 12). This contradicts the idea of public and private property being separated by the sole factor that the state regulates one type of property (public) and cannot regulate the other (private). Private property then is not private, just a type of property that is regulated differently. There is no essential difference rooted in its nature.

In Duncan Kennedy鈥檚 article 鈥溾��, he makes an impressive innovation in the tradition of CLS theory by questioning the relationship between law and power. Kennedy proposes that the bargaining power outlined in Hale鈥檚 theory of coercion is shaped by a structure of 鈥渂ackground rules鈥� or law (p. 327). These laws shape a host of struggles, some of which Kennedy touches on, such as race, gender, and distributional inequalities. The 鈥渂ackground rules鈥� are what determine the individual鈥檚 rights with respect to their property, in what Joseph Singer calls their 鈥渂undle of rights鈥� (, p. 8). There are certain 鈥渂ackground rules鈥� that are generally accepted as essential to encroaching on an individuals 鈥渂undle of rights鈥�, for example you do not have the right to do many things in your own home that violate zoning regulations. Less simply, like the period of American history where domestic violence was not illegal in the home, some 鈥渂ackground rules鈥� police the 鈥渂undle of rights鈥� that an individual has in their home in order to perpetuate inequalities. These 鈥渂ackground rules鈥� however do more than just shape inequality; they are capable of determining the actual allocation of power. Law is then constitutive of power, which allocates bargaining ability, which creates the means in which the economy operates. plays an instrumental role on this point (p. 357). Pre-empting the assumption that the economy reflects the law, Kennedy uses a Foucauldian idea of production to demonstrate that the law is not just a reflection of the economy, it is constitutive of the economy.

Like Hale鈥檚 concept of 鈥渂argaining power鈥�, Foucauldian power is not negative or based in oppression, it is 鈥渢he multiplicity of force relations immanent in the sphere in which they operate and which constitute their own organization; as the process which, through ceaseless struggles and confrontations, transforms, strengthens or reverses them鈥� (p. 352). This is essential to understanding the CLS鈥� project. There are no claims being made about the nature of law or the economy but instead a radical re-interpretation of how these institutions operate. Instead of static, they are fluid. Instead of objective, they are literally constituted by the process in which they are employed in order to serve the dominant power allocation.

This power allocation allows for the justification of unequal distribution of resources and the 鈥渂ackground rules鈥� are what facilitate it. For example, damnum absque injuria (damage through competition) is a phrase expressing the principle of tort law in which some person (natural or legal) causes damage or loss to another, but does not injure them (, p. 25). If we have X, owner of property, they have certain rights, which are correlative to a set of behaviors by Y. In the legal case of damnum absque injuria, X鈥檚 privilege (their rights) is correlative to Y鈥檚 lack of a right (their duty). The CLT鈥檚 argue then that morality may be what determines the allocation of rights, but it is law and property that determines the coercive power within the 鈥渂undle of rights鈥� that are being allocated.

It is immediately clear, when surveying news articles on the Dakota Pipeline, what their dominant ideological associations are. In Robert Bradley Jr.鈥檚 article 鈥溾��, he argues that liberals are crusading against the energy industry by 鈥渂reaking the law鈥�. Bradley makes the claim that shutting down the pipeline would 鈥渄eny Americans thousands of new jobs and hundreds of millions in economic growth鈥�, which emphasizes the extent of the injury, an argument also echoed by liberals. Unlike liberal writers, however, Bradley simultaneously condemns protestors for 鈥渢aking the law into their own hands鈥� and supports the U.S. government鈥檚 protection of the DAPL legal land rights for the 鈥渟ake of the job market鈥�. His coherence to a contemporary conservative understanding of law and economics invalidates itself when he states that 鈥淸c]learly, President Obama, like his environmentalist allies, has no regard for the law鈥hat鈥檚 a dangerous precedent to set鈥�. The warning against setting legal precedents is riddled with irony. The way the law is formed, almost literally, is through the employment of legal precedents. The same legal protections that allow the energy corporation to construct the DAPL in the first place is what now Bradley warns against employing by the protestors. His argument is inconsistent and reflects a misunderstanding of how law and rights interact.

