Law as a Governing Institution
Abstract and Keywords
This article reveals the tension between evolutionary, functionalist driven notions of law and more historical and contingent accounts of the emergence of particular legal systems, practices, and forms. It builds on this by examining how forms of economic organization and economic outcomes are determined by law, and, in particular, by national legal systems. The article problematizes this argument by showing how law in the contemporary period that impacts on economic organization is moving and dynamic, national and international, public and private, soft and hard. This requires a focus on three phenomena: first, the internal structure of legal systems and the sorts of powers and capacities that particular actors accrue in those contexts; second, the development of law as a business and what this means for the dynamism of law from different national contexts; and third, how this dynamism has led to new forms of innovation and internationalization in law.
Law, that is the formal codification and application of norms and values of society as crafted by politicians and judges, is a central institution in modern economies. Law constitutes economic organization, framing the nature of categories such as firms, property, contract, labour, and capital. It defines and facilitates the powers that can be claimed by different actors in the economy—the rights of firms, shareholders, managers, employees, etc. It regulates the ways in which these collective agents can act and provides a means for remedying disputes (Edelman and Suchman 1997: 101). It leads to processes through which instabilities, conflicts, and uncertainties can be dealt with. It does this by reference to precedents, procedures, and theories of justice that constrain what is possible to actors as they enter the juridical field. As Bourdieu says ‘entry into the juridical field implies the tacit acceptance of the field's fundamental law … that …. conflict can only be resolved juridically—that is, according to the rules and conventions of the field itself’ (Bourdieu 1987: 831). Thus, even though (p. 276) the law is integrally related in the modern period to the state and relies to a crucial extent on the state's monopoly of the legitimate use of force as its ultimate form of sanction, it cannot simply be reduced to being an ‘arm’ of the state. The law is politically and professionally mediated. It therefore has its own specific conditions of existence that relate to the form of law (manifested in statute, case law, and systems of regulation), the arenas of law and their rules of action and procedure (public courts as well as private settings), the agents of law, their social position and their licensing system (lawyers, law firms, and judges; professional associations), the technology and artefacts of law (documentation, standards, cases, statutes), and the body of knowledge that underpins the law (the role of jurisprudence and academic legal theorizing that crosses the boundaries between universities, courts, and politics). These conditions of existence constitute obligatory passage points through which other actors such as the state, organizations, and individuals have to pass in order to engage with the law and under certain circumstances change and reform law and the legal system. Law is defined by this dynamic between its internal structuring and conditions of existence and its external impact. The fact that the internal and the external conditions of existence change means that the legal field is not fixed or defined but ever‐shifting and moving, extending, and contracting. This dynamic has important consequences which Bourdieu describes as follows:
As is true of any ‘field’, the constitution of the juridical field is a principle of the constitution of reality itself. To join the game, to agree to play the game, to accept the law for the resolution of the conflict, is tacitly to adopt a mode of expression and discussion implying the renunciation of physical violence and of elementary forms of symbolic violence …. It is above all to recognize the specific requirements of the juridical construction of the issue … a complete retranslation of all of the aspects of the controversy is necessary. (Bourdieu 1987: 831–2)
The logic of judicial fields derives from complex historical path dependencies. We can expect therefore that because law as a social institution has occupied a distinctive place within different trajectories of social and economic development, we will find judicial fields constituted differently across various contexts and that this will be consequential for economic organization. In simple terms, this is why comparative institutional analysis has to take account of law. However, this leads to three possible dangers that we seek to avoid in this chapter. The first danger is to fall into a linear evolutionary perspective based on functionalist principles. For example, there is a long tradition of arguing that in order for a capitalist economy to exist, there must be an appropriate set of legal institutions, e.g. in terms of property rights, contract law, etc. (see for example North and Thomas 1973; North 1990 and in the more policy‐oriented debates on the promotion of the rule of law in developing and transition economies, Dam 2006; for a critical assessment in the case of China see Peerenboom 2002; for Eastern Europe see Murell 2001). The problem with such accounts is that they tend to assume a certain outcome and ignore the variety of different historical developments and the continued diversity between countries in terms of legal systems.
Emphasizing differences between legal systems, however, leads to the second set of dangers because the arena of law has never been a purely nationally defined arena. (p. 277) For example, all western legal systems (including those established elsewhere through colonialism and imperialism) can be traced back to Roman Law and the debates across Christian Europe in the medieval period concerning ius commune, natural law, and the nature of canon law. These debates reflected upon efforts to create a single underlying set of principles of law to underpin (and, to a degree, shape, constrain, and civilize) the more variable systems of customary and local law imposed in particular jurisdictions on the back of the coercive power and, frequently, personal preferences of the local ruler. Even as nation‐states became more powerful and societies more secularized, this ambition for a universal basis for law did not disappear, reaching its Enlightenment apogee in Kant's essay on Perpetual Peace in the effort to ground the principles of law in the operation of Reason. Such efforts to create a public international law became significant in the post‐1945 environment following the foundation of the United Nations and its various principles, charters, and associated bodies. Later processes of economic globalization gave this thrust towards international law a more pragmatic, technical, and functionalist impetus, undermining the Kantian moral imperatives (see Koskenniemi 2007 for an exposition of these tensions). Thus national law is embedded within networks of international law and the exchange, imitation and diffusion of laws, legal principles, and practice and jurisprudence.
The third danger is that law is treated as an independent variable, which determines economic and social organization. Whilst on the one hand, law is constitutive and shaping of economic and social relations, it is not independent of those relations. Most obviously economic actors seek to change the law to accommodate it more to their interests. Legal actors themselves have positions within wider social and economic structures that affect how they are organized, how law is implemented, and for whose benefit. Actors within the legal field mediate and articulate these tensions between law as a field in itself and the broader context. Edelman and colleagues (Edelman 2004, 2007; Edelman and Stryker 2005; Edelman and Suchman 1997; Suchman and Edelman 2007) have been particularly insistent on the importance of seeing law as endogenous to the social order, not standing outside it but continuously interacting. The law moves on and changes because of the way in which those inside the legal field influence and are influenced by those outside it, such as clients, the state, social movements, and economic, social and technological innovations.
In order to avoid these dangers, this chapter is structured around these themes to suggest how they may be combined to give a more complete view of law as a governing institution. The first section of the chapter, therefore, examines classical institutionalist accounts of the role of law. This reveals the tension between evolutionary, functionalist driven notions of law and more historical and contingent accounts of the emergence of particular legal systems, practices, and forms. The second section builds on this by examining how forms of economic organization and economic outcomes are determined by law and in particular by national legal systems. The third section problematizes this argument by showing how law in the contemporary period that impacts on economic organization is moving and dynamic, national and international, public and private, soft and hard. This requires a focus (p. 278) on three phenomena; firstly, the internal structure of legal systems and the sorts of powers and capacities that particular actors accrue in those contexts and how they use this power to shape and innovate in law; secondly, the development of law as a business and what this means for the dynamism of law from different national contexts; thirdly, how this dynamism has led to new forms of innovation and internationalization in law that challenge any deterministic ideas of the relationship between law and economic organization.
Law, Economy and Society in Classical Institutional Theory
Classical institutionalist accounts of law tended to be constructed from an evolutionary point of view. What were the forms of law present in the emergent capitalist societies of the nineteenth and early twentieth centuries and how and why did these differ from those characterizing pre‐capitalist society? In Ancient Law, Maine (1861) argued that law and society had developed from status to contract. Whilst in ancient times, the main function of contract was to tightly bind persons to traditional status groups, the invention of private contract in modern times enabled economic exchange and association between individuals, which were viewed as autonomous and free in their choice of contract partner and not constrained by their membership of a particular status group. Durkheim ( 1997), also emphasized the importance of contract as part of the expansion of what he called restitutive law, i.e. law that provides general rules of conduct towards which individuals re‐orient their behaviour. In contrast to his arch‐enemy, the English utilitarian Herbert Spencer, however, these rules were—as Durkheim showed in his famous analysis of the non‐contractual elements of contracts—embedded in a wider societal context, where social actors sustained reciprocal moral expectations that contracts should be fulfilled. Thus law evolves towards a more individualistic and contractual form as societies become more capitalist but it remains underpinned by social norms, not simply utilitarian compliance.
