On regime uncertainty and legal entrepreneurship.

• Author: Wisniewski, Jakub Bozydar
• Position: Essay

According to economic historian Robert Higgs (1997), an important reason why the Great Depression lasted as long as it did was the prevalence of what he terms "regime uncertainty"--that is, the kind of uncertainty that businesspeople, investors, and entrepreneurs feel in a political and legal environment that threatens to tax and regulate their wealth-generating activities to the extent that they can in many cases no longer expect these activities to be profitable. In other words, the problem is not the uncertainty produced by unpredictable consumer behavior or natural phenomena, but the uncertainty that politicians and bureaucrats create.

However, insofar as the ability to forecast uncertain future accurately can be seen as the main source of entrepreneurial profits (Shackle 1958, 1968; Mises [1949] 1966; Salerno 2008), (1) we may wonder why the emergence of regime uncertainty should be viewed as an especially destructive deterrent to entrepreneurship rather than as an obstacle that entrepreneurs should be uniquely suited to deal with.

The only satisfactory response to this question is one that makes a meaningful distinction between regime uncertainty and its "standard" market counterpart. (2) It would be difficult to think of the former as simply a particularly intense and overwhelming degree of the latter because doing so would suggest that the conditions of regime uncertainty simply make the standards of successful entrepreneurship more exacting, which is inconsistent with the fact that such conditions adversely affect the activities of all entrepreneurs, not only the supposedly insufficiently competent ones. It would likewise be difficult to regard regime uncertainty as qualitatively different from its more familiar counterpart in the sense that it cannot be successfully borne by even the most acute entrepreneur because then the emergence of the phenomenon in question would completely eradicate rather than severely reduce the scale and scope of business activities.

Hence, the most promising answer in this context seems to be that regime uncertainty is not qualitatively different from "ordinary" market uncertainty, but it operates on a different level, which is normally removed from the ambit of entrepreneurial decision making. In order to illustrate this claim, I refer to the hierarchy of levels of social analysis proposed by Oliver Williamson (2000). In this hierarchy, the first level is occupied by soft institutions--customs...