The illusion of law: the legitimating schemas of modern policy and corporate law.

• Author: Chen, Ronald

TABLE OF CONTENTS I. INTRODUCTION II. THE META SCRIPT OF POLICYMAKING A. The Emergence of the Summary Meta Script B. The Mere Script: Elaborating the Summary Script 1. Austria's Basic Script 2. Chicago's Elaborations C. From the Meta Script of Policymaking to the Macro Script of Corporate Law III. THE MACRO SCRIPT OF CORPORATE LAW A. The Emergence of the Summary Macro Script 1. The Early Legal-Academic Debate 2. The Resurgence of Shareholder Primacy 3. "The End of History" B. The Macro Script: Justifying the Summary Script 1. Friedman's Shareholder Primacy Script 2. Legal Academia 's Elaborations a. Maximizing Shared Interests Across Categories b. Balancing Conflicting Interests Across Categories i. Nonshareholders Don't Need Corporate Protection ii. Shareholders Do Need Protection iii. The Pressures of the Situation c. The Illegitimacy of Social Responsibility 3. Summary IV. MAGIC OR ILLUSION? A. The Magician and Our Minds B. Signs of Illusion 1. Misdirection 2. Smoke 3. The Audience's Motives 4. The "Tilt" C. Spotting the Illusion 1. The Illusion of Coherence a. The First Tension b. The Second Tension b. The Third Tension 2. Schematic Illusions 3. Categorical Illusions a. Markets' Versus Regulation b. Profit Versus Social Responsibility 4. The Illusion of Freedom 5. The Illusion of Threat V. UNVEILING THE TRICK AND THE MAGICIAN A. Revealing the Basic Tricks 1. A Concrete Example of the Basic Tricks 2. Refined Evidence of the Tricks B. The Disappearing Distribution Trick C. Revealing the Magician 1. The Situational Magician 2. The Magician's Invisible Hand 3. The Emergence of the Magician a. Early American Corporations b. The Rise of the Modern American Corporation D. Protecting the Illusion and the Magician VI. CONCLUSION "Every way of seeing is always a way of not seeing: every insight is a blindness."

--Alfred North Whitehead (1)

"The evolution of ideas has its own laws...."

--Friedrich A. von Hayek (2)

"Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades."

--Milton Friedman (3)

1. INTRODUCTION

   This Article is about some of the schemas and scripts that form and define our lives. It is about the knowledge structures that shape how we view the world and how we understand the limitless information with which we are always confronted.

   This Article is also about the "evolution of ideas" underlying corporate law and all of modern policymaking. It is about the ways in which schemas and scripts have influenced how policy theorists, policymakers, lawyers, and many others (particularly in the West) understand and approach policymaking generally and corporate law specifically. It is about both the invisibility and blinding effect of those schemas. It is about the battle over those schemas and the prizes of victory. And, finally, it is about how the now-dominant schemas render us the "unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades."

   This Article takes as its starting point the notion that human behavior is influenced by features in our environment, and within us, of which we are largely unaware--our "situation." (4) Our situation is not fixed; it is both malleable and, more importantly, manipulable. Some of the most important features of our interior situation are knowledge structures--the categories, schemas, and scripts through which we interpret and respond to the world around us. (5)

   Insofar as the situation affects our behavior, there is immense value in influencing it. This opportunity results in a significant, largely unseen, competition over our conceptions of the world, of the groups and institutions within it, and of ourselves. We argue that our positive and normative understandings of all of law and policymaking are in fact subject to just that sort of competition. Our hypothesis is that large commercial interests are best suited to succeed in this competition over our situation, and that therefore our laws and policies are biased in their favor.

   That is only half of it. Policies that purport to be in the public interest, but that actually serve primarily the interest of the most powerful, risk being delegitimated. (6) This Article examines how the schemas and scripts behind our laws manage, through illusion, to legitimate institutions, outcomes, policies, and laws that, in fact, reflect the situational power of large commercial interests. It is important to underscore at the outset that this Article does not contemplate a nefarious sleight-of-hand artist intentionally seeking to manipulate us and our worlds. Though some readers may be tempted to erect such a straw man, (7) to do so would be to misapprehend our arguments and misconstrue our evidence. The competition over our knowledge structures is a process akin to the familiar invisible hand of markets. The illusion is the handiwork, neither of an individual mastermind nor even a vast, elaborate conspiracy, but of a situational magician--an assertion that should take on meaning as the Article develops.

