The rule of law and its enemies

What’s the relationship between the nature of law and economic success?

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BY Niall Ferguson

“The fundamental question the Chinese government must face is lawlessness. China does not lack laws, but the rule of law… this issue of lawlessness may be the greatest challenge facing the new leaders who will be installed this autumn. Indeed, China’s political stability may depend on its ability to develop the rule of law in a system where it barely exists.” 

These are the words of Chen Guangcheng, the blind lawyer who was recently allowed to leave China to study in the United States after successfully escaping from his Communist Party persecutors. Less well known in the West, but more influential in China, is the legal scholar He Weifang. In an essay entitled ‘China’s First Steps Towards Constitutionalism’, published in 2003, He rather more tactfully observed: 

“The Western legal landscape does make an interesting and illuminating contrast to China’s legal situation, revealing many discrepancies and inconsistencies between the two… Although China’s modern system was borrowed from the West … things often proceed in different ways between China and the West.”

What, if anything, can countries like China can learn from the West about the rule of law? And I want to cast some doubt on the widespread assumption that our Western legal systems are in such good health that all the Chinese need to do is replicate our best practice – whatever that may be. 

What exactly do we mean by the rule of law? In his book of that name, the late Lord Chief Justice, Tom Bingham, specified seven criteria by which we should assess a legal system: (1) The law must be accessible and so far as possible intelligible, clear and predictable (2) Questions of legal right and liability should ordinarily be resolved by application of the law and not by the exercise of discretion (3) The laws of the land should apply equally to all, save to the extent that objective differences [such as mental incapacity] justify differentiation (4) Ministers and public officers at all levels must exercise the powers conferred on them in good faith, fairly, for the purpose for which the powers were conferred, without exceeding the limits of such powers (5) The law must afford adequate protection of fundamental human rights (6) Means must be provided for resolving, without prohibitive cost or inordinate delay, bona fide civil disputes which the parties themselves are unable to resolve; and (7) Adjudicative procedures provided by the state should be fair. 

My study of history taught me that the English rule of law was the product of a slow, incremental process of judicial decision-making in the courts, based in large measure on precedents. I now realise that this was a rather naive view. As the greatest living theorist of law in the English-speaking world, Ronald Dworkin, explained in Law’s Empire, there really are principles of justice and fairness underpinning the common law, even when those principles are not codified as they are in the United States Constitution. 

Behind the operation of the law lie two things: the integrity of judges and, to quote Dworkin, “legislation …flowing from the community’s present commitment to a background scheme of political morality.” Now, to proceed from the ethical roots of law to its economic consequences may seem like rather a leap. But it’s not. 

Few truths are today more universally acknowledged than that the rule of law – particularly in so far as it restrains the grabbing hand of the rapacious state – is good for economic growth, as well as just good. According to Douglass North, “The inability of societies to develop effective, low-cost enforcement of contracts is the most important source of both historical stagnation and contemporary under-development.’ 

Enforcement of contracts by a third party is necessary to overcome the reluctance of private sector agents to participate in transactions over significant time or distance. The creditor fears the debtor will welch on the deal. Contract enforcement can be provided by private sector agencies such as exchanges, credit companies and arbitrators. 

But usually, in North’s words, “Third-party enforcement [means] … the development of the state as a coercive force able to monitor property rights and enforce contracts effectively.” The problem is getting the state not to abuse its power – hence the need to constrain it. As Avner Greif has argued, if public contract-enforcing institutions reveal information about the location and amount of private wealth, the state, or its functionaries, may be tempted to steal it. 

Where states are not constrained by law, therefore, private contract-enforcing institutions are safer, like the network operated by 11th Century Maghribi traders in the Mediterranean, which was based on their common Jewish religion and kinship ties. The defect of such institutions, as with medieval guilds, is their tendency to raise entry barriers and establish monopolies, discouraging competition and reducing economic efficiency. That is why private contract enforcement tends to yield to public, as economies become more sophisticated. But that process is dependent on constraining the state to use its power of coercion in such a way as to respect private property rights. 

In economics, that is the essential function of the rule of law. It’s the property rights – more than the human rights – that are fundamental. Neither the French civil law system, originating in the Roman legal tradition, nor the German and Scandinavian legal systems, were as good, to say nothing of non-Western systems of law. 

What was it that made and makes common law economically better? In their seminal 1997 article, ‘La Porta’, Lopez-de-Silanes, Shleifer and Vishny argued that common law systems offer greater protection for investors and creditors. The result is that people with money are more willing to invest in, or lend to, other people’s businesses. And higher levels of financial intermediation tend to correlate to higher rates of growth. 