In unexpected similarity, an article by Jack Healy entitled 鈥溾�� published in the New York Times, borrows language from the L & E perspective. In an interview with activist Mesaki Horinek, he recalls saying to police officers, 鈥淭his isn鈥檛 just a native issue. We鈥檙e here to protect the water鈥� For every ranch and every farm along the Missouri River鈥�. His words indicate what is at the heart of the DAPL debate. Who does the water belong to? Or, in our framework, who has the right, and who the duty in this scenario? In Horinek鈥檚 words we can see an attempt at claiming the injury argument originally echoed in Bradley鈥檚 article in which the issue would extend beyond just the immediate population. Healy calls on what he hopes will mobilize courts to usurp the standing damnum absque injuria that is invalidating the right to a clean environment and has long denied Native Americans even the most basic human rights. In the same article, Horinek continues to say, 鈥溙齌hey were on what the Standing Rock Sioux Tribe considers sacred ancestral land, but from a legal perspective, it is owned by the pipeline company. So sheriff鈥檚 officers arrested them for trespassing.鈥�. This quote is the perfect exemplification of the difficulty with moving forward on 鈥渓egal鈥� based issues. The misconception of private ownership is exacerbated by there being no possible 鈥渙bjective鈥� ownership. This is what both media sources mistake. As is commonly an issue with media that is entrenched in the political 鈥渃onservative鈥� and 鈥渓iberal鈥� binary, most of the coverage does not engage with the challenges about conceiving of these rights without a necessary elitist moral framework. Once there can be recognition that property is not stable and natural, on both side of the argument, can there be some resistance.

Coercion is difficult to investigate when DAPL is being discussed by the media in a way in which the ownership of the land is either objectively the corporation鈥檚 or objectively the Native Americans鈥� when it is a question of a relationship of power and how that manifests over access. The methodological issue here is the lack of a historical and sociological approach to the role of pipelines in the U.S., the sustained appropriation of Native American land, the destruction of precious water supplies in vulnerable communities, and the recognition of the Native American genocide enacted by the U.S. government. Without doing interrogative work around the political and social climate in which the pipeline is being built, critics will continue to find themselves trapped by claims to the 鈥渓egality鈥� of it.

Chloe Sariego is a senior at studying Political Economy and Sociology. She is a writer, activist and academic but in her spare time performs with the award-winning improv-comedy team Feral Christine. You can keep up with her at or send her an email at csariego [at] gm [dot] slc [dot] edu.

Photo: Tony Webster Bakken / Dakota Access Oil Pipeline

In contrast to the mainstream Law and Economics (L & E) approach, which informs the Third Moment, my position, derived from the Critical Legal Studies (CLS) tradition (and its historical ancestor, Legal Realism), is:

• Property is fundamentally a bundle of rights and thus property ownership at its core entails coercive power struggles between rivals and between owners and non-owners; coercion at its core.
• The interrelatedness of law and power relations (鈥淚f the program of Realists was to lift the veil of legal Form to reveal living essences of power and need, the program of the Critics is to lift the veil of power and need to expose the legal elements in their composition鈥� (, 109)). These power struggles over economic outcomes occur within the context of background laws that determine property, contracts, and torts.
• The notion of an economic seesaw in with potential for instability in property and contractual relations.
• If the goal is to understand how legal structures shape power struggles then the question becomes how are the laws themselves to be determined? Following the CLS perspective, I would emphasize the role of ideational factors determining the intellectual underpinnings of neoliberal policies鈥攆actors that have consciously been created by the financiers of the L & E tradition.

Core of My Argument
In this blog post I want to focus on the question of property that lies at the heart of the Third Moment framework, an approach that challenges core elements of not just the Third Moment but more generally the L & E framework itself.

a) First, drawing on a long intellectual tradition, pioneered by the Legal Realists, I counter the standard Robinson Crusoe-esque approach to property. In the conventional view property is seen as a person鈥檚 relationship to an object (say piece of land or a car) based on doctrine of first possession. This in rem view of property —involving your vertical relationship to an object鈥攊s basically in Blackstone鈥檚 description of property as a person鈥檚 鈥渄espotic dominion鈥� over external things.

