Legislation versus Private Governance: Lessons from Bruno Leoni

   

To what extent are law and legislation compatible with individual freedom? Bruno Leoni, one of the 20th century's great legal theorists, analyzed all legislation as a form of central planning fraught with problems. He contended that Ludwig von Mises's arguments against central planning of the economy—that it doesn't work because we need market prices to inform us about continuous changes in people's demand and supply—can be applied to central planning of the law. To Leoni, the conclusions about central planning of the economy (1961,  20) "may be considered only as a special case of a more general realization that no legislator would be able to establish by himself, without some continuous collaboration on the part of all the people concerned, the rules governing the actual behavior of everybody in the endless relationships that each has with everybody else" (italics in original).

Leoni argued that the legal central planners—government legislators—are not in a position to evaluate the myriad effects of their mandates on society. Neither opinion polls nor referenda nor mindreading will be sufficient to see how well the laws will conform to the wishes of individuals in society. Leoni wrote (1961, p. 22), "In these respects a legal system centered on legislation resembles in its turn … a centralized economy in which all the relevant decisions are made by a handful of directors, whose knowledge of the whole situation is fatally limited and whose respect, if any, for the people's wishes is subject to that limitation" (italics in original). So rather than viewing legislators as helping to create order in society, Leoni (1961, 21) portrayed them as creating a "legal war of all against all." As an alternative to top-down legislation, Leoni (1961, 152) supported bottom-up law or "spontaneous law-making processes." He thinks lawyers and judges are often useful, but only when people seek them out.

Leoni was seemingly a near-anarchist and closer to anarchism than his friend Friedrich Hayek or his friends and my professors James Buchanan and Gordon Tullock. Leoni (1961, 89) stated, "Even those economists who have most brilliantly defended the free market against the interference of the authorities have usually neglected the parallel consideration that no free market is really compatible with a law-making process centralized by authorities." After Hayek's Constitution of Liberty (1960), Leoni's influence on Hayek became clear in Hayek's Law, Legislation, and Liberty: Rules and Order (1973). Hayek talked about a system of decentralized judges discovering law and expressed deep skepticism about legislation even though he did not take the argument as far as Leoni in opposing all legislation.[28]

But how far should this argument go and exactly what role do lawyers and judges have in a free society? Leoni left readers with some unanswered questions and concluded Freedom and the Law (1961, 248) with the following: "While the market allows individuals to make free choices provided only that they are prepared to pay for them, legislation does not allow this. What we should now ask and try to answer is: Can we make a more successful comparison between the market and nonlegislative forms of law?"

In his essay Lottieri gives a thoughtful commentary on Leoni, describing Leoni's theory that proper law stems from individual exchanges of claims. Leoni (1961, 192) referred to "the law as individual claim" and stated, "Dictionaries define a claim as 'a demand for something due.'"[29] Leoni (1961, 192) said that "only individuals can make claims, just as only individuals can make choices." Lottieri then asks us to consider Leoni's "analogy between law and the market." Lottieri points out that market exchanges are mutually beneficial and at the core of any free society. Likewise, Lottieri discusses how exchange of claims and exchange of powers can be mutually beneficial. For example, Crusoe and Friday agree not to aggress against each other, and that enables them to sleep well at night. Or people about to enter a contract agree that each party ought to deliver what he promises. Such legal norms need not be legislated from the top and can easily come from the parties.

A potentially important difference between market exchange and exchange of claims or powers is who is party to the agreement. With market exchange, all parties involved agree. But can we have universal agreement with, to use Matt Kibbe's phraseology (2015), norms that one learns in kindergarten? "Don't hurt people and don't take their stuff." Lottieri wonders if we can have proper exchanges of power from Leoni's framework and is skeptical in the end. Lottieri writes, "When I buy or sell a car, I enter a real and voluntary contract, but when we consider the so-called 'exchange of claims,' we are forced to admit that it is not really an exchange. There is no moment when, as with trade, people living in a territory stipulate that none will kill other human beings." So Lottieri concludes that Leoni unsuccessfully made the case that exchanges of claims are equivalent to market exchanges.

