Beyond the Third Moment in Law and Development: New Insights from Legal Political Economy

This blog post provides insights from what I have come to call the legal political economy perspective to critique the World Bank and neoclassical economics more generally. At the heart of what has been called the World Bank’s Third Moment in Law and Development is the claim that government involvement is necessary to eliminate “market failures” and promote both business development and social justice.

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 (“If 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” (Gordon 1984, 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 Hale’s framework 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—factors 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’s 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—is basically in Blackstone’s description of property as a person’s “despotic dominion” over external things.

b) In contrast, Legal Realists and the CLS view—known in the literature as the progressive view of property—conceptualized property in social and relational terms. The use of one’s property invariably has impacts on other people’s property—in the Realist view property was a treated as a “bundle of rights” which determined the damage or costs that use of one’s property could impose on others within the given structure of laws. Thus: ‘property governs relations between persons with respect to things, rather than relations of persons to things,’ (Cohen [1927], 1993, 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 the economy is a network of coercive power relations. Hale’s framework drew on the theoretical framework established by Wesley Hohfeld who in a landmark 1913 article established a set of fundamental jural relations of property holders relative to others such that, as Warren Samuels summarized it, “…there 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.”

e) The conventional wisdom would have it that coercion can only exist in regards the government’s actions vis-à-vis the private sector. Hale’s point was that, while different in form, private coercion (what he called “private government”) 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’ bargaining power (e.g. via jobs programs etc.) but cannot alter the fundamentally coercive pressures on them from property owners. The “free market” is as much a regulatory system—because laws are by definition regulations—as its opposite except that it reduces the society’s 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 “deregulated” labor relations which followed increased employers’ coercive powers over employees. Thus a “free market” is as coercive as one involving more state regulation. In short, per Hohfeld’s insight, the law can both restrict (or prohibit) the exercise of power while also permitting it even when “it is not there” as in a “deregulated” framework. Thus, from the Realist standpoint, the Third Moment goal of simultaneously achieving “efficient” 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’s own property will inevitably have social consequences. This is why, as Samuels argues, externalities are ubiquitous in Hale’s analysis (Samuels 1973, p. 286). “Every exercise of volitional freedom tends to restrict or change the volitional freedom of others, through the coercive impact on the alternatives open to others” (ibid). But if externalities are ubiquitous then they are the inevitable outcomes of normal market behavior. However, if “market failures” are ubiquitous then they are not “market failures” anymore! Quite logically, therefore, there can be no such thing as a “perfect” market which of course implies that there is no such thing as an “imperfect” 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—or its opposite in neoclassical theory, some type of imperfect competition—in this view of property. Incidentally, those who claim that early capitalism consisted of perfect competition should note the following. In his classic The Transformation of American Law 1780-1860 (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 “…the essential attribute of property ownership was the power to develop one’s property regardless of the injurious consequences to others” (Horwitz 1977, p. 99. Emphasis added). “[P]ermissions to injure play an enormously important role in economic life, since all competition is legalized injury…” (Kennedy 1991, 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 “anything”. In writing about progressive policies (such as jobs program; wage increases via strong unions; progressive taxes) Hale wrote that such policies raised workers’ bargaining power and increased coercive pressures on capitalists thereby possibly undermining the incentive to invest. The following quote from Hale is significant: “[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.” 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 “hard” 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 “pressure from below”. The need for destabilizing property relations to achieve such goals has been discussed by a number legal scholars (Ezra Rosser for example). 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’s argument regarding the destabilizing approach to legal change is neither nihilistic nor a “pie in the sky” 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’ pitched political battles over structural challenges to property prerogatives are very much today’s 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—when 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 (MacLennan 1988)?

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.

2 thoughts on “Beyond the Third Moment in Law and Development: New Insights from Legal Political Economy

  1. It is necessary to know what is meant by the concept of property. Can a person own durable capital (unmovable) goods like a house and then say that this is his property? I believe he can. But what about the land surrounding and under the house. Is this his property too? I ask this question because it seems to me that in owning both kinds of property, this owner is performing two different economic functions as both the house and the land owner.

