Economy and Law

The relationship between economy and law has been an important object of inquiry for sociologists. Classical theorists Durkheim and Weber promoted sociology as a discipline by offering theories of this relationship. Today, sociological research on law and the economy provides ideas and empirical evidence to help answer such key questions as: Where do firms and markets come from? How and why do they operate and evolve as they do? How do legislatures and courts shape inequalities of income and wealth? How do legislatures and courts affect the participation in paid labor markets, jobs, and earnings of people of different races, ethnic groups, religions, and genders?

Among classical theorists, Marx assumed “bourgeois” law would reflect and reinforce capitalist relations of production. At most law was an object of class conflict among factory owners and workers, but it was not a major causal force in its own right. Durkheim focused much attention on the law-economy relationship, making it central to his analyses of economic modernization. For Durkheim, shifts in law from punitive to restitutive legal principles and sanctions indicated changes in social bases of solidarity. Societies moved from solidarity rooted in similarity to that rooted in difference and complementarity, as a consequence of increased economic division of labor. In contrast to Durkheim and Marx, who viewed the nature of legal ideas, behavior, and institutions as consequence rather than cause of economic ideas, behavior, and institutions, Weber emphasized the conjoint, mutually reinforcing rise of a formal rational legal system and of capitalism in Western Europe. Weber’s ideas have been especially influential in economic sociology and for contemporary perspectives on law and economy (Trevino 1996; Swedberg 2000; Stryker 2003; Edelman & Stryker 2004).

According to Weber, formal rational law provided legal rights and guarantees to parties in exchange, enhancing predictability and certainty in contractual relations. This increased the probability that promises were kept, promoting market exchange, which in turn promoted further changes in business and contract law. Though full blown capitalist economies were unlikely without legal enforcement of contracts, economic exchange and markets could exist without such enforcement. One among many sources of legal rationalization itself was separation of sacred and secular law going back to republican Rome’s practice of refusing to let priests interfere in daily life (Trevino 1996).

Similarly, legal concepts and tools of negotiability, agency, and the juristic or legal person probably were necessary for developing economic action and institutions with very high degrees of systematization, calculability, and predictability. Banknotes, checks, and bills of exchange are signed legal documents including unconditional promises to pay. As Trevino (1996) points out, because such negotiable instruments were not promoted until the seventh century, markets but not full blown capitalism could develop in ancient Rome. Finally, by making business organizations bearers of universal rights and duties, entitled to formal equal treatment under the law, the legal personhood concept provided a bridge between developing ideas of rule of law and rule oriented legality in the polity, and development and reproduction of capitalist ideologies, firms, and markets.

Contemporary treatments follow Weber in presuming that law operates both as an independent and dependent variable with respect to the economy (Edelman & Stryker 2004). With respect to centrality of law in the social construction of firms and markets, for example, Roy (1990) showed that antitrust policy contributed to a massive merger wage in the US at the turn of the twentieth century. Focusing on an 1897 Supreme Court decision that unexpectedly declared key provisions of the Interstate Commerce and Sherman Acts to be constitutional, Dobbin and Dowd (2000) showed how this decision triggered a chain of events leading the railroad industry away from cartel forms of business organization to oligopoly enhancing friendly mergers. Not only did firm and market structures change, so too did business models of appropriate and efficient profit oriented behavior.

Business activity shapes the nature of law, as well as vice versa. For example, Fligstein and Stone Sweet (2002) showed that increased cross border trade within the European Community promoted more litigation of EC law, that the two together promoted more EC legislation, and that all three of these together promoted the founding of new EC oriented lobbying groups in Brussels. Here, firm economic behavior and concomitant legal and political behavior are transforming legal ideas, action, and institutions, creating a new EC level regulatory system and transforming a treaty based common market into a constitution based transnational legal system.

With respect to economic inequality, research shows how economic and social regulations, including legislation governing collective bar gaining, health and safety, pensions, and equal employment opportunity, have reshaped the nature of the American workplace, transforming workplace governance, business hiring, firing and promotion procedures, and impacting labor market outcomes for women and minorities (Stryker 2003). As well, redistributive tax and social welfare legislation at the core of the welfare state ideal led to measurable reductions in income inequality in advanced industrial democracies, though these reductions were not of the magnitude that many anticipated (Lempert & Sanders 1986).