Marx and Engels also took an evolutionary view of law as adapting and changing in response to broader environmental processes even if they emphasized the class interests which drove these changes more than most other authors. In The German Ideology, for example, they saw the rise of capitalism as inseparably intertwined with legal guarantees of private ownership of the means of production and the employment relationship: ‘Whenever, through the development of industry and commerce, new forms of intercourse have been evolved (e.g., insurance companies, etc.) the law has always been compelled to admit them among the modes of acquiring property’ (Marx and Engels 1976: 92, cited in Stone 1985: 52).
The American institutional economist and labour historian John Commons in the Legal Foundations of Capitalism ( 1995), developed similar arguments examining the process by which English courts from the sixteenth to the eighteenth century validated business practices, and thereby converted ideas relating to property.
These evolutionary accounts tended to see law as a dependent variable in the broad historical transition to capitalism; the law was subject to irresistible pressure to change in a way which made it more functional for the emerging new order. Once in place, however, the law as an institution becomes itself determining; it reinforces the particular pattern of economic organization by putting in place rules and sanctions that are functional for and fit the structure of the economy.
By contrast, another strand of analysis focused more specifically on the nature of the law as an institution and the place of this institution in the broader social context. The dominant influence here is Weber. In particular, Weber was well aware of the indeterminacy in the relationship between legal and economic phenomena. In his view, law reflected not only economic but also ethical, religious, social, and political influences. Therefore, economic phenomena could have at best a partial impact on legal phenomena. It could not determine the law and the law should not be seen as evolving from one state to another because of purely economic factors. For Weber, the relationship between the economy and law was strongly mediated by the legal system, legal thought and the dominant types of ‘legal honoratiores’ in different countries, or in his own words: ‘Economic factors can therefore be said to have had an indirect influence only … we shall frequently see that those aspects of law which are conditioned by political factors and by the internal structure of legal thought have exercised a strong influence on economic organizations’ (Weber  1978: 655).
The law as a specific set of social relations with its own conditions of existence emerges strongly in Weber's analysis. Legal norms and rules, according to Weber, differ from other social norms and rules because they are made, imposed, and sanctioned by a staff of people especially holding themselves ready for this purpose (Rechtsstab). Rational legal authority, as compared to other forms of authority, is based on an abstract legal order that grants formal treatment to all subjects and violations of which are sanctioned by the Rechtsstab. But it also depends on the legitimacy beliefs of those subjected to authority in the legality of the order. Apart from legislation ‘from above’, Weber's analysis, therefore, highlights the role of ‘legal honoratiores’ and judicial procedures in charge of making and enforcing the law (Weber  1978: 784ff). In his comparison of common and civil law systems, Weber pointed to the influence of the social composition and training of lawyers, judges, and other law specialists in different societies on the development of legal thought and its affinities with the substance and form of law as well as the operation of the legal system. His arguments therefore reject the notion of the law as determined and evolving in order to meet the ‘needs’ of the economy2 and instead focus (p. 280) on the necessity for a detailed analysis of the legal system in its own right in order to disentangle the subtleties inherent in the relationship between law and economy (Rheinstein 1954).
Weber's rejection of simple evolutionary accounts of law is reflected also in the work of Eugen Ehrlich, a law professor born in Bukowina in 1862 and living in Czernowitz until his death in 1922, both cities located in a part of the former Austrian‐Hungarian Empire that fell under several, changing legal jurisdictions over the course of his lifetime. Ehrlich started from the observation that the rules, which guide the behaviour of actors in economy and society, often diverge significantly from the rules that are laid down in statutory law and court rulings. Therefore, his writing was dedicated to the analysis of ‘a practical concept of law’ (Ehrlich  2002: 3 ff) which would help to fill the ‘blind spot’ of jurisprudence (Ziegert  2002: xxvii) and to replace the assumptions of evolutionary and functionalist accounts of the law with an alternative empirical sociology of the law. Ehrlich's Fundamental principles of the sociology of law ( 2002) was, like Weber's Economy and Society ( 1978), constitutive for the formation of the sociology of law and socio‐legal studies.3 The fragility of the legal authorities under which Ehrlich lived led him to particularly appreciate that in transnational contexts, there are often various overlapping and competing private and state actors claiming legitimacy for law‐making and law enforcement (Quack 2007). For Ehrlich ( 2002), legal rules are only followed by people because they are supported by pre‐existing social orders of living. It is only within the context of social norms, which tie members of a society together through a web of mutual expectations and potential social sanctions, that we can understand why legal rules are followed or not, hence, the author's critique of the positivist position that ascribed legal propositions an effect in their own right. Ehrlich's plea for a study of the ‘living law’ (Ehrlich  2002: 81), instead, drew attention to the methodological need for an empirical study of the interactions between legal and social rules in practical life. It also pointed to routines and practices of social life as a source for legal decision‐making rules and state law. In Ehrlich's view, legal rules are distinct from social rules in so far as they emerge from a specialized social structure aimed at developing a system of legal decision‐making and/or the state as legislator. While the legal decision‐making system includes lawyers and judges as those who apply and further develop the law in individual case decisions, state law encompasses all the rules, which are devised by state functionaries and politicians, passed through the parliament or decreed by a ruler. In sum, the work of Ehrlich like that of Weber highlights the importance of studying the legal system itself in order to understand better the effects of legal rules on (p. 281) economic coordination. Ehrlich, more than Weber, prepared the ground for a profound understanding of the reflexivity of legal in response to social norms (and vice versa) highlighted in modern socio‐legal theories, such as Nonet and Selznick (1978), Luhmann (1985) and Teubner (1983).
Law Shaping National Differences in Economic Organization
The previous section has shown that institutionalist analysis has an ambivalent legacy in respect of law as a governing institution. Contemporary discussions on law in institutional analysis do reflect some of these ambiguities. While both the analysis of business systems (Whitley 1999) and the varieties of capitalism approach (Hall and Soskice 2001) highlight distinctive legal systems as an important institutional dimension shaping economic organization in different societies (and thereby question the notion of universally valid development trajectories), they remain largely silent on how the law itself evolves and how it specifically affects economic organization as compared to other institutions. As Stryker (2003) critically remarks, institutional and socio‐economic studies are often very unspecific about the nature of institutions and do not separate out the effects of law from other institutions' effects (see Swedberg 2003 for economic sociology). Whitley (1999) refers to law under the broad category of state regulation and introduces it predominantly as an institutional factor shaping forms of economic organization. Similarly, Hall and Soskice (2001 a) in the presentation of their analytical framework refer to contract law as an institutional element, which is complementary to specific types of inter‐company relations that are regarded as typical of liberal and coordinated market economies (LME and CME). Contributions to their volume illustrate the complementary effects of legal regulations with specific forms of corporate governance, inter‐company relations, and innovation in LMEs and CMEs (Vitols 2001; Casper 2001). In both approaches, law is treated as an exogenous factor with determining effects on economic organization, reinforcing a particular institutional framework. Little consideration is given to the actual interpretation and adaptation of legal rules by the actors in question, the interaction of legal and non‐legal institutions, and the recursivity of law.4 This sort of comparative institutionalist analysis focuses on how different legal systems have constituted firms as legal entities, and have shaped the rights of collective (p. 282) actors in relation to firms and rules on how collective actors may behave in market contexts.
