Anarchy, order, and trade: a structuralist account of why a global commercial legal order is emerging.

• Author: Druzin, Bryan H.

ABSTRACT

While still fragmented, the world is witnessing the emergence of a global commercial legal order independent of any one national legal system. This process is unfolding both on the macrolevel of state actors as well as on the microlevel of private individuals and organizations. On the macrolevel, the sources of this legal order are complex international agreements; on the microlevel, private contracts employing commercial customary practices and arbitration are driving this process forward. Yet there is no comparable evolution occurring (in any substantial sense) in noncommercial areas of law such as criminal, tort, or family law. There is an overall asymmetry in the development of transnational legal order. But why is this occurring? This Article argues that the emergence of a global commercial legal order may be partially attributed to the unique structural nature of trade. The Article gives a structuralist account, positing that, unlike legal order of a non-commercial nature, commercial legal order has built-in mechanisms that make it particularly suited to evolve in a transnational context--that is, to evolve and sustain itself in the absence of a central legislative or coercive authority. The Article identifies and explores these built-in mechanisms. The Article concludes that, because commercial legal order is uniquely predisposed to emerge without the state, this asymmetry should not only continue but likely grow even more extreme.

Table of Contents I. Introduction II. Mechanism One: Reciprocity A. A Vision of Governance as a Child of the Market B. Reciprocity Induces Compliance 1. The Force of Reciprocity on Both Micro- and Macrolevel 2. The Importance of Both Stick and Carrot 3. Repetition and Reputation C. Reciprocity as a Distinguishing Feature of Commerce D. Why Commercial Communities Are Primed to Produce Customary Law III. Mechanism Two: Market Pressures A. Commercial Law as an Instrument of the Market B. An Example Drawn from History: The Medieval Law Merchant C. The Law Merchant Reinforced Business D. The Modern Law Merchant IV. Mechanism Three: Network Effects A. The Limits of Market-Induced Uniformity B. What are Network Effects? C. Network Effects and the Standardization of Legal Practices D. Polycentrism and Market Insulation 1. The Concept of Network Insulation 2. Localized Network Effects V. Other Mechanisms A. Transregional Nature B. A Commercial Veil of Ignorance C. Universal Nature D. Ease of Consensus and Immediate Legitimacy E. Modeling and the Element of Competition VI. Conclusion I. Introduction

There is something afoot in transnational law. It is becoming increasingly obvious that there is a general asymmetry in its development, with commercial legal structures converging at a faster rate than law of a non-commercial nature. While still fragmented and exhibiting degrees of polycentrism, a global commercial legal order is coming into focus. (1) This emergence is unfolding both on the macrolevel of state actors as well as on the microlevel of private individuals and organizations. On the macrolevel, the sources of this legal order are complex international agreements; on the microlevel, private contracts employing customary law and arbitration are driving this process forward. This transnational legal order represents a rich and growing body of jurisprudence functioning under dispute settlement mechanisms that boast principles and rules that are no longer restricted to specific spheres of influence but actually entail elements of integration as trade law is being partly or fully harmonized. (2) Yet law of a noncommercial nature has no comparable evolution taking place (in any truly substantial sense) in areas such as criminal, tort, or family law. (3) The question thus arises, what can account for this "edge" that commercial legal order seems to have over its noncommercial counterparts?