b) In contrast, Legal Realists and the CLS view鈥攌nown in the literature as the progressive view of property鈥攃onceptualized property in social and relational terms. The use of one鈥檚 property invariably has impacts on other people鈥檚 property鈥攊n the Realist view property was a treated as a 鈥渂undle of rights鈥� which determined the damage or costs that use of one鈥檚 property could impose on others within the given structure of laws. Thus: 鈥榩roperty governs relations between persons with respect to things, rather than relations of persons to things,鈥� (, p. 122); it is a bundle of rights determined by the legal framework that is in place.

c) The interesting question is of course, how is that legal framework set up and who sets it up? The CLS tradition rejects the formalist approach to law (i.e. one which is neutral, apolitical and a technical set of principles); law is deeply political.

d) Such a bundle of rights view of property automatically implies that economic relations in capitalism are fundamentally coercive, involving adversarial relations between rival property owners and between property-owners and non-owners. It was Robert Lee Hale who is most famously associated with the idea that . Hale鈥檚 framework drew on the theoretical framework established by Wesley Hohfeld who in established a set of fundamental jural relations of property holders relative to others such that, as , 鈥溾�here is an underlying or implicit structure of advantage and disadvantage, of power and of exposure to power, with a consequent structure of mutual coercive capacity depending upon who has what right, what privilege, what power, and what immunity and, therefore, who (else) has what duty, what no-right, what liability, and what disability.鈥�

e) The conventional wisdom would have it that coercion can only exist in regards the government鈥檚 actions vis-脿-vis the private sector. Hale鈥檚 point was that, while different in form, private coercion (what he called 鈥減rivate government鈥�) is as powerful as government coercion; this coercion arises from the structure of property relations themselves so that progressive policies may intervene to raise workers鈥� bargaining power (e.g. via jobs programs etc.) but cannot alter the fundamentally coercive pressures on them from property owners. The 鈥渇ree market鈥� is as much a regulatory system鈥攂ecause laws are by definition regulations鈥攁s its opposite except that it reduces the society鈥檚 coercive power on capital.

Some Implications

a) First, distributional struggles always operate under the background laws that determine property, contracts, and torts. Consider for example in Lochner vs. New York, the Court struck down a NY statute that restricted the working hours of bakery workers on the grounds that it interfered with the freely arrived at contracts of employers and employees. In response to the Lochner decision, Realists would argue that the more 鈥渄eregulated鈥� labor relations which followed increased employers鈥� coercive powers over employees. Thus a 鈥渇ree market鈥� is as coercive as one involving more state regulation. In short, per Hohfeld鈥檚 insight, the law can both restrict (or prohibit) the exercise of power while also permitting it even when 鈥渋t is not there鈥� as in a 鈥渄eregulated鈥� framework. Thus, from the Realist standpoint, the Third Moment goal of simultaneously achieving 鈥渆fficient鈥� property rights and social justice is internally contradictory once one rejects the theory of property underpinning it.

b) Second, the very notion of property in the Legal Realist framework implies that private actions involving one鈥檚 own property will inevitably have social consequences. This is why, as Samuels argues, externalities are ubiquitous in Hale鈥檚 analysis (, p. 286). 鈥淓very exercise of volitional freedom tends to restrict or change the volitional freedom of others, through the coercive impact on the alternatives open to others鈥� (ibid). But if externalities are ubiquitous then they are the inevitable outcomes of normal market behavior. However, if 鈥渕arket failures鈥� are ubiquitous then they are not 鈥渕arket failures鈥� anymore! Quite logically, therefore, there can be no such thing as a 鈥減erfect鈥� market which of course implies that there is no such thing as an 鈥渋mperfect鈥� market. In short, the Legal Realist notion of property removes a core conceptual plank of the Third Moment framework.