There is no doubt that this approach has yielded a range of important insights into the relationship between law and different forms of capitalism and the impact of law on economic performance outcomes. The relevance of law for the constitution of corporate and collective actors has been highlighted by institutional and legal scholars with regard to national differences in the incorporation of the large modern enterprise (Hopt 2007), small‐ and medium‐sized enterprises (Bagnasco and Sabel 1995; Lane 1995), including those prevalent in banking and finance (Deeg 1999; Vitols 2005; Lütz 2002), formal association and the interest organization of capital (Schmitter and Streeck 1985) and labour (Ferner and Hyman 1998), the prevalence of intermediary organizations (Morgan and Quack 2005), and the capacity of local public administration and government in relation to the central political authorities of a country (Putnam 1994; Zeitlin 1995). Less often treated in the varieties of capitalism and business system approach—though arguably of similar importance for the comparative institutional analysis of economic systems—are the professions (Abbott 1998; Lane et al. 2002), ‘third sector’ organizations (Anheiner and Seibel 1990; Evers and Laville 2004) and civil society organizations (Della Porta 2007). Another factor, which is highly relevant for shaping the constitution of economic actors and their resources, is inheritance law (Beckert 2008) which also has broader consequences for the distribution of wealth within societies.
In the field of financial economics, the relationship between law and corporate governance has become of major interest. La Porta and colleagues have argued that the degree of legal protection accorded to outside shareholders is crucial to understanding the growth of financial markets and through this financial development more generally (for an extensive overview of the debate, see La Porta et al. 2008; also Goyer in this volume). They argue that where this protection is high, outsiders are encouraged to invest in financial markets, thus making these markets broader and deeper and overall more efficient in terms of their allocation process. By contrast, where these protections are weak, insiders dominate companies and seek the private benefits of control. The result is less efficient allocation of capital. La Porta et al. ascribe these different forms of protection to differences between common law systems (where protection is high) and civil law systems (where protection is low). On the basis of quantitative analysis based on cross‐country comparisons, they argue that there is clear evidence that better shareholder protection is associated with higher income per capita. The arguments of La Porta et al. are based on a strong view of the determining effect of law and in particular on the nature of law at a high level of abstraction, i.e. in terms of the comparison between civil and common law.
Taking this issue more broadly, however, the constitutive function of law for the formation of identities, preferences, and strategies of economic actors may be illustrated with a focus on the role of capital and labour in the corporate governance of large public companies in Japan, Germany, and the United States (see Morck 2000, 2005 and O'Sullivan 2003 for a comparison of a broader range of countries). Historically, the emergence of the large modern corporation in the nineteenth (p. 283) century (that is a company with legal personality, limited liability, and transferable shares) soon led to a series of crisis and scandals, which quickly drew public attention to the need for regulation of the corporation. The company law codifications of the second half of the nineteenth century in the Western industrialized countries and subsequent reforms over the last 100 years were attempts to find a balance between protection of owners, as individuals and as a class, and the public interest. With increasing separation of ownership and control (Berle and Means 1932, Roe 1994), finding a balance between delegation of decision‐making to directors and management and ensuring control over them by legal rules and liability became another focus of attempts to regulate the public corporation in company law, bankruptcy law, and other fields of law. While entailing a fair amount of cross‐border borrowing and learning (Hopt 2007), legal specifications of the rights and duties of different groups of stakeholders in public companies still show significant variations between countries.
Aguilera and Jackson (2003: 453) highlight how the property rights arising from these historical developments in the contemporary period ‘shape capital specifically by establishing rights that favour different types of shareholders’. According to these authors, Japanese law entails a ‘shareholder sovereignty model’, where voting rights follow a majority principle and shareholders' meetings retain broad powers. German law, too, privileges majority voting, but its ‘constitutional model’ differs from Japanese law in so far as it legally mandates two‐tier board structures with substantial supervisory functions being delegated from general shareholder meetings to a supervisory board, since the latter tends to give disproportionate power to owners of large blocs of shares and thereby favours their strategic interests. Legislation in the United States, in contrast, is characterized by a ‘liberal market approach’, which provides minority shareholders with strong protection by means of high disclosure requirements and norms of one‐share‐one‐vote.5 However, the federal structure in the US and the competition between states means that the actual operation of these processes is more complex. The state of Delaware has become the favoured place of incorporation for US companies because Delaware law has been relatively open to executives creating protective mechanisms against hostile takeover, such as ‘poison pill’ defences. Income from incorporation is essential to the Delaware state budget and this requires the approval of senior managers in firms; elements of the legal system that favour incumbent management versus shareholders constitute an informal quid pro quo. In sum, by granting differential rights, legal stipulations in the three countries favour different interest groups in their influence on corporate governance (see also Goyer in this volume; Coffee 2006; Gourevitch and Shinn 2005; Morgan 2007; Roe 2003).
On the labour side, too, corporate governance in public companies shows considerable variation in the types of collective actors involved and the degree to which they are entitled to representation in company decision‐making (Gospel and Pendleton (p. 284) 2005; Pistor 2001; Streeck 2009). These reflect historical struggles of labour to organize at the firm‐level and other channels of influence on corporate management, which in some countries resulted in representation being guaranteed by statutory law (like co‐determination in Germany), while in other countries being written into collective bargaining agreements (like joint consultation practices in France) which are derived from statutory collective bargaining rights, and again in other countries being very weak (as in the USA) (Aguilera and Jackson 2003). The degree and the form of representation rights (co‐determination, information, or consultation) give employees and unions distinctive channels to influence companies' decisions, which in turn shape the collective identity of representation bodies and unions in the different countries. One area in which the impact of different forms of employee representation becomes visible is in the restructuring of large companies where the legal rights of employees to representation and consultation slows down the sort of quick takeover process which is characteristic of the US and the UK (Ahlering and Deakin 2007; Deakin 2009; Deakin et al. 2006).
In addition to providing a legal identity, law also shapes larger patterns of economic organization by defining the rules which should govern the relationships between corporate and collective actors within the economy. In this way legislation and court decisions shape broader ‘patterns of competitive and/or cooperative relations between economic actors’ with significant implications for industry structures, models of production, and innovation, and for what Fligstein (2002) called the ‘control conception’ of an industry or economy. Property relations are also significant in this respect since they define social spaces in which companies determine their business models, develop patterns of inter‐firm cooperation, and strategize for market control (see Campbell and Lindberg 1990 for different American industries; Carruthers and Ariovich 2004).
Anti‐trust and competition legislation has historically played an important role in institutionalizing such control conceptions. In many countries, it reflects social struggles that took place during formative historical periods that became enshrined into law and subsequently influenced the economy in substantial ways. In the USA, the discussions and conflicts preceding the passing of the Sherman Antitrust Act in 1890 and following during the years up to the Clayton Act in 1914 represents such a formative period (Berk 1994). In the struggle between big corporations and small producers, cartels and loose agreements became denounced as unreasonable restraints of trade and were therefore outlawed in principle while mergers between firms, as long as they increased efficiency, remained a legitimate form of economic behaviour (Djelic 1998). Alternative patterns of control, such as associational systems, (see Berk 1994 for the railroad industry; Schneiberg 2007 for infrastructure industries) became undermined by government anti‐trust cases against such small‐firm trade associations in the 1920s.
US anti‐trust policy made, as emphasized by Chandler (1977, 1990), a major contribution to the growth of mergers and concentrations in US industry. Jurisdictional actions played an equally important role in the struggle about the legitimacy of different production models (Berk 1994). While overall, the American economy was fostering mergers leading to large concentrations, oligopolistic market control, and (p. 285) mass production, there always remained loopholes and exceptions, and legislation also had sometimes unintended effects. Zeitlin (2007: 229) highlights how localized speciality producers were able to informally organize the provision of collective services and information exchange, enabling collective learning at the industry level (Scranton 1997; see also Whitford 2006). Drawing on Berk (2009) he also points to exceptional court decisions, which allowed associations in the printing industry information sharing as long as they refrained from coordinated pricing policies. Finally, anti‐trust decrees obliging large firms to licence technology to competitors became the basis for the development of new industrial clusters in the Silicon Valley (Borrus and Zysman 1997, cited in Zeitlin 2007: 229). In sum, however, US anti‐trust legislation can be said to have fostered for a long time large corporations and mass production at the expense of such alternative forms of production.