Conversely, Edelman et al. (1999) showed that courts take into account managers’ business concepts and routines, including their business adapted interpretations of equal employment opportunity and affirmative action laws, when making formal adjudicative rulings on whether or not firms have violated equal employment laws. Thus, more “covert” day to day managerial interpretations diffusing across firms and economic sectors, as well as more “overt” business attempts to influence legal rules through litigation, often have dramatic effects on law enforcement, such that the impact of equality promoting legislation is minimal or even the converse of that intended (Yeager 1990; Stryker 2003; Edelman & Stryker 2004). Law and society scholars highlight such differences by contrasting ”law on the books” with ”law in action” (Trevino 1996; Stryker 2003; Edelman & Stryker 2004). The legal profession itself – in addition to advancing members’ interests in creating and monopolizing markets for their services – also shapes the content of legal rules and the structure of legal institutions (Lempert & Sanders 1986; Dezalay & Garth 1996).

Consistent with many recent studies and findings, current sociological ideas about the law-economy relationship emphasize co evolution (Stryker 2003). Legal ideas, actions, and institutions reciprocally shape and are shaped by economic ideas, action, and institutions in intersecting institutional fields. An excellent example is provided by Dezaley and Garth (1996) in their study of the emergence of a transnational legal order of commercial business arbitration. This new legal field, which transforms international and national business disputing, emerges and itself becomes transformed through inter connected power struggles over business, markets, and the state within and among lawyers and businesspersons operating in and across local, national, and transnational organizations and institutions.

Social mechanisms through which law-economy co evolution occurs are a topic of lively debate. Some scholars emphasize how law reshapes actors’ cost benefit calculations and interests. Others emphasize how legal and economic concepts and institutions are mutually constitutive, with law’s power in and for economic life rooted in taken for granted meanings, norms, and values. Where scholars emphasizing rational calculation tend to conceptualize law as a set of state promulgated formal rules, scholars emphasizing how law helps to construct cognitive frameworks for economic behavior tend to emphasize a broader concept of law as legality (Stryker 2003; Edelman & Stryker 2004). Legality encompasses codified rules as well as symbolic and ritual elements of law and social behaviors mobilizing and enacting both state made formal laws and law like principles and processes outside the formal legal system.

Stryker (2003) suggests that both formal legal rules and broader notions of legality affect the

calculations by economic and legal actors, and also these actors’ cognitive interpretive frames and their normative evaluations (see also Dezalay & Garth 1996; Kelly 2003). Reviewing extant research, Edelman and Stryker (2004) suggest that political mechanisms involving resource mobilization and counter mobilization and institutional mechanisms involving hegemony and diffusion of taken for granted meanings and practices combine to account for the mutual endogeneity of legal and economic ideas, actors, and institutions. They show how a ”sociological” approach to law and the economy, emphasizing that ideas of economic efficiency and rationality are socially constructed, is different from a ”law and economics” approach. The latter relies on a priori concepts of rationality and efficiency as assumptions for its theories about business behavior and as a normative standard to evaluate legal rules and institutions. Finally, law plays facilitative, constitutive, and/or regulatory roles with respect to economic ideas, actors, and institutions. Sometimes it plays all three at once. For example, corporation law constitutes corporations as bona fide economic actors and legal persons while it also facilitates and regulates capital accumulation (Edelman & Stryker 2004).

Diverse quantitative and qualitative methods are used productively to study law and the economy. Both quantitative modeling and case oriented comparative techniques have been used to investigate the impact of statutes, directives, executive orders, and court rulings on, for example, business behavior, unionization, strikes, economic growth, employment, unemployment, international trade, and transformation of market structures, as well as on the labor market participation, jobs, and wages of minorities, women, and members of diverse ethnic and religious groups (Donahue & Heckman 1991; Fligstein & Stone Sweet 2002; Edelman & Stryker 2004). Quantitative methods likewise have proved useful for assessing diffusion of new business structures and practices in response to changing regulatory laws and for investigating distinct periods in law and economy dynamics. Case oriented comparative historical methods have been especially helpful in examining key events or turning points in mutually constitutive legal and economic processes (Stryker 2003). Precisely because the over time role of law in constructing currently taken for granted economic concepts, actors, behaviors, and institutions tends to become invisible from contemporary vantage points, research investigating short and long term law-economy dynamics is important for understanding current economic phenomena, as well as for appreciating the possibilities and probabilities of future economic transformations.

References:

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17. Yeager, P. (1990) The Limits of Law: The Public Regulation of Private Pollution. Cambridge Univer­sity Press, Cambridge.

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