Like so many arguments in social science, this theory of legal origins implies a certain version of history. Why did French law end up being worse than English? Because the medieval French crown was more assertive of its prerogatives than the English. Because France was less peaceable internally and more vulnerable externally than England. 

Because the French Revolution, which distrusted judges, sought to convert them into automata, implementing the law as defined and codified by the legislature – or emperor. The result was an even less independent judiciary and courts precluded from reviewing administrative acts. When the French exported their model to their colonies in Asia and Africa, the results were even worse. 

The theory of legal origins also has important historical implications for non-Western legal systems. As He Weifang has argued, in the imperial era, Chinese government made: ‘no arrangement whatsoever for the separation of powers’ so that “the country magistrate exercised comprehensive responsibilities [including all] three basic functions, namely the enacting of rules … the execution of rules … and the resolving of disputes.”

Confucianism and Taoism deprecated lawyers and deplored the adversarial mode. Yet attempts to import elements of the British legal system to China were a failure. When the late Qing state belatedly entered the commercial sphere, it did so in a counter-productive way, over-taxing merchants and delegating power to monopolistic guilds without effectively constraining itself or its agents. The results were rampant corruption and economic contraction. 

In recent years there has been something of a backlash against the legal origins hypothesis. Naomi Lamoreaux and others have pointed out that the French economy performed rather well, not least financially, despite not having the common law. Yet for me the theory’s weakest point becomes apparent if we just look at the state of the English common law as it was in the period when, by implication, it must have done the greatest good: the period of the industrial revolution, when the English and their Celtic neighbours radically altered the course of world economic history. 

Here is a contemporary description of an English court at that time: 

“… Some score of members of the … bar … are … mistily engaged in one of the ten thousand stages of an endless cause, tripping one another up on slippery precedents, groping knee-deep in technicalities, running their goat-hair and horsehair warded heads against walls of words and making a pretence of equity with serious faces, as players might… The various solicitors in the cause, some two or three of whom have inherited it from their fathers, who made a fortune by it… are… ranged in a line, in a long matted well … between the registrar’s red table and the silk gowns, with bills, cross-bills, answers, rejoinders, injunctions, affidavits, issues, references to masters, masters’ reports, mountains of costly nonsense, piled before them. This is the Court of Chancery … which so exhausts finances, patience, courage, hope, so overthrows the brain and breaks the heart, that there is not an honourable man among its practitioners who would not give – who does not often give – the warning, “Suffer any wrong that can be done you rather than come here!” 

Negative impact

It might be objected that Charles Dickens was not being entirely fair to the legal profession of his day in Bleak House. Yet Dickens had started his career writing court reports. He had seen his own father imprisoned for debt. His biographers confirm that he knew whereof he spoke. And historians of the 19th Century English legal system largely confirm his account. 

First, we must note the tiny size of the system. As late as 1854, the entire judiciary of England and Wales sitting in courts of general jurisdiction numbered just fifteen. Second, until 1855 there were severe statutory restrictions on the ability of entrepreneurs to create limited liability companies, a legacy of the time when the promoters of monopoly firms like the South Sea Company had successfully pulled up the ladder behind them to boost the value of their own shares. 

Third, in the single most important sector of the Victorian industrial revolution, the railways, recent research has revealed that ‘English common law and common law lawyers had a profound and largely negative impact’. Solicitors were notorious as speculative railway share promoters, judges were publicly accused of favouritism and the Parliamentary Bar ran a nice little racket, effectively selling statutory approval for new rail lines. 

What are we to make of this? Does history essentially refute the legal origins thesis that the common law trumps all other systems? Not quite. 

For despite the evident shortcomings of the English legal system in the industrial age, there remains compelling evidence that it could and did adapt to the changes of the time, perhaps even in ways that facilitated the process as well as accommodating it. This point is best illustrated with reference to the 1854 Exchequer case – well known to law students on both sides of the Atlantic – of Hadley and Baxendale. 

How credible is common law’s claims to superiority over other systems? Are we living through a time of creeping legal degeneration in the English-speaking world?

The dispute was between two Gloucester flour millers, Joseph and Jonah Hadley, and the London-based carriers Pickford & Co. The Hadleys had sued Pickfords for the full amount of their losses – including foregone profits – resulting from late delivery of a replacement hand-crafted mill shaft. It’s no coincidence that Pickfords are still around today and the Hadleys’ firm, City Flour Mills, is not. 