The development of competition law in Europe, and particularly in Germany, provides an interesting comparison to the US case. Historically, cartels have been regarded much more favourably by German policy‐makers, industry, and the larger public well into the period after the Second World War than they have in the US (Herrigel 1996). Attempted transfers of US competition law to Europe (Djelic 1998) in the early post war period were partially successful. However, as the reform of the German competition law in 1957 shows, social struggles over what would represent acceptable forms of cooperative behaviour and what should be outlawed as inappropriate restraints on competition took their own dynamics within a distinctive historical, social, and institutional context (Quack and Djelic 2005). While outlawing cartels, the Law against Restraints on Competition (Gesetz gegen Wettbewerbsbeschränkungen), passed in 1957, excluded certain types of company agreements from the general ban. In particular, term‐fixing, rebate, and specialization agreements remained legal and provided small‐ and medium‐sized firms with the possibility of information sharing and collective learning at the industry level (Herrigel 1996: 170–4). Furthermore, industries in which full competition was not regarded as possible were excluded from the application of the law. This applied not only to the public and infrastructure sector but also to banking and insurance (Djelic and Quack 2005, 2007). In sum, a break with cartels was combined with legal stipulations, which subsequently allowed German industry to reinvent previously existing forms of social coordination in a modern associational form. While certainly not the only factor, the development of German competition law after the Second World War can be nevertheless plausibly considered as a constitutive influence on the persistence of a decentralized industrial order (Herrigel 1996) and the success of diversified quality production in the 1970s and 1980s (Streeck 1991). The importance of competition law in fostering or hindering the provision of common or public goods at the disposal of all or a group of companies has been more generally highlighted in research on the success of Italian, German, and Danish industrial districts in comparison to their decline in Britain and the US (Zeitlin 1995, 2007).6
(p. 286) Law in the Contemporary Period: Combining the Weberian Perspective and Comparative Analysis
The previous section examined the ways in which law could be seen to determine and shape economic organization. In that perspective, law is given a classic ‘black box’ status where its inner workings are bracketed off in order to concentrate on its effects on other institutions. However, as we illustrated at the start, there is an alternative approach to law as an institution that derives from the historical and sociological accounts of law initiated by Weber and Ehrlich. From this perspective, we need to get inside the ‘black box’ and understand how it is constituted and reconstituted under specific historical conditions in order to appreciate the co‐evolution and interaction of law, and economic organization. This requires three steps: firstly an historical understanding of how the legal field became constituted in different social contexts and the impact of this on relations between law, lawyers, and economic organization; secondly, an analysis of how and where the law evolved from being structured by political and social relations into becoming a business in its own right and the consequences of this for economic organization; thirdly, how, as law became a particular form of business, it changed the conditions under which international economic activity takes place, becoming highly innovative in shaping and reshaping legal rules and constraints at different levels of action (national, regional, global) and through distinct modalities of law (soft law, hard law, private law, lex mercatoria, etc.). In this way, the interactive nature of the relationship between law, political authority, and economic organization can be identified, leading away from deterministic and evolutionary models towards a social and political concept of law as an institution.
The social constitution of legal fields
In this section, we examine how the actors in the legal field became constituted and the implications of this for economic organization. The focus is particularly on the relationship between lawyers on the one hand and on the other hand, firstly the state and secondly, the private actors in society (particularly those with economic power). The basic issue that we explore is the degree to which lawyers identified with the state as a political entity, with the private actors as clients, or with law as a set of principles and processes above and beyond the state and private interests. It is this identification and its embeddedness in practices of law and the social relations of law that shapes how law as an institution interacts with economic organization.
If we take the example of England, what became identified as the common law tradition emerged from the combination of a tamed monarchy, an independent legislature controlled by the rich and powerful, and a legal profession with its own structure (Osiel 1990). This arose from the long and tortured process of political and (p. 287) social change from the late medieval period into the early modern age. As early as the signing of the Magna Carta in 1215, the rights of nobles against the monarchy were enshrined and kingship became the centre of long running battles between different noble families. The efforts of the Tudors were to create a system of national administration freed from the influence of Rome where monarchical power could be asserted in any part of the kingdom. This reduced the powers of feudal lords but faced other challenges such as those arising from religious and commercial change, both of which could find outlets in disputation in the parliamentary and legal systems (Braddick 2000). The Civil War of the mid‐seventeenth century and the Glorious Revolution of 1688 created a new balance between monarchy and parliament, which worked against the imposition of a system of law controlled from above and led to a relatively flexible approach in which case law, disciplined by systems of appeal and legislative oversight, adapted to changing circumstances.
Under these conditions, lawyers claimed to be guardians of liberty by using the common law and the system of precedents to legitimize rights (particularly of property) and to guard against state despotism (on lawyers and liberalism in general see Halliday and Karpik 1997; Halliday, Karpik, and Feeley 2007). On the other hand, the liberty which was being protected was the liberty of the individual property owner. Thus the English lawyer was always firmly tied to the client (invariably drawn from the rich and powerful classes) against threats to the property of the client, either from the monarch or later from the propertyless masses either through theft, revolution, or the actions of a redistributive state.
Lawyers were not part of the emerging state apparatus; in theory they were an ‘independent’ profession with the power to control their own systems of recruitment, qualification, remuneration, and ethical values. Even though judges were appointed by the monarch and later the government, they had to be chosen from the profession where they had spent many years practising as independents in return for fees from clients. In so far as they were dependent, they were dependent on their clients rather than the state. This contributed to a particular vision of the law and the role of lawyers. They sought to serve their clients' interests by interpreting the law creatively. Such creativity could be tempered by the judiciary or the legislature but the overall consequence was that the common law evolved gradually but continuously as circumstances changed, as clients faced new problems and lawyers developed new solutions. Common law was a pliable instrument for the wealthy and for their legal advisers.
Most European societies evolved a different dynamic primarily because monarchical power lasted longer and therefore legal systems were imposed much more powerfully from the top with very little restraint from either a legislature or an independent judiciary. This was formalized in the Codes of law imposed by Napoleon across much of Europe in the early nineteenth century and although the defeat of Napoleon led to their repeal, many European nations eventually produced their own codes. Although nineteenth‐century Codes achieved political legitimacy through the adapted forms of political authority, which European states were establishing in this period, the principle of the Code remained unchanged—to place in an orderly manner in statute the law which governed all particular actions. In civil code (p. 288) law systems, judicial decision‐making focused on the statute and commentaries on the statute rather than cases. The law could only respond to changing circumstances by statutes themselves being changed. Associated with this, legal advice was cautious and constraining. If statute and the scholarly exegeses associated with statute did not explicitly give permission for a particular course of action, then it would be considered illegal and not to be undertaken.
Code law systems had two effects. On the one hand, lawyers in these systems became guardians of those rights, which had been established against monarchical control or were established in the Code itself, and the principles underlying the Code. On the other hand, lawyers faced the problem of being embedded within the state, being effectively servants of the state. Therefore where the state was illiberal, they were unable to practise the doctrines of liberalism (Halliday and Karpik 1997) and became potentially complicit in the coercive nature of the state (as happened with German lawyers in the Nazi period). Either way, the legal profession in these systems was at arms' length from private clients. In a number of contexts, judges were appointed by the state without any period as independent practitioners. The independent fee‐earning lawyer was of relatively low status compared to the lawyer as a civil servant or even, later, as an employed adviser inside firms.