This Article argues that part of the reason is simply structural in nature. It is posited that the emergence of a global, commercial legal order may be at least partially attributed to the unique character of trade. Unlike legal order of a noncommercial nature, commercial legal order has built-in mechanisms that render it particularly well-suited to evolve in a transnational context. (4) As a result, commercial legal order has the ability--and, in fact, the tendency--to run ahead of the State and evolve, grow, and sustain itself quite robustly in a transregional context. (5) Of course, this evolution is multifaceted and complex; clearly, there are other factors that are contributing to this emergence. However, what theorists miss is the unique structural nature of trade that gives commercial legal ordering a fundamental edge over its noncommercial counterpart. The structuralist account offered here is not put forward as the sole and universal explanation for this emergence. (6) Indeed, national laws remain an imminent force that reinforce the emergence of markets and legal order--this is not denied here. Yet the built-in mechanisms of commerce need to be recognized as playing at least a contributory role in the emergence of a global commercial legal order. This Article identifies and discusses these mechanisms, focusing on three: the element of reciprocity, the practical requirements of the market, and the existence of network effects. These three elements are key; the market gives rise to similar legal practices, network effects standardize these practices, and reciprocity then helps sustain this legal order in the vacuum of centralized authority. (7)

In a nutshell, the Article's thesis is this: commercial legal order is uniquely capable of evolving in a transnational context partially because it possesses built-in structural features that allow it to emerge, self-standardize, and sustain itself without a central authority, and it is this ability that helps explain the incongruous development of international legal order where in fact there is no such authority. As such, legal structures within the commercial sphere are able to advance at a swifter speed than other forms of legal order that lack these mechanisms. That is, commercial legal order is able to evolve within what is a state of technical anarchy. (8) The basic structure of trade drives toward convergence--a fact that may be discerned as much on the macrolevel of state actors as it is on the microlevel of private parties. For the structuralist account offered here, the distinction between private and state actors makes little conceptual difference. It does not matter the size of the trading entity; all that is required is that it act as a single, unified entity. When dealing with other states, national governments meet this definition.

The Article's argument is developed in four parts. Part I discusses the ability of reciprocity to sustain commercial legal order in the absence of a central coercive authority. Part II then discusses how market forces channel the emergence of a generally similar body of law. Part III argues that network effects then help standardize these legal practices. The discussion on network effects perhaps represents the Article's strongest contribution to the literature. Part IV then broadens the scope of the discussion and looks at other mechanisms of a structural nature that also potentially play a role in this process. Because of the primary importance of reciprocity, the market, and network effects in giving rise to stateless commercial legal order, the bulk of the Article is devoted to examining these three mechanisms; however, the discussion of other factors is also important. The Article concludes that, because commercial legal order is uniquely predisposed to emerge without the state, we should expect this asymmetrical emergence to not only continue but likely grow even more extreme. Indeed, a truly unified, largely stateless global commercial legal order is rapidly coming into focus. This is not the case for other forms of law. This Article attempts to shed some theoretical light on why this is occurring. At a time when the proliferation of international legal structures is accelerating, a closer look at the unique ability of commercial law to evolve in the absence of a centralized authority is, to say the least, highly relevant.

2. Mechanism One: Reciprocity

   This Part explains how, as the result of reciprocity, commercial legal order can sustain itself without the enforcement power of a centralized authority--mechanism one. The Part that follows it then discusses how commercial legal order can, as the result of market forces, emerge in a fairly similar fashion--mechanism two. The third Part then discusses the crucial role of network effects in inducing standardization--mechanism three. Key to all of this, however, is the larger, underlying concept that legal order can arise as the child of the market. (9) In more precise terms, that legal order can arise and sustain itself without a centralized authority. Indeed, this idea forms the core underpinning of this discussion. As such, it needs to be outlined, if only briefly.

   1. A Vision of Governance as a Child of the Market

      The idea that legal order can arise through the mechanics of the market has been the subject of a great deal of speculation and theory. Indeed, game theorists, libertarians, anarchists, and law-and-economics scholars all contend that law may evolve and sustain itself without the state. (10) Economists such as Friedrich Hayek offer a unique vision of how legal order may emerge. (11) They argue that, just like markets emerge, the rules of governance may evolve from the outcome of actors pursuing their individual interests. (12) Hayek contends there are two ways in which order can originate: "made" order and "grown" order. (13) Similar to Hayek's description, Lon Fuller distinguishes between "horizontal forms of order" and "vertical order" imposed by the state. (14) Fuller sees law as something that mirrors the market...