Leoni's concluding chapter of Freedom and the Law (1961, 175–79) reports a couple of questions that he received from colleagues about the draft of his book: "Is there any possibility of applying the 'Leoni model' of society?" and "Who will appoint the judges or lawyers or other honoraries to let them perform the task of defining the law?" To the first question he answered, "The displacement of the center of gravity of legal systems from legislation to other kinds of law-making processes cannot be attained in a short time." From here one might assume that his vision is pie-in-the-sky thinking. But to the second question he was more grounded and responded, "It is rather immaterial to establish in advance who will appoint the judges, for in a sense, everybody could do so, as happens to a certain extent when people resort to private arbitrators to settle disputes in their own quarrels."

I believe Leoni's argument can be strengthened by highlighting that such examples are quite common. Lottieri mentions that "it may be more interesting to call attention to the wide network of private cities in which companies offer the basic services of a political order in competitive markets, such as protection of property, among others." My own research on private governance (Stringham 2015) shows that around the world in history and in modern times, people commonly have opted into rule-enforcing clubs to solve various problems. To use Leoni's terminology, parties exchange claims when they opt into these clubs. And I think such opt-ins offer a perfect example of Leoni's idea about the parallels of certain legal exchanges and market exchange.

Consider, for example, when someone opts to invest in a company. The relationship is ongoing and can have any number of arrangements, including intermediaries and rules, to govern it. When the first stock markets emerged in Amsterdam, London, and New York beginning over four centuries ago, many of the transactions were forward contracts. Government authorities considered them a form of gambling and refused to enforce such contracts. But despite a lack of legislation to govern these early stock markets, they still emerged and helped create very complex financial contracts, with their operation made possible by many private rules and regulations, or "exchanges of claims," in Leoni's terminology.

In 17th-century Amsterdam, the markets were governed by informal norms and reputation mechanisms. In 18th- and 19th-century New York, brokers transformed coffeehouses into private clubs to create and enforce rules. In London, stockbrokers would write the names of defaulters on blackboards and exclude the unreliable from their club. They created a rulebook that outlined systems of arbitration and stated that these rules were necessary because the law of the land was insufficient to govern their markets. In New York the rule-enforcing clubs added various listing and disclosure requirements for the companies they invested in.

Today, the Securities and Exchange Commission has many mandates that take important decision-making power away from investors and from providers of private governance such as the New York Stock Exchange. Nevertheless, the New York Stock Exchange competes on many margins with Nasdaq, the London Stock Exchange, and other exchanges. Exchanges can have listing and disclosure requirements legislated by lawmakers or their administrative councils, or they can have them chosen by providers of private governance on behalf of their ultimate customers: investors and listed firms. Lawyers can be involved in working for market participants. Lottieri asks, "Are there circumstances when we have proper exchanges of power?" The stock exchanges do not use force in the traditional sense of power. But they govern the majority of wealth in the United States and many other countries. I think it is safe to say that a competitive system of private governance lives up to Leoni's ideals, and this choice of governance can be considered akin to market exchange.

[28.] Hayek (1973, 168) wrote, "The case for relying even in modern times for the development of law on the gradual process of judicial precedent and scholarly interpretation has been pervasively argued by the late Bruno Leoni, Liberty and the Law (Princeton, 1961). But although his argument is an effective antidote to the prevailing orthodoxy which believes that only legislation can or ought to alter the law, it has not convinced me that we can dispense with legislation even in the field of private law with which he is chiefly concerned." For a discussion of Hayek's views toward legislation, see Stringham and Zywicki (2011).

[29.] Leoni (1961, 195) wrote, "[N]ow we should define what a claim is and what a legal claim is. This means that we have to lift our attention from people who say, 'I ought to' to people who say, 'I have a claim,' or 'I demand,' or 'I intend,' or 'I request.' Without those people there is no 'law.'"