The development of the legal profession in Germany illustrates the impact of this. During the nineteenth century, German states spearheaded by Prussia and Bavaria sought successfully to bring lawyers under state control (Siegrist 1996). The Prussian model of a closed and state‐regulated legal bar in which lawyers as well as judges had the status of civil servants became crucial for the further development of the legal profession in the unified Germany. Even after the establishment of an independent and self‐governing German bar association in 1878, the professional prototype of the lawyer continued to be modelled on the civil servant. This was intensified by the development of civil law regulations concerning trade and economy, such as the German Civil Code of 1896 that provided comprehensive legal codification. The German Empire built on the Prussian authoritarian state tradition regarded law as an unquestioned order to which citizens had to comply (Rueschemeyer 1990, 1997). The professional and legal system in the German Empire, thus, offered fewer opportunities for lawyers to develop entrepreneurial qualities than in the British context. There was also less demand for market‐based legal advice, as large German corporations and banks established in‐house legal departments that internalized a considerable part of legal work.
The majority of the German legal profession maintained a strong social and cultural distance from the needs and interests of industry and commerce (Siegrist 1996) that was reflected in the status‐group orientated approach, a critical attitude towards the expansion of law firms in scale and scope, and an emphasis on professional standards that focused on the single practitioner (Blankenburg and Schultz 1989; McClelland 1991). Legal education reflected this with a predominant emphasis on constitutional and administrative law and little on areas like contract drafting or tax law. Osiel summarizes that the dominant view of law in the German case saw it as a: (p. 289)
purely analytical, intellectual construct, a sealed system of logically interconnected propositions impermeable to the economic pressures of the business world …. Whatever new opportunities for work and wealth the evolving social needs of the time presented to lawyers were thereby lost. (Osiel 1990: 2052–3)
An important element in this discussion is what Bourdieu refers to as ‘the general position of the juridical field within the broader field of power’ (Bourdieu 1987: 823). In common law systems, lawyers established themselves as independent practitioners serving the interests of their clients. From early on, this brought them into close alliance with the rich and powerful. In the USA, Perrow in his analysis of the development of the American economy in the nineteenth century labelled lawyers as the ‘shock‐troops of capitalism’ (Perrow 2002) for the ways in which they served the robber barons of the gilded age. In the UK, these linkages were more subtle. A key group of law firms (later forming the nucleus of the Magic Circle firms) worked in the City of London, facilitating the development of the stock market and associated activities as well as working with the Bank of England and the UK Treasury. Members of these firms were part of a social and political elite of British society (Morgan and Quack 2005).
Although there were business law firms in Germany, they were outnumbered by lawyers working inside the state or inside companies and banks. Rueschemeyer describes the Prussian bar in the mid‐nineteenth century as ‘as close to being Prussian civil servants as an attorney can be. And legally they were considered to be members of the royal Civil Service, with all the obligations this entailed for their professional and personal conduct, including restrictions on political activity’ (Rueschemeyer 1997: 210). They did not exercise the influence of US and UK lawyers. They were a part of the German corporate system, not independent of it nor particularly influential within it.
In France, also, the state played a central role in shaping the position of lawyers in the broader social structure. What differentiated this civil law system from Germany, however, was that French lawyers had played a role in the downfall of the Ancien Regime and became associated with the new state. Karpik identifies French lawyers as central actors in the building of a ‘liberal political society’ (Karpik 1997, 1999). Lawyers identified the rule of law with the principles of a liberal state and the rights of the individual as expressed in the Declaration of the Rights of Man passed by the French National Assembly convened after the fall of the Bastille in 1789. For Karpik,
The relationship with the political sphere had become the dominant organizing principle of the profession …. It is the priority given to political action together with the distance the collectivity maintained with respect to capitalist accumulation of wealth … which enables us to understand the presence of a profession … characterized by self‐government, a rigorous code of ethics, a moderate economics, primacy of the courts and of the pleadings, a preponderance of individual clients. (Karpik 1997: 122)
In these different societies, therefore, the position of being a lawyer was constructed in distinctive national ways. In England, lawyers were closely allied to dominant (p. 290) economic interests, using their knowledge to advise firms and wealthy individuals on how they could act. This advice was entrepreneurial, business oriented, case law based. In Germany on the other hand, lawyers were mostly employed by the state and only a small number were engaged in advising clients on an independent fee basis. Further the law was treated as something embedded in statute not something that could be adapted and remade by lawyers in response to changing economic circumstances. In France, lawyers were strongly embedded in the development of political liberalism, standing aloof in most cases from economic activity.
Law as a business: the rise of the mega‐law firm7
These developments had implications for the way in which lawyers organized their activities through to the mid‐twentieth century. In France, for example, lawyers tended to work as sole practitioners or in small partnerships. Their individual clients rarely required more resources. Even where lawyers took on corporate work, this was of a limited scale. Only gradually, in the period after 1945, did a small number of firms become more specialized in corporate work but even then their size remained limited.
Germany was also characterized by relatively small firms of lawyers. Lawyers were only admitted to practice in their local court and therefore law firms were highly localized. The growing complexity of legal issues and growing demand for private legal advice raised repeatedly controversial debates within the German Chamber of Attorneys, particularly in the 1920/30s and in the 1960/70s, about the degree to which lawyers should become engaged in commercial activities and whether the operation of large law firms was consistent with the ethics of a liberal profession (Siegrist 1996). The existing rules of self‐regulation were criticized by business law firms in various local Chambers of Attorneys as limiting innovation and being dominated by the interests of sole practitioners (Rogowski 1994, 1995) but there was no majority to achieve a fundamental change. The practice of lawyers remained restricted to the locality in which they were registered at a court. Though cooperation between lawyers (and lawyers and accountants) was possible and took place in the legal form of civil law association (Gesellschaft bürgerlichen Rechts, GbR), the size of these firms remained limited by the ‘location principle’. Few German law firms had more than ten partners in the early 1980s, long after restrictions on partnership size had been removed in England. It was not until the late 1980s that this situation changed. Following a decision of the Federal Court of Justice in 1987 that declared the (p. 291) existing code of professional rules for lawyers as invalid, a number of reforms have taken place that liberalized the practice of law firms significantly. The admission of supra‐local law firms led to the establishment of national law firms through mergers between law firms from different regions. Whereas none of the largest corporate law firms had employed more than fifty lawyers (including partners and associates) in 1989, many of them doubled in size during the following three years, the largest one reaching the number of one hundred and twelve lawyers in 1992 (Rogowski 1995: 125).
It is interesting to compare these developments to those in the US. The nature of US economic and political development from early on placed its legal profession on a distinctive trajectory. Abel and Lewis (1988) argue that nineteenth‐century Americans were already more likely to use law and litigation to maintain a sense of moral order than their counterparts in England and Western Europe. This was related to the more pluralistic and transient nature of the American society, considerable mistrust of citizens in any concentration of government power and their strong rights‐orientation. In the context of an eventually evolving weak and fragmented American state, lawyers and judges represented—to use Alexis de Tocqueville's expression—the ‘aristocracy’ of pre‐revolutionary America. Tocqueville also provided one of the earliest descriptions of what much later would be labelled the judicialization of politics (Shapiro and Stone Sweet 2002 b) when he wrote that ‘scarcely any political question arises in the United States that is not resolved, sooner or later, into a judicial question’ (1945: 290).
Within this context, the economic development of the United States, at the beginning of the twentieth century, laid the ground for the triumphal procession of private practitioners and their influential role in the development of the American legal profession. The transformation of American capitalism from a small producer society into a world of large industrial corporations and big business was largely facilitated by lawyers. American business lawyers developed an unparalleled scope of professional activity, both inside and outside the court room. The anti‐trust legislation that attempted to combat the misuse of economic power, for example, gave responsibility for judgements to the courts and thereby opened the floor for spectacular ‘legal wars’ between industrial giants each represented in the courts by an army of lawyers (Roy 1997). At the same time, lawyers expanded their activities from legal advice into adjacent fields, such as the intermediation of financial and corporate deals. Overall, their focus shifted from representation at the courts to negotiations in the board room and to contract work in their offices. According to Galanter and Palay (1991: 1), American lawyers started to ‘do more things for more clients and in more settings (not only the courts) than do their counterparts elsewhere’. The growth of big business in the ‘gilded age’ of American capitalism thus stimulated and was stimulated by the emergence of the big law firm.
