The Answer Is Transaction Costs

Certainty, Common Law, and Statutory Law: Todd Zywicki of Scalia Law

• Michael Munger

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Todd Zywicky, professor at George Mason's Scalia Law School, challenges some conventional legal doctrine, taking up the views of Bruno Leone and Friedrich Hayek. What if the legal world has underestimated the power of spontaneous order? Todd's intellectual journey sheds light on how these groundbreaking ideas contrast sharply with the dominant constructivist views shaping contemporary legal thought.

Todd offers perspectives on the role of intuition and reasonableness in the courtroom, inspired by the legacies of Leone and Hayek. Uncover the hidden parallels between market dynamics and legal systems, emphasizing the fluidity of Roman law as a process of discovery.

Links:

Todd Zywicki's Faculty Page

Zywicki's published work on Leoni, and the Common Law


The Loper Bright SCOTUS Decision (And the Gorsuch concurrence!)

If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !


You can follow Mike Munger on Twitter at @mungowitz


Speaker 1:

This is Mike Munger, the knower of important things from Duke University. Today's guest is Todd Zwicky, one of the best law professors in the area of political economy and an expert in the common law and emergent rules. A new twedge this month's letter, plus book it a month and more Straight out of Creedmoor. This is Tidy C.

Speaker 2:

I thought they'd talk about a system where there were no transaction costs. It's an imaginary system. There always are transaction costs. When it is costly to transact, institutions matter and it is costly to transact.

Speaker 1:

My guest today is Todd Zwicky of George Mason Law School, the Scalia Law School, and, todd, I want to welcome you to. The Answer is Transaction Cost and, as always, I asked the guest to say a little bit about their intellectual journey. How did you come to the point where you were interested in the common law which, oddly, is sort of a strange thing for a law professor to be interested in? And also, how did you become interested in Bruno Leone and Friedrich Hayek?

Speaker 2:

Well, thanks, mike, and thanks for that question, because I've been a longstanding Leone fanboy, so I'm glad that our ranks are growing. Hopefully this goes all the way back to when I was in college, believe it or not, and I was an intern at the Institute for Humane Studies as a summer intern and Walter Grinder was there and Walter carried around with within this amazing red-weld folder of typed manuscripts by this guy named Bruno Leone which were, as we've noted, the unpublished second set of freedom lectures he gave that eventually were published in the third edition as appendices to the third edition of Freedom and the Law, and I was very interested in Hayek at the time. I ended up writing my undergraduate honors thesis on Hayek, which I later published as a co-author with Ed Stringham, and I was going on about Hayek and all this sort of stuff and Walter Grinder essentially said well, why are you reading the Imitation for Hayek? Why don't you read the Real Thing, which is this guy Leone? And so I did, and I read Freedom of the Law and what really resonated with me at the time.

Speaker 2:

I often say that there's kind of two Hayek fans. There's the constitutional liberty Hayekians and the law legisl of liberty Hayekians, depending on your taste for spontaneous order, and I was definitely in the latter camp and so understanding Hayek, who I was interested at the time, but understanding Leone's ideas, but also, as I think we'll talk about, sort of Leone is kind of in the more radical version of Hayek and the way in which he embraces spontaneous order, and so it goes all the way back, you know, 30 years, when I was 20 years, 20 years old I guess even older than that now, to tell the truth but but I've been interested in Leone and his influence on Hayek and Hayek's views on the common law ever since.

Speaker 1:

Well, let's say you were at Dartmouth College a connection, although we were not there at the same time. It is the refining fire both of us went through at one time or another. I think it was a great place and you also being at IHS means that you had quite a few resources as an undergrad. But then you went to law school and a fair amount of your law school writings not all by any means, not even most, but a fair amount of your law school writings are also pretty heterodox, in the sense that they're notek uses or in the sort of interpretive law sense that Leone might use. Where do they come from and why do we have one set of laws instead of another?

Speaker 2:

Yeah, and this will resonate with you, I think, mike, which is, if you, I was once told by the great psychologist Jonathan Haidt that I may have had the best tweet length definition of libertarianism ever, or classical liberalism. As I said, I think people left to their own devices do pretty well in managing their lives, and when put in charge of other people's lives they're no good at it. And so sort of the twin pillars of sort of animates everything. The overarching views, I think, is spontaneous order, the virtues of spontaneous order, what are the potentialities and the limits of spontaneous order? On one side, that's the Hay, half is public choice, and I'm the co-author of the only law school coursebook that exists on public choice in the law, and so pointing out sort of the benefits of spontaneous order, how spontaneous order works, and then the limits of collective choice and all the things that come about rent seeking and all those sorts of things.

Speaker 2:

There's Pete Betke among those called the Hayek issue and the Buchanan issue, and so that is really the overarching kind of premise for these hundreds of articles I've written. Is that tension and that duality. And in law today the second view, the constructivist view, predominates. The spontaneous order view is underappreciated. Law and economics does some of that. But in fact, as we may talk about, the common law today is misunderstood by almost every law professor, because they don't understand the concept of spontaneous order and they think of the positivist view. The central planning views come to so dominate the way that law professors think about this that it's even corrupted the way they think about the common law, believe it or not.