For although the local jury decided for the Hadleys, the appellant judges in London reversed their decision. According to the American judge and legal scholar Richard Posner, Hadley and Baxendale enshrined the principle ‘that where a risk of loss is known to only one party to the contract, the other party is not liable for the loss if it occur’. 

It was later said of the original Assize judge, Sir Roger Crompton, that he ‘never recognized the notion that the common law adapts itself by a perpetual process of growth to the perpetual roll of the tide of circumstances as society advances’.  That was certainly not the approach of the appeal judges, Barons Alderson, Parke and Martin, who – in the words of a modern commentator – ‘refashioned the substantive law of contract damages’. 

As Alderson reasoned: ‘The only circumstances… communicated by the plaintiffs to the defendants at the time the contract was made were that they were millers whose mill shaft was broken. There was no notice of the ‘special circumstances’ that the mill was stopped and profits would be lost as a result of delay in the delivery of the shaft.” 

So the loss of profits couldn’t be taken into consideration in estimating damages. To put it really crudely, this was a ruling that favoured big over small business – but that is not really the important point. The point is that Baron Alderson’s reasoning illustrates very well how the common law evolves – a process elegantly described by Lord Goff in the 1999 case of Kleinwort Benson and Lincoln City Council: 

When a judge decides a case which comes before him, he does so on the basis of what he understands the law to be. This he discovers from the applicable statutes, if any, and from precedents drawn from reports of previous judicial decisions… In the course of deciding the case before him he may, on occasion, develop the common law in the perceived interests of justice, though as a general rule he does this ‘only interstitially’… This means not only that he must act within the confines of the doctrine of precedent, but that the change so made must be seen as a development, usually a very modest development, of existing principle and so can take its place as a congruent part of the common law as a whole. 

I believe this gives an invaluable insight into the authentically evolutionary character of the common law system. In this lecture, however, I want to address a different question: How good in practice is the rule of law in the West – and in particular in the Anglosphere – today? There are four threats I would identify. 

‘Intrusion’

First, we must pose the familiar question about how far our civil liberties have been eroded by the national security state – a process that in fact dates back almost a hundred years to the outbreak of the First World War and the passage of the 1914 Defence of the Realm Act. Recent debates about the protracted detention of terrorist suspects are in no way new. Somehow it’s always a choice between habeas corpus and hundreds of corpses. 

A second threat is the very obvious one posed by the intrusion of European law – with its civil law character – into the English legal system, in particular the far-reaching effects of the incorporation into our law of the 1953 European Convention on Fundamental Rights and Freedoms. This may be considered Napoleon’s revenge: a creeping French-ification of the common law. 

A third threat is the increasing complexity – and sloppiness – of statute law. A grave problem on both sides of the Atlantic as the mania for elaborate regulation spreads through the political class. 

A fourth threat – especially apparent in the United States – is the increasing cost of the law: an estimated $1.7 trillion a year, according to the US Small Business Administration Report, in additional costs arising from compliance with regulations. On top of that come the costs arising from the US system of tort law, which the Pacific Research Institute puts at more than 2.2 per cent of US GDP in 2003. 

Well, one may argue about such figures. But my own personal experience tells a similar story: merely setting up a new business in New England involved significantly more lawyers and much more in legal fees than doing so in old England. Experts on economic competitiveness, like Michael Porter of Harvard Business School, define the term to include the ability of the government to pass effective laws; the protection of physical and intellectual property rights and lack of corruption; the efficiency of the legal framework, including modest costs and swift adjudication; the ease of setting up new businesses; and effective and predictable regulations. 

Evidence that the United States is suffering some kind of institutional loss of competitiveness can be found not only in Porter’s recent work but also in the World Economic Forum’s annual Global Competitiveness Index and, in particular, the Executive Opinion Survey on which it’s partly based. The survey includes 15 measures of the rule of law, ranging from the protection of private property rights to the policing of corruption and the control of organised crime. 

It’s an astonishing yet scarcely acknowledged fact that on no fewer than 15 out of 15, the United States now fares markedly worse than Hong Kong. In the Heritage Foundation’s Freedom Index, too, the US ranks 21st in the world in terms of freedom from corruption, a considerable distance behind Hong Kong and Singapore. 

Perhaps the most compelling evidence of all comes from the World Bank’s Indicators on World Governance, which suggest that, since 1996, the United States has suffered a decline in the quality of its governance in three different dimensions: government effectiveness, regulatory quality and the control of corruption. 

Compared with Germany or Hong Kong, the U.S. is manifestly slipping behind. One consolation is that the United Kingdom doesn’t appear to have suffered a comparable decline in institutional quality. 

