The Spontaneous Evolution of Commercial Law

Abstract

Jeremy Bentham contended that property and state-made law born and must die together. Before the [state's] law there was no property: take away the law, all property ceases [4,309]. Most economists have taken this argument to heart. Clearly, some system of defining and then protecting and enforcing property rights (property law) and rules of exchange (contract law) is needed for a market system to develop. But does the state have to develop and enforce property and contract law? One purpose of the following presentation is to demonstrate that the commercial sector is completely capable of establishing and enforcing its own laws. A second purpose is to illustrate that modern commercial law is, in fact, largely made by the merchant community despite governmental efforts to take over provision of such law. Commerce is an evolving process of interaction and reciprocity which is simultaneously facilitated by and leads to an evolving system of commercial law. Carl Menger [17] proposed that the origin, formulation and the ultimate process of all social institutions including law is essentially the same as the Adam Smith [20] described for markets. Markets guided by Smith's invisible hand coordinate interactions, and so does customary law [6; 7]. These systems develop because, perhaps through a process of trial and error, it is found that the actions they are intended to coordinate are performed more effectively under one institutional arrangement or process than under another. The more effective institutions and practices replace the less effective. In the case of customary commercial law, traditions and practice evolve to produce the observed spontaneous order. As Hayek explained, however, while Smith's and Menger's insights are firmly established in economics, the study of jurisprudence has been almost completely unaffected by their arguments [9, 101]. One reason, of course, is that the invisible hand explanation for the emergence of market order is highly plausible because there is an obvious mechanism-the mechanics of individual but interrelated market prices-which provides the necessary coordination we call the price system. The mechanism of evolution for a legal order is much less obvious. Thus, the legal positivist view, which holds that law is the product of deliberate design, has a strong following among economists. Another major purpose of this discussion of commercial law, therefore, is to demonstrate that the rules of property and contract necessary for a market economy, which most economists and legal scholars feel must be imposed, have evolved without the