American Legal Realism Goes to China: The China Puzzle and Law Reform

• Author: Gil Lan
• Published date: 01 June 2014
• Date: 01 June 2014
• DOI: http://doi.org/10.1111/ablj.12030

American Legal Realism Goes to

China: The China Puzzle and

Law Reform

Gil Lan*

INTRODUCTION

A current prevailing theory states that a nation needs a well-enforced

system of formal property and contract rights in order to enjoy economic

growth (the “Rights Theory”).1This theory has prestigious intellectual

foundations2and also enjoys the support of international organizations

*Assistant Professor, Law and Business Department, Ted Rogers School of Management,

Ryerson University. The author would like to express his thanks to the American Business

Law Journal (ABLJ) and the Academy of Legal Studies in Business (ALSB) for the many

useful comments on a prior version of this article which was presented at the 2012 ABLJ

Invited Scholars Colloquium. Parts of this article were adapted or excerpted from the

author’s doctoral dissertation. The author also thanks Kathy Le for her excellent research

assistance. Special thanks to Robert Bird, Ann Morales Olazábal, Jamie Prenkert and Lee

Reed for their insightful critique and support at the 2012 ABLJ Invited Scholars Collo-

quium. The author is very grateful to Joseph Singer for his inspirational works and helpful

comments.

1E.g.,CURTIS J. MILHAUPT &KATHARINA PISTOR,LAW &CAPITALISM:WHAT CORPORATE CRISES

REVEAL ABOUT LEGAL SYSTEMS AND ECONOMIC DEVELOPMENT AROUND THE WORLD 17 (2008)

(characterizing this theory as the “prevailing story” that can be found repeated throughout

important academic literature); see also Mariana Prado & Michael Trebilcock,Path Dependence,

Development, and the Dynamics of Institutional Reform,59U.T

ORONTO L.J. 341, 345 (2009)

(arguing that a view of many economists is that “whatever the state does, it should provide

effective institutions and processes to protect private property rights and enforce contracts,

which are considered prerequisites for investment and economic growth in market

economies”).

2Frank K. Upham, FromDemsetz to Deng: Speculations on the Implications of Chinese Growth for Law

and Development Theory, 41 N.Y.U. J. INT’LL.&POL. 551, 557 (2009) (stating that this line of

thought can be traced back to the works of Max Weber); see also MILHAUPT&PISTOR,supranote

1, at 18 (affirming that this particular theory can be thought of as originating from Max

Weber).

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American Business Law Journal

Volume 51, Issue 2, 365–427, Summer 2014

© 2014 The Author

American Business Law Journal © 2014 Academy of Legal Studies in Business

365

such as the World Bank.3In the midst of many developing and developed

nations still struggling from the aftershock of the 2008 Financial Crisis, one

nation stands out conspicuously: China. China has enjoyed enormous

economic success over the last thirty years and has experienced an impres-

sive annual gross domestic product (GDP) growth rate of almost ten

percent.4This exceptional rate of growth has also resulted in outstanding

poverty reduction in China—between 1981 and 2004, over six hundred

million Chinese have had their living conditions lifted above the poverty

line.5As of 2010, China became the world’s second largest economy6and

the United States’ second largest trading partner.7

China accomplished all of this without a strongly enforced regime of

formal property rights. Thus, China’s modern experience seems to con-

tradict the Rights Theory’s claim that formal property rights are an inte-

gral component for economic development.8Given the entrenchment of

3See WORLD BANK,WORLD DEVELOPMENT REPORT 1996: FROM PLAN TO MARKET 48 (1996), available

at http://wdronline.worldbank.org/worldbank/bookpdfdownload/40 [hereinafter FROM PLAN

TO MARKET] (“Property rights are at the heart of the incentive structure of market

economies.”).

4WAYNE MORRISON,CONG.RESEARCH SERV., RL33534, CHINA’SECONOMIC RISE:HISTORY,TRENDS,

CHALLENGES,AND IMPLICATIONS FOR THE UNITED STATES 3 (2013), available at http://www.fas.org/

sgp/crs/row/RL33534.pdf (“This has meant that, on average, China has been able to double

the size of its economy in real terms every eight years.”).