The crucial thing about the growing size of law firms was that it enabled specialization. It was Paul Cravath who in the first decade of the twentieth century established the new organization of the law firm by employing highly qualified associates from law schools on an understanding that they might progress to partnership after having worked as associates for an extended period. Under the up or out system, only (p. 292) a small number each year would succeed yet all the associates would work long hours in an effort to win the tournament. This employment system quickly spread across American law firms and allowed them to achieve growth in size and specialization. The number of law firms with more than four lawyers increased significantly in the first two decades of the twenieth century. In the early 1940s, it was not unusual for the largest American law firms to employ forty or fifty lawyers—though most of them were still operating only in one city or region. According to Galanter and Palay (1991: 14) ‘the large law firm—and with it the organization of law practice around the “promotion to partnership” pattern—became the industry standard’.
From the 1970s onwards, the large American law firm underwent a further change as it adapted to the increasing internationalization of US business and the expansion of capital markets. Galanter described this as the rise of mega‐lawyering (Galanter and Dingwall 1983), a term that has since been taken up to describe changes in other countries such as the UK (Flood 1989, 1996). The size and geographical scope of law firms increased from the 1980s onwards, partly through inter‐state mergers and the establishment of offices outside the US, to an extent that formalized management methods were introduced to govern their activities. American mega‐law firms, in short, became increasingly driven by commercial considerations of how to increase turnover and profitability through high partner‐to‐associate (leverage) ratios, maximizing the rain‐making capacities of their partners and having the legal work done by numerous associates and employees.
The emergence of the mega‐law firm resulted from a ‘conjunction between the growth imperative inherent in the big firm's organizational form and a set of changes in the business and legal environment’ (Galanter and Palay 1991: 76). Among the latter, the merger and acquisition waves of the 1980s and the increasing financialization of corporate governance in the US deserve mentioning. Another important factor was the growth in litigation, with a significant number of cases involving increasingly complex issues and higher stakes than in earlier periods. Robert Kagan coined the term ‘adversarial legalism’ to describe the dramatic increase in judicialization and litigation that the US has experienced since the 1970s (Kagan 2001). Adversarial legalism is characterized by two key features: formal legal contestation, e.g. competing interests and disputants readily invoking legal rights, duties, and procedural requirements, and litigant activism, e.g. a style of legal contestation dominated by disputing parties or interests, acting primarily through lawyers (Kagan 2001: 9). Kagan argues that the emergence of adversarial legalism relates to the inability of powerful actors—most obviously the state but also social groups such as the civil rights movement, trade unions, and employers' associations—to impose their goals on others, in other words where ‘authority is fragmented and in which hierarchical control is relatively weak’ (ibid). The US federal system with multiple jurisdictional levels coupled with a market system that sustains diversity of forms of economic organization is crucial to this adversarial legalism. Within this environment of adversarial legalism, mega‐law firms with their abilities to search systematically for precedents, to gather evidence on a large scale, and to develop aggressive arguments, prospered and grew to a previously unforeseeable extent while also (p. 293) expanding their reach to foreign markets (Dezalay 1990, 1995; Dezalay and Garth 1996, 2002 a, b).
The process of mega‐lawyering proceeded more slowly in the UK. After the Second World War, a small number of law firms based in the City of London became integrally involved in facilitating the construction of financial products and aiding in their legal constitution. Although this led to some jurisdictional disputes, particularly with merchant banks (less so with accountants who were generally low status in this particular corner of the English class system), in the main, the symbiotic relationship between the City and these firms worked highly effectively in providing a legal environment in which financial institutions could experiment and develop new products. However the relatively small scale of the City compared to the environment of Wall Street and the US where large corporations were becoming predominant in the economy meant that there was limited pressure for growth and the Cravath system was not really used. Until 1967, the UK maintained a ceiling of twenty on the number of partners that could join together in one law firm so even the richest and most profitable law firms stayed relatively small. Once the ceiling was removed, firms could grow in size and the possibility of national and international expansion became a reality. It was not until the mid‐1980s when a series of political and institutional changes occurred in the UK that there opened up huge new areas of business for corporate lawyers (Flood 1989, 1996). These included the Big Bang deregulation of the Stock Exchange, the Financial Services Act, the privatization of state enterprises, the transformation of building societies’ assets from mutual to private ownership, and a pension reform giving rise to increased private investment. These changes were followed up with the opening of Eastern and Central Europe to business and financial markets and later by the rise of China and India. For the US and UK mega‐law firms’ internationalization was the obvious way forward. From the 1980s, US and UK law firms’ set up offices in new locations and engaged in mergers with other lawyers in the main centres of financial, political, and economic power (Spar 1997; Warf 2001). German firms were particularly favoured targets for mergers as they offered access both to the German market itself and to much of Central and Eastern Europe (Morgan and Quack 2005; Quack 2008).
The rise of the mega‐law firm is a crucial point in the development of law as a governing institution for two reasons. Firstly, the capacity of law firms to shape the law on behalf of their clients increases exponentially because of the resources being deployed. The important point here as will be described in the following section is that the mega‐law firm can effectively ‘attack’ the law, finding ways round it and through it for clients, finding ways to influence legislation, finding new ways of avoiding state law and replacing it with forms of private, soft law. It can engage legal procedures at new levels—international, regional, global, as well as national. The mega‐law firm has the capacity for this in a way that previous types of law firms have not. Further they have access to multinational clients for whom this sort of activity is deemed valuable and economically rewarding. Thus the mega‐law firm reconstitutes the relevant economic law in its own image as multilevelled, multifaceted and multi‐jurisdictional.
Secondly, the mega‐law firm is a US invention; it is a product of adversarial legalism and in important ways a carrier of adversarial legalism. It requires vast numbers of cases, conflicts, litigations, and above all fees to be economically viable. However in its power it threatens other models of law firms by winning their clients, accessing their markets, and shaping a new international arena of law. Thus the model of the small independent lawyer is undermined as national, regional, and international mergers and acquisitions creates new global law firms.
Internationalization and innovation
The growth of mega‐lawyering brings into sharp relief the development of the entrepreneurial side of legal activities. It reveals law in the making, shifting and developing at multiple levels and in multiple arenas as mega‐law firms and their clients develop a more activist and interventionist position on law, defining it as much as a facilitator as a constraint. From this perspective, the law as stable, predictable, and determining of economic action breaks down. Instead the law itself has to be seen as endogenously positioned with economic and social fields evolving and changing in response to actors and circumstances within those fields. Similarly the fields cannot be conceptualized using a national lens; they are frequently international in scope, with overlapping forms of jurisdiction, disputation, and adjudication that the mega‐law firms coordinate and manage. Large law firms with intense forms of specialization, high numbers of lawyers, developed systems of support, dense networks of offices across jurisdictions cooperating together are active on behalf of their corporate clients in solving problems and developing solutions for problems clients did not even realize they had. Powell argues that:
the role of lawyers in shaping cases and manipulating the law to fit their clients' interests becomes central …. Lawyers not only interpret and transform the law in their daily practice but also create new devices … lawyers use novel legal arguments and courtroom advocacy to change the common law or case law that governs relations among private interests … lawyers contribute to lawmaking by the development of new legal practices and devices such as novel tax shelters, new arrangements for the ownership and leasing of property, new types of securities and bonds and even new forms of corporate organization. (Powell 1993: 426–8)
The entrepreneurialism and innovation of law firms increases not just because of the capabilities arising from scale but also because of the new opportunities, which emerge from internationalization. McBarnett identifies what she describes as the problems posed for global business in terms of:
• clashes between jurisdictions in terms of basic legal concepts as well as their interpretation and application,
• multiple requirements being imposed … [e.g.] different accounting rules,
• gaps, where there are emergent markets, for example, but no legal infrastructure within them appropriate to market dealing (McBarnett 2002: 100).