c) Third, the fundamentally coercive nature of property relations implies that competition between owners is always a legalized form of injury. There is no place for perfect competition鈥攐r its opposite in neoclassical theory, some type of imperfect competition鈥攊n this view of property. Incidentally, those who claim that early capitalism consisted of perfect competition should note the following. In his classic (1977) Morton Horwitz argued that the shifts in legal thought and policy over the course of the nineteenth century revolved around cognizance of the fact that business development by its nature involved injurious rivalry amongst competitors. As Horwitz discusses (chap. II, III, & IV), while the beneficial impacts of business competition came to be seen as the key to industrialization, the debates about the appropriate legal framework revolved around the consequences of the destructive effects of cheaper and/or newer technologies adopted by rival firms (ibid., 133). Thus it came to be recognized that 鈥溾�he essential attribute of property ownership was the power to develop one鈥檚 property regardless of the injurious consequences to others鈥� (Horwitz 1977, p. 99. Emphasis added). 鈥淸P]ermissions to injure play an enormously important role in economic life, since all competition is legalized injury鈥︹�� (, p.333). Clearly these major debates regarding the legal foundations of business competition would not have taken place if perfect competition had prevailed!

Further Implications

It does not follow that the bundle of rights underpinning property can be 鈥渁nything鈥�. In writing about progressive policies (such as jobs program; wage increases via strong unions; progressive taxes) Hale wrote that such policies raised workers鈥� bargaining power and increased coercive pressures on capitalists thereby possibly undermining the incentive to invest. The following quote from Hale is significant: 鈥淸I]f the wages are pushed beyond a certain limit, the impairment of the incentive of the capitalists may before very long react unfavorably on the laborers themselves.鈥� Thus a key challenge that Hale was pointing to was how to organize the bundle of rights to both provide the incentive to invest and create the framework for social and economic rights. It must be pointed out here that the bundle of rights underpinning a firm, for example, determines both the level and the composition of its cost. For example, the background rules would determine the level of wages and how 鈥渉ard鈥� employers can pump out productivity increases from workers (give the technology). Both of these factors determine the structure of unit labor costs and thus prices. Thus the background laws are central to structure of prices in an economy; the latter is not a natural phenomenon!

The motivating push for destabilizing existing property rights in the pursuit of progressive policies has always involved 鈥減ressure from below鈥�. The need for destabilizing property relations to achieve such goals has been discussed by a number legal scholars (). The destabilizing approach essentially challenges core elements of a particular property regime, such as the rights of a landlord to evict low-income tenants or land reform policies in the Global South.

Rosser鈥檚 argument regarding the destabilizing approach to legal change is neither nihilistic nor a 鈥減ie in the sky鈥� proposal. It is very much grounded in historical reality if one considers a wide range of policies from the Factory Acts in the UK, to the push for progressive income taxes, New Deal labor legislation, or the Clean Air Act. All of these fundamentally challenged the status quo. Further, as Rosser argues, yesteryears鈥� pitched political battles over structural challenges to property prerogatives are very much today鈥檚 taken-for-granted laws that operate as the ground rules of our daily lives. In short, only in hindsight does the destabilizing approach seem radical鈥攚hen it first challenged property norms. After all, does even the most devout libertarian challenge mandatory seatbelt laws although they were opposed by the auto industry for decades ()?

In short, policy debates should not be only about what the effects of the use of a piece of property are (Do firms generate enough jobs? Do their activities pollute the environment?), but need to also focus, more fundamentally, on the deeply political and historical factors that determine the bundle of rights themselves. Power struggles, given prevailing legal structures, become central to policy.

These power struggles that determine the bundle of rights are intimately determined by knowledge creation. I would argue that an alternative to neoliberalism has to involve a rejection of the orthodox Law and Economics approach which practically naturalizes all market phenomena. The central goal of the Law and Economics movement has been to eviscerate all notions of power and politics by, in part, rooting its framework in neoclassical microeconomic theory (a large part of the funding came from conservative foundations such as the Olin Foundation). Thus quite apart from the virulent impact of money in politics which tends to privilege the wealthy, there is also a more insidious form of ideological training that shapes the thinking of not only those who make laws and economic policies but also adjudicate the laws in the court system.

Heterodox economists need to be cognizant of the ways in which the veins of power in the body politic and economic have structured the nature of neoliberal policies and maintained their durability eight years after the crash of 2008.

Jamee K. Moudud is a Professor of Economics at Sarah Lawrence College.

This is post #2 in a series on law, institutions and economics. In the first post, Mohamed Obaidy critically discusses the Law and Economics paradigm.

This article is a work-in-progress and the final version is forthcoming in Volume XXXVII of Law & Inequality: A Journal of Theory and Practice (LAW & INEQ.)

