2013 Chapters (Layout Features)

The Economics Behind Law in a Market Economy: Alternatives to the Neoliberal Orthodoxy

Stiglitz, Joseph E.

We noted in the introduction that China, like developing countries all over the world, has been urged to adopt a set of institutions, typically described as “best practices” and thought to characterize the Anglo-American model of market economy. Underlying a successful market economy, it is argued, there exists a rule of law—and by rule of law what is meant is not just any legal framework, but a particular one, what we referred to in the introductory chapter as the “neoliberal orthodoxy,” based on “Chicago School” economics. It is important to place this approach, which focuses on notions such as “secure property rights,” in perspective. It has long been the subject of intense debate among both economists and legal scholars. Although the Chicago School has had enormous influence in thinking about legal and other institutions, it no longer represents the best thinking about the relationship between law and economic policy—far from it. As we explained in the Introduction, as a matter of economics, many of the foundational premises of the Chicago School have been challenged. As a matter of law, the institutions thought necessary for market efficiency have been shown to be far more variable and contingent. And there is more to a successful economy than just efficiency. There is not a single best set of institutional arrangements that work for countries in different circumstances with different objectives. Countries face choices about their institutional arrangements, and the choices about strategy and institutional form are critical, particularly as China puts in place institutional arrangements that will have a long-term dynamic effect on the structure of the Chinese market economy. As China sets out to create a market economy with Chinese characteristics, as it sets out to advance its objectives of creating a harmonious society, as it thinks about institutional designs that provide the flexibility for changing course as it advances in its development (in accord with the principle of “crossing the river by feeling the stones”), it needs to think carefully about the full range of consequences of each of the alternatives—not only for efficiency and equity today, but for how current choices are likely to impact its future evolution. This chapter explains the limitations both of the underlying economics upon which the neoliberal orthodoxy is based and of some of the associated legal principles.