If the rule of law, broadly defined, is deteriorating in the United States, where is it getting better? I recently delved into the Bank’s treasure trove, the World Development Indicators database, to see which countries in Africa are ranked highly in terms of: the quality of public administration; the business regulatory environment; property rights and rule-based governance; public sector management and institutions; and transparency, accountability and corruption in the public sector. The countries that appear in the top twenty developing economies in four or more of these categories are Burkino Faso, Ghana, Malawi and Rwanda. 

Another approach I’ve taken is to look at the IFC’s Doing Business reports since 2006 to see which developing countries have seen the biggest reduction in the number of days it takes to complete six procedures: starting a business, getting a construction permit, registering a property, paying taxes, importing goods and enforcing contracts. 

The African winners are, in order of achievement, Nigeria, the Gambia, Mauritius, Botswana and Burundi. Other emerging markets on the right track are Azerbaijan, Croatia, Iran, Malaysia and Peru. 

By contrast, The People’s Republic of China has achieved astonishing growth without good legal institutions and without much improvement in them. However, many scholars argue that if China does not now transition to the rule of law, there will be a low institutional ceiling, limiting its future growth. 

The case of Bo Xilai’s anti-corruption campaign in Chongqing illustrates just how far China still is from the rule of law. 

Radical change

As He Weifang has pointed out, the Chongqing judges essentially acted as an arm of Bo’s regime, accepting extorted confessions and omitting cross-examination. For years, He Weifang has campaigned for judicial independence, accountability of the National People’s Congress, especially in regard to taxation, freedom of the press and conversion of the Communist Party into a ‘properly registered legal entity’, subject to the law – including the meaningless rights in Article 35 of the PRC Constitution. 

For those of us who live in the West, where lawyers often seem to have become their own vested interest, it’s strange to encounter lawyers who aim at this kind radical change. Today, however, Chinese lawyers – who numbered just 150,000 in 2007 – are a crucial force in China’s rapidly evolving public sphere. 

Recent surveys suggest that they are ‘strongly inclined towards political reform… and are profoundly discontented with the political status quo’. To read statements like the following, from a lawyer in Henan province, is to be reminded forcibly of a time when lawyers were in the vanguard of change in the English-speaking world, too: 

“The rule of law is premised on democracy; rights are premised on the rule of law; rights defence is premised on rights; and lawyers are premised on rights defence.”

The fall of Bo Xilai this year is one of a number of signs that elements within the Communist Party hear these arguments. 

In a recent speech in Shenzhen, Zhang Yansheng, secretary general of the academic committee for National Development and Reform, argued that – and I quote – ‘we should shift towards reform based on rules and law’, adding ‘if such reform does not take off, China will run into big trouble, big problems.’ 

What we don’t know is whether or not China’s next experiment with importing the essentially Western notion of the rule of law will be more successful than past attempts. With good reason, He Weifang warns against naive imitation of the English, or American, legal systems. 

In Shakespeare’s A Midsummer Night’s Dream, he writes in a rather engaging aside: “A person was changed into a donkey, and the other person cried, “Bless thee! Thou art translated.” 

The introduction of a Western system to China is just like this. Common law translated into Chinese might well turn out to be like Bottom: a donkey, if not an ass.  Like the human hive of politics or the hunting grounds of the market economy, the legal landscape is an integral part of the institutional setting in which we live our lives. Like a true landscape it’s organic, the product of slow- moving historical processes – a kind of judicial geology. 

But it is also a landscape in the sense of Capability Brown: it can be improved upon. And it can also be made hideous – even rendered a desert – by the rash imposition of utopian designs. We may imagine Oriental gardens in England and English gardens in the Orient. But there are limits to what transplantation can achieve. 

Once-verdant landscapes can become desiccated through natural processes, too. Mancur Olson used to argue that, over time, all political systems are likely to succumb to sclerosis, mainly because of rent-seeking activities by organised interest groups. Perhaps that is what we see at work in the United States today. Americans could once boast proudly that their system set the benchmark for the world; the United States was the rule of law. But now what we see is the rule of lawyers, which is something different. It’s surely no coincidence that more than a third of Senators are lawyers, and a quarter of members of the House of Representatives. But how is the system to be reformed if, as I’ve argued in these lectures, there’s so much that is rotten within it: in the legislature, in the regulatory agencies, in the legal system itself? 

The answer is that reform must come from outside the realm of public institutions. It must come from the associations of civil society. It must come, in short, from us: the citizens. (

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