鈥�As a step toward that ideal it seems to me that every lawyer ought to seek an understanding of economics. The present divorce between the schools of political economy and law seems to me an evidence of how much progress in philosophical study still remains to be made. In the present state of political economy indeed, we come again upon history on a larger scale, but there we are called on to consider and weight the ends of legislation, the means of attaining them, and the cost.鈥� (Oliver Wendell Holmes; 1897) [1]

The World Bank鈥檚 policy focus shifted in the 1990s from a market-oriented paradigm to other issues such as social justice, poverty reduction and 鈥渕arket failures鈥�, where institutions had to play a greater role [2]. Known as the Post-Washington Consensus or the Third Moment in Law and Development, this new paradigm emphasizes the importance of 鈥済ood governance鈥�, the implementation of property rights for economic growth, and makes the following proposition: well-defined and formalized property rights lead to market efficiency, economic growth and development. Hence, since then the establishment of the 鈥渞ule of law鈥� has become the new goal to reach for developing countries.

However, this Law and Economics paradigm relies on a narrow set of theoretical assumptions and is heavily influenced by neoclassical views of the state, the market and overall competition. But this framework raises some questions: (a) are these assumptions empirically valid, namely is the implementation of property rights a necessary condition for economic growth and development? And (b) are 鈥減erfect competition鈥� and 鈥渕arket failures鈥� reliable concepts one should start from to cope with development 鈥� if by such term we mean a social and economic process that will ultimately increase human well being?

The role of institutions in New Institutional Economics

Classical political economists stressed the importance of institutions in human affairs – particularly in the economic sphere – from the very beginning. On the one hand, there was a tradition that tried to draw economists鈥� attention on the determinant role of social and cultural norms and how they shape/influence the individuals鈥� decision-making process (for instance, in the findings of Weber, Durkheim and Veblen). On the other hand, another tradition paid more attention to the mode of subsistence of society and how physical institutions reflect and regulate class struggle (as illustrated by the Scottish Historical School 鈥� which included Adam Smith, John Millar, Adam Ferguson and William Robertson 鈥� and the Historical Materialist tradition initiated by Karl Marx. In that regard Malthus and Ricardo were close to both movements despite their divergent theories).

However, the modern overlap between institutional economics and development took a different path and started with Douglas North鈥檚 early work [3]. In this case, by institutional economics one should understand neoclassical institutional economics. The policy ramifications of this new paradigm differ form the classical tradition.

North鈥檚 institutional approach ultimately supports the efficient market hypothesis: markets can and do fail if the underlying institutional arrangements do not provide a solid ground for private transactions. It follows that a legal system in which property rights (or the rule of law) are clearly defined and strongly protected will correct these market failures and achieve the market clearing process.

There are two elements than can explain such a narrow departure: (a) the Coase Theorem as a basis for the legal reforms [4] and (b) Hayek鈥檚 political influence on neoclassical economics [5]. On the one hand, the Coase Theorem concludes that 鈥渢he legal environment could impose effects and costs on market actors that would become variables determining economic output鈥� [6]; on the other hand, Hayek鈥檚 theory of the state included 鈥渕inimal government, the rule of law, and strong property rights鈥� [7]. From this perspective, one can anticipate the conceptual tour de force the New Institutional Economics (NIE) would come up with: (i) given that economic output is dependent on the legal environment, (ii) and given the minimum role the state should have to allow market clearance, (iii) the state鈥檚 sole intervention is to limit transaction costs by implementing strong and clear property rights to achieve economic growth. This latter proposition is perfectly described by De Soto: 鈥淧roperty is鈥� the legal expression of an economically meaningful consensus about assets. Law is the instrument that fixes and realizes capital鈥� [8]. The immediate political translation was fostered by the New Political Economy (NPE) and its focus on international trade law policy: the world is a global efficient market if each state implements the rule of law domestically and free trade (the law of comparative advantage). The circle is now complete: the world economy reaches economic growth and by extension development. This approach is not a fundamental critique of the perfect competition paradigm but represents rather a mere departure from it by adopting an imperfect competition framework 鈥� namely, perfect competition would be closely reached if the imperfections were removed (a radical critique could be found in the theory of real competition that is a 鈥渄ynamic disequilibrium process or a violent life-and-death struggle rather than the static equilibrium set of conditions underpinning conventional theories鈥� [9]).