   We begin our discussion in Part II with the dominant knowledge structures underlying modern policymaking, describing the emergence of what we term the "meta script" of policymaking--or the schemas that frame our approach to policy analysis today. Part III turns to the law regulating large commercial interests--specifically, corporate law--and examines the emergence and dominance of the new "macro script" of corporate law. It examines the schemas that identify and legitimate the purpose of the law. Parts IV and V highlight the signs of illusion in those schemas and then begin to unveil the situational magician behind those illusions. Corporate law works, as all illusions work, by relying on a set of schemas that guide our attention and inferences and play into our intuitions and motives. (8) Yet the outcome and response that this Article suggests is neither so benign nor lighthearted as that of a magic show. While its analysis is concentrated on corporate law, the Article's implications reach each of us, from law student to legal scholar, citizen to policymaker, and reveal something unsettling: all of us are susceptible to schematic sleight-of-hand, tricks that render us vulnerable to dangerous illusion. Where many have heretofore tended to see magic, this Article reveals the illusion of law and some of the unseen mechanisms that make it possible. (9)

   This project's larger ambition, it should be noted, is not to encourage disillusionment with the purported goals of the law, but to provide insights that help tailor our means and to narrow the gap between our ends and our outcomes.

2. THE META SCRIPT OF POLICYMAKING

   This Part begins with a stylized history of the emergence of what we call the summary meta script that currently dominates policy analysis. (10) The goal here is not to offer a detailed scholarly account of Biased, supra note 5, at 1249. We divided the law into levels, like categories, so that we might better understand them (see Figure below). The first and "highest" level of the law we labeled the meta level. The ideas, concepts, and conclusions generated at the meta level we call the meta schemas or meta scripts. Meta schemas are general, in that they inform our approach to, and understanding of, all areas of law and policy. The conventional view that legal rules should focus on efficiency concerns, leaving "distributional" issues for the "tax-and-transfer system," is an example of a meta script. See infra text accompanying notes 467-485 (briefly discussing the distribution versus efficiency debate). See generally Ronald Chen & Jon Hanson, Distribution versus Efficiency: Missing the Taste of the Pie (work in progress, on file with author) (examining that debate in detail) [hereinafter Chen & Hanson, Distribution versus Efficiency].

   The macro level involves specific areas of the law, such as corporate law, property law, or tort law--the divisions found on the covers of casebooks, treatises, and on the pages of law school course catalogues. Insights at the macro level are those that relate to the entire body of an area of law. These macro scripts make sense of an area of law, helping determine what disputes are resolved by it, what its goal or purpose is, and to what extent the given area of law overlaps or interacts with other areas of law. Macro scripts also can inform how individual cases should be resolved--which leads to the third schematic level of law.

   The micro level is where the law is applied in specific doctrinal areas to specific cases and disputes. Thus, for example, within tort law, micro scripts include everything from battery to defamation to products liability. In corporate law, the micro level comprises questions involving the duty of loyalty, self-dealing, shareholder voting, shareholder suits, control transactions, and so on.

   This schematization of the law into meta, macro, and micro levels provides a framework for our analysis in this Article and others to follow. In other work now in progress, we are testing our illusion-of-law hypothesis by comparing the micro scripts to the macro script of corporate law, Ronald Chen & Jon Hanson. The Illusion of Law: The Legitimating Schemas of Corporate Law Doctrine--Part I (work in progress, on file with authors) [hereinafter all the historical forces that have given shape to our current policy scripts. Rather, it is to highlight the ideas that are commonly said to have informed, or even caused, the changing tides in policymaking over the past quarter century. Section A picks up where the now-dominant meta schemas were first gaining credibility and a meaningful foothold in policymaking circles.

   1. The Emergence of the Summary Meta Script (11)

      Travel back in time to the early 1970s, a time when corporate CEOs were talking openly and often about their commitment to social responsibility, (12) when inflation...