In terms of law firms and their multinational clients, the goal is to recognize variations across jurisdictions, levels, and arenas and to use these effectively for the economic benefit of both the clients and the law firms. This is partly about arbitrage, where difference is taken for granted and used to maximize advantages. It is also partly about the opposite, i.e. creating standard rules which apply across jurisdictions. These two practices go together, in creating value for clients and profits for the law firms, at the same time as generating a vortex of activity, innovation, and uncertainty that sucks more and more actors in.
In relation to arbitrage, the global law firm is able to advise clients about how to utilize the diversity of national legal systems in order to both manage their affairs and maximize their advantage. In the field of merger and acquisitions, for example, global deals require that relatively large numbers of national competition authorities agree to the terms. This is a complex process of coordination, which can break down particularly if key competition authorities such as those in the US or Europe decide that a deal is inappropriate (Morgan 2006). Global law firms aim to overcome client problems and develop solutions. This has the potential to create a new product/solution that can then be sold to other clients. McBarnett states that:
Law is not just an obstacle to business but a material which can be worked on to its advantage. If creative means can be found to overcome legal obstructions to global deals, then those obstructions—still in existence, at least for a time, for others—become not an obstruction but an opportunity, and a route to competitive advantage. There is therefore a constant drive for new legal constructs to solve the global problem not just at the collective level but at the level of the individual business. (McBarnett 2002: 101)
At the global level then, law firms have multiple opportunities to develop new ways into the problems and gaps that exist in dealing across jurisdictions. Flood, for example, provides a range of illustrations of how law firms develop new products for banks, investors, and multinationals in order to provide a legal framing for new problems (Flood 2002, 2007, 2008; Flood and Skordaki 2008; Flood and Sosa 2008).
This places global law firms in a complex relationship to movements to harmonize and standardize laws across national boundaries. It might, for example, be argued that it is in the interests of global business to establish stability and predictability through creating forms of ‘global law’. Indeed, there is plenty of evidence that at least in the form of privately agreed international rules and regulations (soft law) this is occurring in many arenas (Djelic and Sahlin‐Andersson 2006). For example, Morgan describes how the private association, the International Securities and Derivatives Association (ISDA), made up of the largest participants in the over‐the‐counter derivatives markets, created a model contract that became the common template for all such transactions. Two major law firms from the UK and the US played a significant role in drawing up the contract and identifying potential areas of problems where national jurisdictions might contradict the rules which ISDA sought to provide. Local legal opinions were therefore sought and efforts made to lobby for (p. 296) change in national systems in order to bring them in line with the international model contract (Morgan 2008). This works against arbitrage techniques, but by reducing costs and uncertainty brings another set of gains for clients.
This interplay between national and international, hard and soft law has become a central arena for global law firms and for firms and regulators in many different sectors (Applebaum, Felstiner, and Gessner 2001; Djelic and Quack 2003; Djelic and Sahlin‐Andersson 2006; Gessner 2009; Graz and Nölke 2008; Likosky 2002; Quack and Djelic 2005). At one level, these studies reflect the emergence of what Hedley Bull described as ‘the new medievalism’ (Bull 2002). Bull identified the decline of the sovereignty of the nation‐state as a return to a sort of medieval order in which there existed multiple forms of authority and legitimation with overlapping spheres of jurisdiction. Although Bull's metaphor overplays the decline of the nation‐state and neglects the long‐term existence of Kantian forms of theorizing about international law and their embeddedness in certain international institutions such as the UN with the idea of a constitutionalized international legal system (Koskenniemi 2007), it nevertheless captures some of the new environment, which is being created by the interactions between law and global law firms with multinational clients and new forms of transnational solidarity.
In her analysis of this form of legal pluralism, Riles emphasizes what she describes as ‘stepping outside Weber's shadow’ (Riles 2006), i.e. the absolute association of law with the state and instead recognizing that the nation‐state's ability to define the nature of the law that is relevant for its subjects has never been absolute. It has always been mitigated by transnational and global arenas of law as well as national and local (see also Halliday 2004). It is about other actors besides the state and other arenas besides those defined by the nation‐state. The confluence of international mega‐law firms, multinational clients, global economic processes, and new forms of international law‐making in the public and the private domain and at various levels of collectivity (the EU, the WTO on the public side and the plethora of private standard setting bodies on the other) has created a new environment. As Watt states: ‘Such changes suggest multiple polyvalent perspectives from which law can be perceived: beyond the perspective of the national court, law is evolving under the impetus of private arbitrators, mobile capital seeking to invest, transnational communities of interests, international courts or non‐governmental organizations’ (Watt 2006: 585; see also Applebaum et al. 2001; Gessner 2009).
For example, there is no doubt that the legislative institutions of the European Union have generated a dense net of European regulations and directives which have direct and indirect effects on national law in the member states. As a result, comparing the law of different nation states as independent and separate entities within the EU is increasingly misleading. Instead, the development of the law in the member states needs to be considered as interconnected and co‐evolving in various ways (Alter 2001; Craig and De Búrka 2007). This opens space and opportunities for economic actors to strategize on multiple levels of the policy and law‐making process. Furthermore, networked governance within the EU generates various types of voluntary rules and standards as potential sources of formalized law (p. 297) (Tömmel and Verdun 2009). In addition, European law has become interconnected through various treaties with international law (Oberthür and Gehring 2006).
Beyond an analysis of the multilayered nature of the legislative process in the EU, it is important to consider a number of related elements of the transnationalization of law. The first element concerns the shift of decision‐making into legal arenas and out of the political context. The second concerns the nature of the process of decision‐making in this arena and the sort of knowledge that is effective in this arena. The third element concerns the construction of a global elite to manage these processes.
With regard to the shift of decision‐making into legal arenas, this has been articulated as a process of judicialization (Shapiro and Stone Sweet 2002 a). At one level, this enables actors to take out of the political arena controversial issues that seem incapable of solution and instead place them in a context where they can be resolved according to specific rules and procedures. This creates a different logic, one that is driven by technical expertise and the ability to marshal legal resources rather than being driven by debates on broader values and norms. In an era where these values and norms are subject to contestation and there are a plurality of interests articulated in the political realm, there are significant institutional blockages to resolving many issues through the political process. Increasingly, therefore, this gap has been filled by the development of formal and informal legal rules and practices. Dezalay and Garth, for example, have shown how the International Court of Arbitration in Paris became an increasingly important site for the resolution of disagreements between companies and countries (Dezalay and Garth 1996) and has filled this gap. The Court was drawn from notable lawyers from the US and Europe who developed their own rules of procedure. The Court was convened on the instruction of the parties to the disagreement and proceeded on the basis of minimal publicity in order not to create wider conflict between two commercial actors who would in the future want to work together again. Dezalay and Garth show how gradually US global law firms, primarily because of their mega‐law capabilities and their common law competences became dominant actors in this process representing multinational clients and sovereign states and providing increasing numbers of arbitrators.
Similar developments have occurred in the arena of trade law where the formation of the WTO led to a judicialization of disputes between countries via the creation of the Appellate Court of the WTO, where aggrieved nations could seek remedy on the grounds that their ability to conduct free trade according to WTO rules was being obstructed by the actions of a government (Garth 2008). In the EU, the European Court of Justice has become increasingly involved in interpreting the relationship between European law and national law. Contrary to initial expectations, the ECJ has evolved a significant constitutional role and in so doing has taken some issues away from the politics of the Council of Ministers and moved them into a judicial form (Alter 2001, 2008; Cohen and Vauchez 2007). In these arenas, the model of process and litigation developed in the US, which requires legions of lawyers working in a highly concentrated way on particular cases and bringing these (p. 298) cases to court and representing them, has become dominant—leading some authors to identify a global transfer of Kagan's adversarial legalism (Keleman 2006; Keleman and Sibbitt 2004).