The World Bank 鈥渞eligiously鈥� implemented the principles of the Third Moment in Law and Development. Some economists, such as Rodrik [10] and Sen [11], criticized some propositions of the theory by incorporating a human rights approach (in the case of Sen) or by giving a greater role to state intervention in industrial policy (in the case of Rodrik). Yet, these critiques did not question the core premises of NIE: (a) protecting property rights (strongly or formally, since Rodrik makes this distinction) increases economic output and (b) if market failures are corrected perfect competition is achieved. Hence, the question is whether a radical critique is necessary if one wants to (a) understand the process of economic development and (b) propose a policy solution to make such a process sustainable.

Property as a 鈥渂undle of rights鈥�

There is no doubt that the arrangement of legal entitlements affects economic and social development in general (and such a framework is not monolithic). Yet, one needs to have a deeper understanding of property to realize how the 鈥溾�渃lear and strong鈥� property rights is a misleading recipe鈥� [12]. Hence, a thorough analysis of the concept of property should expose the limits of the Law and Economics policy implications as highlighted by David Kennedy, a scholar in the Critical Legal Studies tradition.

As David Kennedy puts it: 鈥淔rom a development perspective, what matters is not the 鈥渟trength鈥� or 鈥渃larity鈥� of property rights, but the relationship between legal entitlements and the distribution and use of resources in a particular time and place鈥� [13]. We can extract from Kennedy鈥檚 remark two ingenious theses: (i) property is allocated through a power struggle and this allocation does not happen in a vacuum; (ii) property is not sui generis but represents a bundle of rights 鈥� namely, a relationship between individuals in relation to an object, which render the notions of 鈥渟trong鈥� and 鈥渃lear鈥� very problematic. One can notice how these two propositions directly challenge the core premise of the World Bank Third Moment paradigm.

Kennedy illustrates the first thesis by stating that: 鈥淒evelopment specialists must understand that in a market economy, 鈥減roperty鈥� has no ideal form separate from social and economic struggle in that society. (鈥�) Before 鈥減roperty rights鈥� can be strong or weak, they must be allocated. In every Western society, the process of allocation has been inseparable from political and social struggle and debate鈥� [14]. In other words, a system of secure property rights is not an a priori framework, but is determined by social interactions and conflict. This view can find an echo in Polanyi鈥檚 concept of embeddedness 鈥� namely, the economic sphere is embedded in human and social institutions (Polanyi : 1944). In fact, even within the Marxian tradition little attention has been paid to this a priori determination (rather than a mere parameter) of property rights (despite Marx鈥檚 analysis of 鈥渂loody legislation鈥� and primitive accumulation in Capital Vol.I). Therefore, if property is determined by a social struggle it also gives power to the winners of such a struggle to maintain its domination and structure the rule of the game to shape the income distribution to their advantage. Moreover, the state is primordial in this process as it is the authority that enforces and allocates entitlements: the state is a locus of constant struggles from the very beginning of any market formation. As a consequence, since property rights and social struggles are intertwined, it follows that this process cannot be unique, uniform and homogenous as assumed in modernization theory and NIE. This process can only be peculiar and specific to each society (it does not exclude similarities). Property rights are not a 鈥渟ystem鈥� but a human institution historically constructed and contingent on time and geography.

The elaboration of the first thesis automatically leads one to question the very definition of property: if property is not a legal system per se but rather a historical process, what shape does its legal implementation take?