    The house is the result of labor put into its construction and its value will change with time usually firstly rising and then falling as it becomes old and obsolete. The land can never do this, but its value does grow when the surroundings become developed, due to both the community and the nation contributing (by paying taxes) to improvements in the infrastructure of the region. This extra value is not caused by the land owner and as a result he has no moral rights to it. Yet the laws of land ownership confer on him this right and the ability to exploit land value increases when a site has been purchased and later sold after the region has been further developed as well as the charging of rent for the right for its access.

    Such land ownership can actually harm the rest of the community because its non-use will make it harder to find a suitable site nearby and the greater competition for it and the resulting cost in rent or in purchase price will rise. To benefit from these changes is unethical because the advantage being taken is at the cost of others including taxpayers and would-be entrepreneurs, who will find it too costly when sites of land are unused and speculated and monopolized in this way.

    A fairer way of organizing land tenure is to collect a revenue for its ownership, whether it is used or otherwise. This is the economic rent taken as if it were a tax. It is sometimes called Land Value Tax although strictly it does nothing to slow down national progress as other forms of taxation do. It actually is an incentive to more progress because it encourages land owners who do not properly use their land to sell it to somebody who will make full use of it, and who can then afford to pay the revenue. (Past such tenants would call this money rent or lease and give it to the land-property owner.)

    So this claim for the introduction of a Land Value Tax is justified. Actually it affects the economy in 17 different ways which are summarized below:

    17 Aspects of LVT Affecting Government, Land Owners, Communities and Ethics

    Four Aspects for Government:
    1. LVT, adds to the national income as do other taxation systems, but it replaces them.
    2. The cost of collecting the LVT is less than for all of the production-related taxes–tax avoidance becomes impossible because the sites are visible to all.
    3. Consumers pay less for their purchases due to lower production costs (see below). This creates greater satisfaction with the management of national affairs.
    4. The national economy stabilizes—it no longer experiences the 18 year business boom/bust cycle, due to periodic speculation in land values (see below).

    Six Aspects Affecting Land Owners:
    5. LVT is progressive–owners of the most potentially productive sites pay the most tax.
    6. The land owner pays his LVT regardless of how his site is used. A large proportion of the ground-rent from tenants becomes the LVT, with the result that land has less sales-value but a significant “rental”-value (even when it is not used).
    7. LVT stops speculation in land prices and the withholding of land from proper use is not worthwhile.
    8. The introduction of LVT initially reduces the sales price of sites, even though their rental value can still grow over a longer term. As more sites become available, the competition for them is less fierce.
    9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced competition for access to the additional sites that come into use.
    10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced gradually, to allow these speculators sufficient time to transfer their money to company-shares etc., and simultaneously to meet the increased demand for produce (see below).

    Three Aspects Regarding Communities:
    11. With LVT, there is an incentive to use land for production or residence, rather than it being unused.
    12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up their businesses and because they pay less ground-rent–demand grows, unemployment decreases.
    13. Investment money is withdrawn from land and placed in durable capital goods. This means more advances in technology and cheaper goods too.

    Four Aspects About Ethics:
    14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this extortion by gathering the surplus rental income, which comes without any exertion from the land owner or by the banks– LVT is a natural system of national income-gathering.
    15. Bribery and corruption on information about land cease. Before, this was due to the leaking of news of municipal plans for housing and industrial development, causing shock-waves in local land prices (and municipal workers’ and lawyers’ bank balances).
    16. The improved use of the more central land reduces the environmental damage due to a) unused sites being dumping-grounds, and b) the smaller amount of fossil-fuel use, when traveling between home and workplace.
    17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural way– to provide more jobs. Then earnings will correspond to the value that the labor puts into the product or service. Consequently, after LVT has been properly introduced it will eliminate poverty and improve business ethics.

    Let us understand and teach what is implied by property ownership.

    Like

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