Illusions of a spontaneous order: "norms" in contractual relationships.

• Jurisdiction: United States
• Author: Charny, David
• Date: 01 May 1996

INTRODUCTION

Nonlegal enforcement systems come in many varieties. The ordinary rules of everyday conduct are enforced by the gossip of neighbors and scolding of friends; while, at the other extreme of complexity, investors may comply with intricate financial arrangements mainly to preserve their-market reputation, rather than from fear of lawsuit. The need for further typology is evident.

The Japanese products liability system and the transactional rules of the American grain industry--carefully described in the articles before us(1)--represent two variants of a particular type of nonlegal governance regime--a type in which the parties devise a fairly comprehensive system that includes written rules of conduct, sanctions, and procedures for enforcement These systems are established in a two-step process: first, norms evolve as a result of transactors' dealings (as in the grain industry) or industry consensus (standards identifying "design defects"); second, the centralized agency selects among, codifies, and enforces these norms. The substantive rules of conduct applicable to transactions are formulated in part by courts and legislators, in part by nonlegal decisionmakers--trade organizations, independent standard setters, arbitrators. Correlatively, the sanctions imposed for violation of the rules are at first cut "nonlegal" expulsion from the trade association or revocation of the license to use a trade emblem. In the background, courts stand ready to enforce the damages stipulated by law--expectation damages for breach of contract and full compensation for injuries suffered in tort.

In these settings, then, the nonlegal systems both displace in part, yet rest upon, he extant legal regime. The systems: represent attempts to modify the background law--the products liability regime as applied to consumer products and Article 2 of the Uniform Commercial Code (UCC) for sales of grain. At the same time, the systems establish contracts that, although containing terms that may differ from background law, would be enforceable as contracts. Presumably, if the Japanese council as insurer refused to honor the insurance contract, the consumer could go to court to obtain compensation promised under the contract. The grain traders can also go to court, although the court sometimes would be bound by the contracts' arbitration provisions. And of course the myriad background rules of tort, property, and contract structure the markets within which these particular transactions occur.

Accepting the evidence provided by Bernstein and Ramseyer as to the operation of these hybrid systems, this Comment addresses some of the questions this evidence raises for our understanding of the role of norms in their relation to legal governance. What do we need to know about norms? What can we learn from the examples here? In particular, I shall comment in Parts I and II.A on the broad claim that nonlegal norms can supplant or importantly supplement "public" regulation; in Part II.B on the claims that emergent nonlegal norms are "efficient;" and in Part II.C on the claim that the legal system generally should not provide legal sanctions for violations of norms in commercial transactions.

1. METHODOLOGICAL QUESTIONS: WHAT IS AT STAKE?

   The roots of the modern conception of norms in law and in economics are Hayekian. Of course, modern social theory broadly understood had been obsessed with the debate between those who saw the just social order as necessarily "constructed" centrally and by rational principles, and those who see it as proliferating benignly by spontaneous generation from the decentralized, only locally coordinated decisions of the members of society. 1 Curiously, however, this debate had until recently been of only marginal importance in economics, and correlatively in the hybrid subdiscipline of law and economics.

   In economics, the question of spontaneous generation had been a central theme of Hayek, Schumpeter, and other, lesser members of the "Austrian school."(2) But Hayek's contribution had always been treated as marginal by the mainstream Anglo-American economic tradition, which culminated in the great general equilibrium theorems of the 1950s. The mathematical formalization of general equilibrium theory depended upon methods and assumptions very different from Hayek's. In particular, a central problem with integrating Hayek's insights lay in his conception of imperfect information. Hayek's conception was epistemologically far more radical than the conceptions of imperfect information built into modern principal-agent models. In Hayek's conception, the problem was not that a central planner (or indeed, many other market participants) could not predict social actors' preferences, but rather that it was not meaningful in principle to speak of these preferences until the choices had actually been made--something that could only be done by the participants themselves, not by some central planner acting on their behalf. IA contrast, students of the law and economics of market relationship--particularly, those in fields that most directly address the law that bears on market transactions, like tort, contract, and regulated industries--inherited the neoclassical approach, which works from particularized informational deficiencies (or "transaction costs").

   Consequently, contemporary legal and economic analysis arrives at Hayekian principles obliquely--through a multivalent conception of "norms"--while avoiding the persistently unfashionable Hayekian epistemology. In retrospect, the impetus for the move, first among economists and then among law and economics scholars, is apparent. For economists, norms first entered the picture to explain conduct of macroeconomic importance that seemed inconsistent with simple-minded utility maximization, such as the stability of work effort and wages despite aggregate economic fluctuations.(3) As such apparently "irrational" conduct is pervasive in the phenomena that law addresses, the transfer of economics to law demanded a correspondingly greater emphasis on a source of conduct outside of a mere rational calculation about compliance with extant legal sanctions, which as a practical matter are often minimal even for seriously harmful conduct. In short, one needed to preserve the "rational actor" paradigm in the face of all sorts of conduct that did not seem particularly rational.(4) Explaining that individuals were responding to the pressures of the nonlegal sanctions that attached to violations of nonlegal specified norms provides a prolific means for doing so: particularly because one can, in principle, posit a "sanction," such as shame before others or a guilty conscience, chat has whatever force is required to explain he conduct at issue.

   But the rhetoric of "norms" has served a second--dare one say more overtly political?--function. Again, the connection is tight with the move towards "imperfect information" economies, or more generally with an economics that moves from a richer description of human agency than the standard perfectly informed utility-maximizer. The difficulty arises with the political consequences of the new economics--consequences that will lead us (at the end of this Comment) to see the wisdom of the Hayekian approach to the economistic vindication of conservative principles. It should be remembered that even the most radically collectivized of economic systems could be built on strictly neoclassical economic principles. For every market, it came to seem, there was a market failure; and for every market failure, a prescription for legal regulation or public provision. The move to collectivism seemed to proceed even more readily as individual agents were more cogently characterized as ignorant and irrational: for thee it was harder to explain the advantages of decentralized as against centralized decisionmaking. Indeed, advantages of centralized information gathering and deliberation might improve the rationality of collective over individualized decisionmaking.

   "Norms" help to assure the conservative or anti-collectivist that the limited laissez-faire approach of an austere common law regime can achieve the proverbial best of both worlds. A nonlegal norm system can aggregate the insights of a large number of individual actors through mechanisms for the "evolution" of norms through some principle of rational selection.(5) Although decentralized, nonlegal norm system might produce conduct that reflected the comparatively greater degree of enlightenment of the norm-generating procedures. In turn, as we just saw, the availability of a system of nonlegal sanctions for violation of the rules of conduct specified the norm system would explain in terms of "rationality" why individuals often acted in ways that seemingly departed from rational self-interest.

   Thus, the research program must specify the mechanisms by which norms--particularly "efficient" norms--are formulated and the procedures and sanctions by which norms are enforced.

2. ANALYSIS OF NORMS: EVIDENCE FROM TRANSACTIONAL SYSTEMS

   1. Where Do Norms Come From?

      An efficiency claim for norms should depend on some account of how the procedures that generate norms are likely to generate efficient norms. A problem with the literature to date has been the sheer diversity of types of nonlegal normative systems. Indeed, one might question whether it is useful to use the same term ("norms") for comprehensive and relatively complex regimes as for more informal and diffuse sanctioning systems. With the systems that...