According to Kennedy, the notion 鈥渢hat property rights concern the relationship between an individual and 鈥渉is property鈥濃�� is false. On the contrary, one should understand property as 鈥渢he relationship between people with respect to a thing鈥� and 鈥渢he difference is crucial鈥�[15]. This distinction is of first importance because it directly refutes the notion of 鈥渕arket failures鈥� for the following reasons. I have explained in the first section how NIE consider the rule of law as a remedy to market failures. In that sense market failures are understood as ill defined and weakly protected property rights. In this view property is defined as a relationship between an individual and his/her object. Suppose, we replace this conception of property by Kennedy鈥檚 鈥� namely, property is a relationship between individuals in relation to a thing 鈥� what becomes of the notion 鈥渟trong鈥� and 鈥渃lear鈥� and more important, what becomes of market failures? Three implications follow from this conceptual shift:

(a) The state has its say on the private settlements and agreements, as it defines and enforces 鈥渢he rights of one against the other鈥� [16]

(b) Since property constitutes a bundle of rights that could vary in substance due to political and social struggles, it can never be 鈥渃lear鈥� and 鈥渟trongly formalized鈥� as it will damage other individuals鈥� opportunities.

(c) Since it is a relationship with other agents, its process of entitlements 鈥渞outinely fail鈥� therefore 鈥渢ransaction costs are ubiquitous鈥� [17]. Transaction costs being market failures, if market failures are ubiquitous they become the market itself.

This set of propositions demonstrates the deep conceptual change operated by the legal realist approach. Jamee Moudud remarkably illustrates the proposition (c): 鈥淏ut if externalities are ubiquitous then they are the inevitable outcomes of normal market behavior. But if 鈥渕arket failures鈥� are ubiquitous then they are not 鈥渕arket failures鈥� anymore鈥� [18]. Consequently, the entire theoretical legal corpus of NIE and NPE falls apart: (1) property is not a spontaneous pre-established framework; (2) property cannot be clearly and strongly defined in a singular way; therefore (3) property cannot be the cause (with the epistemological implications of the term) of economic growth.

I would like to thank Professors Sanjay Reddy and Jamee K. Moudud, and Ingrid Harvold Kvangraven for their helpful and enlightening feedback.

This is part 1 of a 2-part series on law, institutions and economics. In Part 2, Prof. Jamee Moudud offers new insights from Legal Political Economy.

Mohamed Obaidy is an MS student in Economics at The New School

Sources

[1] Holmes, Wendell Oliver, 鈥淭he Path of Law鈥�, Harvard Law Review, 457, 1897
[2] K. Moudud, Jamee, 鈥淏eyond the Third Moment in Law and Development: Insights from Critical Legal Studies and Critical Political Economy鈥� (2016). Law and Economics: Contemporary Approaches.
[3] Lance E. Davis and Douglass C. North (with the assistance of Calla Smorodin),听Institutional Change and American Economic Growth. Cambridge: Cambridge University Press, 1971; And North, Douglass C. and Robert Paul Thomas,听The Rise of the Western World: A New Economic History. New York: Cambridge University Press, 1973.
[4] Coase, R.H, 鈥淭he problem of Social Cost鈥�, Journal of Law and Economics, Vol.3, Oct.1960.
[5] Hayek, Friedrich, The Constitution of Liberty, Chicago, IL: University of Chicago Press. 1960.
[6] Thomas, Chantal, 鈥淟aw and Neoclassical Economic Development in Theory and Practice: Toward an Institutionalist Critique of Institutionalism鈥� (2011). Cornell Law Faculty Publications. Paper 608. at 979.
[7] Id. at 976.
[8] Id. at 999.
[9] Moudud, J.K., Bina, C., and Mason, P. (2012). 鈥淚ntroduction: the Search for an Alternative.鈥� In Alternative Theories of Competition: Challenges to the Orthodoxy鈥�, eds. J.K. Moudud, C. Bina & P.L. Mason, Routledge Press. P.5.
[10] Rodrik Dani, One Economics, Many Recipes: Globalization, Institutions, And Economic Growth. P. 99-100 (2007).
[11] Sen, Amartya, Development as Freedom. P.3-4 (1999).
[12] Kennedy, David (2011) 鈥淪ome Caution about Property Rights as a Recipe for Economic Development,鈥� Accounting, Economics, and Law: vol.1 : Iss. 1, Article 3. P. 53.
[13] Id. at 5.
[14] Id. at 10.
[15] Id. at 26.
[16] Id. at 40.
[17] Id. at 40.
[18] K. Moudud, Jamee, 鈥淏eyond the Third Moment in Law and Development: Insights from Critical Legal Studies and Critical Political Economy鈥� (2016). Law and Economics: Contemporary Approaches. P. 20.