The second issue concerns the nature of the legal knowledge, which counts in these transnational arenas. Here, there is a strong argument that the dominant form of knowledge is one based on US law and in particular on the development of a particular conjuncture of economic knowledge and law that has characterized the US over the last few decades. The Law and Economics movement pioneered in the US, and in Chicago in particular, involved a drawing together of free market economics with a focus on law as both a contributor to the free market and as also subject to the efficiency requirements of the free market. These arguments linked together common law, free market economics, and issues of economic development into the neo‐liberal discourse that became a dominant feature of international economic policy from the 1980s to the impact of the credit crisis of 2008. Faust, for example, quotes Posner, one of the founders of the economic analysis of law, stating that ‘the common law is best (not perfectly) explained as a system for maximizing the wealth of society’ (Faust 2006: 839). Dezalay and Garth explored how this combination of legal and economic analysis became spread throughout the world (Dezalay and Garth 2002 a, b). Key features of this concerned the investment that the US made in providing education and training in law for the elites of other countries (Silver 2000, 2002, 2007), often by providing scholarships to the best and the brightest students from foreign systems into the US legal education world. European legal elites had been badly tainted by their involvement and sometime collusion with the Nazis. By contrast, the US in the era post‐1945 was seen as the bringer of the rule of law in a benign liberal environment. Elites seeking to study law therefore turned to the US in a way which they had not previously. In the US, these elites learnt the nature of the law and economics perspective, many of them in the most high status and well connected of the law schools. Some of them took this knowledge back to their home countries where over time they became increasingly influential conduits for the flow of these ideas and practices into their home systems. Others stayed in the US and acted from there to spread such ideas by using their networks in their original locations, while at the same time increasing the diversity inside the US firms sufficient to allow them to deal more effectively with different legal systems.
This spread had impacts on many areas of law. In competition law, for example, the US model with its emphasis on the technical analysis of economic impacts and its rejection of simple concentration models and definitions of anti‐competitiveness has been of major significance. It has led a shift in competition policy away from the politics of producers and small firms and into the judicial arena where economic analysis has become the key deciding factor (Djelic 1998, 2002; Djelic and Kleiner 2006; Gerber 2006; Morgan 2006; Quack and Djelic 2005). In financial markets law, the combination of US (New York) law and UK law has been the dominant force (Morgan 2008).
These arguments about the Americanization of the transnational arena may ultimately over‐estimate the process. The creation of transnational rule systems remains relatively decentralized with a wide range of participants. Halliday and Carruthers, for example, have looked at the development of bankruptcy law in different national contexts and whilst they identify certain common actors, they also emphasize that there is an element of uncertainty in the process of transplanting rules across contexts. Actors in national contexts react back and create loops of recursivity in which changes and adaptations are made to systems (Carruthers and Halliday 2006; Halliday and Carruthers 2007, 2009; Halliday and Osinsky 2006). Similarly, law firms may take different forms in the global arena and do not necessarily follow the US model of mega‐law and adversarial legalism (Morgan and Quack 2005; Quack 2008). Duina (2007) shows how different national legal traditions had a significant influence on how different transnational market systems (the European Single Market, NAFTA, and Mercosur) were built. His analysis demonstrates that the law influenced how transnational markets are organized and that law at one level (national) affected economic activity at another level (transnational). In a multipolar world characterized by diverse legal actors, traditions, and arenas, there remains a high level of complexity and indeterminacy even within a context where US law has many sources of dominating power (Quack 2007).
In this chapter, we have examined law as a governing institution. Contrary to some institutionalist accounts in which law is taken as a given, an exogenous factor determining economic organization, we have emphasized the dynamic, endogenous nature of law. As we have shown, there are many useful insights about institutional reproduction and change that can be developed through treating the law as stable and then comparing the impact of distinctive national systems of law on aspects of economic organization. There is now, for example, a flourishing field in relation to issues of corporate governance where analyses of shareholder protections and the claims of various legally constituted actors to particular assets or to particular rights are clearly affected by the law. Similarly, laws relating to markets and competition impact strongly on how firms evolve and develop in relation to merger and takeover activity, price fixing and profit‐taking in markets and incentives for innovation associated with the protection of intellectual property rights and the vesting of claims to IPR in various entities. There is no doubt that continued research along these lines can yield dividends in terms of understanding differences across nations and firms and the impact of these processes on the growth of firms and national economies.
However, throughout this chapter, we have emphasized that this approach needs to be balanced by a view which recognizes that law is always something in the making. It has its own trajectory of development, which is historically embedded. This embeddedness is reflected in the nature of law itself, in the organization of the legal profession, and in the position of law and lawyers in the broad political and social structure of the society. These actors in the juridical field or on its margins engage in shaping and reshaping the law as part of their regular activity and business. It is therefore essential to understand the internal dynamics of the business of law and how it is evolving and with what purpose.
In this respect, we have emphasized three features. Firstly, we have shown how the growth of mega‐law firms speeds up the dynamics of legal innovation and internationalization since these firms have the capability to explore multiple legal environments and engage in arbitrage as well as standardization in order to serve their multinational corporate clients. Secondly, we have demonstrated that this reflects the emergence of a multilayered world of law where there are overlapping jurisdictions and judicial and quasi‐judicial bodies ranging from the national through the regional (especially the EU) to the global (most prominently in the WTO). Thirdly, we have highlighted the growth in this multilayered system of soft law and private agreements between actors as ways of resolving potential legal problems (e.g. in the establishment of the International Commercial Court of Arbitration or in the work of the International Swaps and Derivatives Association). An understanding of how law is evolving is therefore crucial to our analysis of institutional change and stability. It is necessary to ‘open the black box’ of law in the way in which other such issues have been opened for analysis. Once this is done, what appeared to be stable and objective is revealed to be subject to contestation and change.
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(1) We thank John L. Campbell, Grahame Thompson, Richard Whitley, and Jonathan Zeitlin for helpful comments on an earlier version of this chapter.
(2) This is not to neglect the unresolved ambiguities inherent in Weber's work between his assessment of civil law as formally more rational than common law and his analysis of the complexity of the intermediating role of the legal system (for a long‐standing debate see for example Trubek 1972, Hunt 1978, and Ewing 1987). Our view, however, is that the ‘English problem’ can be also seen as a case of equifinality in which the English and continental legal systems represent ‘two kinds of administration of justice’ (Weber  1978: 892).
(3) Interestingly, Ehrlich was translated into English (in 1936) much earlier than Weber's and Durkheim's writings on law and was very influential for socio‐legal research in the US under the promotion of Roscoe Pound at the Harvard Law School (Ziegert  2002: pp. xxvi).
(4) The chapter by Teubner (2001) represents an exception since it deals with the question of how legal irritants affect cross‐border transfers of legal concepts from a perspective that acknowledges the recursivity of law.
(5) But note that shareholders in the US historically have little direct influence over company management, such as nomination for corporate boards of directors or control over their pay.
(6) France would be another negative case though not caused by competition law.
(7) While in the following section we focus on law firms as important actors in the legal field, other authors have highlighted the influence of legal scholars and judges in generating ideas and legal constructs. In a very interesting comparison of the historical evolution of American and German corporate law, Klages (2009) demonstrates how legal actors in each country produced law doctrines, which oscillated between institutionalism and individualism and thereby established an elective affinity of law and economic interests. Rehder (forthcoming) provides an in‐depth analysis of an epistemic community of labour judges, which reshaped legal doctrines in German labour law.