5Results Profile: China PovertyReduction,WORLDBANK, http://www.worldbank.org/en/news/2010/

03/19/results-profile-china-poverty-reduction (last visited Nov. 8, 2013) (noting however that

“[e]ven as the overall level of poverty has dropped, inequality has increased and the remain-

ing poverty has become concentrated in rural and minority areas”). For a more detailed

discussion on the World Bank’s methodology, see also WORLD BANK,POVERTYDATA :ASUPPLE-

MENT TO WORLD DEVELOPMENT INDICATORS (2008), available at http://siteresources.worldbank

.org/DATASTATISTICS/Resources/WDI08supplement1216.pdf.

6China Overview,WORLD BANK, http://www.worldbank.org/en/country/china/overview (last

visited Nov. 8, 2013) (“With a population of 1.3 billion, China recently became the second

largest economy and is increasingly playing an important and influential role in the global

economy.”).

7See Top Trading Partners—August 2013, U.S. CENSUS BUREAU, http://www.census.gov/foreign

-trade/statistics/highlights/top/top1308yr.html (last visited Nov. 8, 2013).

8See Kevin E. Davis & Michael J. Trebilcock, The Relationship Between Law and Development:

Optimists VersusSkeptics,56A

M.J.COMP.L. 895, 934 (2008) (“Along these lines, the most radical

interpretations of China’s recent astounding rates of economic development, despite weak

ratings on most conventional criteria for quality of laws and legal institutions (the so-called

‘China Enigma’), suggest that formal laws and legal institutions are not central determinants

of a country’s economic development.”).

366 Vol. 51 / American Business Law Journal

the Rights Theory as a well-accepted theory of development, China’s

economic growth is now a “puzzle” that begs to be explained.9An over-

looked piece of the puzzle is an actual investigation of the term “property

rights” itself. The Rights Theory envisages a formal definition of prop-

erty10 and characterizes property as a clearly defined set of entitlements for

an individual with respect to certain assets (i.e., land or chattels). These

entitlements are protected from government predation and enforceable

against other individuals. In turn, this view is part of a broader under-

standing of law as an autonomous set of determinable, formal rules capable

of apolitical adjudication by neutral judges.11 This broader understanding

of law formed the basis of classical legal thought (CLT) in America until the

turn of the twentieth century.

Commencing in the early 1900s, CLT was attacked by a group of

American scholars, judges, and lawyers known as the Legal Realists.12 The

Legal Realists’ assault on CLT revealed the logical inconsistencies within

CLT’s core reasoning. The methods and arguments used by the Legal

Realists formed the basis of a school of thought known as American Legal

Realism (“Legal Realism”).13 Legal Realism is considered highly influential

in American legal scholarship and is arguably the inspiration for more

9See generally Donald C. Clarke, Economic Development and the Rights Hypothesis: The China

Problem,51A

M.J.COMP. L. 89, 91–93 (2003) (discussing the hypothesis that contract and

property rights are important for economic development in the context of China).

10See id. at 100 (referring to the works purporting to support the “Rights Hypothesis” as

tending “to focus almost exclusively on security from arbitrary expropriation, without being

concerned about whether that security comes from a well-functioning legal system or simply

a wise government that prudently declines to exercise the power it has to expropriate in

order to maximize its ultimate revenue from taxing the income stream”).

11See generally Albert H.Y. Chen, Rational Law, Economic Development and the Case of China,8

SOC.&LEGAL STUD. 97 (1999) (arguing that general theories on rational law, based on the

works of Max Weber and Douglass North, may need to be slightly revised in order to account

for China’s experience).

12See Stewart Macaulay, The New Versus the Old Legal Realism: “Things Ain’t What They Used to

Be,” 2005 WIS.L.REV. 365, 369 (2005) (“Much of the traditional story of legal realism focuses

on the Columbia and Yale Law Schools during the late 1920s and the 1930s. It is easier to

describe what those who came to be known as realists were against rather than what they were

for. The enemy was traditional legal scholarship that focused on the logic of doctrine.”)

(footnote omitted).

13See generally AMERICAN LEGAL REALISM (William W. Fisher III etal. eds., 1993) (collecting,

excerpting, and commenting upon seminal works relating to American Legal Realism).

2014 / American L egal Realism Goes to China 367