Speaker 1:

Well, let's go to a couple of quotes from Leone and then talk about one of the central concepts that Leone wanted to be as a quality of a good legal system was certainty. That is, we all know what the law is, and the big advantage of that is that we can all coordinate expectations and, as I talked about a little bit with Russ and also with Don Boudreau about this, the public choice. People tend to have a very different view of what legal cases do than what judges and law professors do. When I talk to judges and law professors, they say, well, the main thing is we have to get these court decisions right. And I say, no, the main thing is we don't have any court decisions because everyone knows what the law is and there are no disputes. So the ideal is there wouldn't be. There are disputes, there are disagreements, but then we all say, okay, yeah, I see what the law is, I know how that will come out. We don't need to go through this lengthy process. Once people internalize that, those becomes rules of behavior. They become the laws that we all recognize, and that's what Leone meant by certainty. So let's see a little bit about how he got there. And then I'd like to ask you about his view of Supreme Courts or of formal courts and legislatures book. This is the 1991 edition which, as you said, has some extended appendices.

Speaker 1:

Judges or lawyers or others in a similar position are to intervene only when they are asked to do so by the people concerned, and the decision of judges is to be effective mainly in regard to the parties to the dispute, only occasionally in regard to third persons and practically never in regard to people who have no connection with the party concerned.

Speaker 1:

So, as you put it, you can go on about your business. If everything works satisfactorily, you never have to call in the state what this means Leone observes, and then you go back to quoting Leone. The authors of these decisions have no real power over other citizens beyond that which those citizens themselves are prepared to give them by virtue of requesting a decision in a particular case. Now we would contrast that, I think, with the outcome is I use my judgment to resolve the set of facts that are before me and if there's an exact analogy to something else, other people in a similar dispute might use it. But nobody pours over the words that I use in the decision, in the reasoning that I give, and that's not the way that our legal system works. Even in a judicial process, the words of judges in the written decision have the force of law. So why would Leonie not have liked?

Speaker 2:

that Well, I think I'm going to get a gold star from Professor Munger when I say the answer is transaction costs.

Speaker 1:

There is celebration on this end.

Speaker 2:

The celebration on this end, which is rules we'll just say legal rules, however generated, that cohere with people's expectations, reduce transaction costs. And, as you said, one of the biggest transaction costs is legal uncertainty and litigation. To the extent that judges try to enact rules that interfere with what people want to do or their expectations, that forces parties to have to work around those rules to try to arrange their affairs, with the law being an obstacle rather than being something that actually furthers what they want to do. And so the great insight of Leone, and then later expanded on by Hayek, is most modern law professors, most modern lawyers, think of the certainty of the law as long, detailed recitations of definitions and various sort of provisions in the law and that sort of thing, but they don't have any logic to them. So you can open up the federal code and look at the law for wire fraud and you will find an unbelievably precise, detailed set of definitions of wire fraud and have no idea whether or not you've just committed wire fraud.

Speaker 2:

And Harvey Silverglate tells a story in his book Three Felonies a Day where he'll sometimes have somebody come in and say I literally don't understand what I did here.

Speaker 2:

That was illegal.

Speaker 2:

And Harvey will say neither do I right, because it's this appearance of certainty what Leone is saying and what Hayek is saying is it's actually more certain if you have concepts for the law that resonate with people's intuitions and kind of go with the grain of what people's expectations are and help to facilitate coordination in society, rather than thinking of it as this sort of external sort of thing you impose on people, which is what this modern view of, say, wire fraud is, which is we're going to have these very detailed definitions but they don't intuitively resonate with anybody.

Speaker 2:

And I think that's what they're getting at there, which is laws that are conceptual, which is laws that are conceptual, that kind of fit with people's framework of how the world works, are going to facilitate coordination. They're going to meet with people's expectations and, as a result, be more certain over time. And so you could compare, say, wire fraud to the old common law crimes like arson. Everybody knows if you've committed arson, everybody knows if you've committed robbery, and I think that's what they're getting at here, which is that the common law, by being arrested in people's shared experiences, is more certain to people. You know whether or not you're violating the law, you know what your contractual obligations are, for example, rather than these long, detailed sort of things that have the appearance of certainty.

Speaker 1:

With a three or four part test, tell me what they mean. So if there's a three or four part test and you have to meet at least three of them, it reminds me of the moral science of casuism that in the early Catholic Church, after Aquinas tried to implement the set of, so they took Aquinas' rules and then they tried to interpret them, so I could actually tell whether literally every individual action was moral or not. And in fact no one could tell anything, because you could always find something that I'd violated, because actually a lot of them were actually contradictory. It might even have contradictory mandates, because what I'm trying to do is elaborate this rule but it might contradict another rule, because it's very difficult to keep those things straight.

Speaker 2:

That's right and you know, you could think of it as being the difference between Webster's Dictionary, which was designed to try to in some sense not codify but kind of reflect how people actually spoke English, versus what the French do, right, where they determine what French is going to be and whether a word is allowed to actually be called French or not, because they have a design system of language.

Speaker 1:

Right, and so one actually reflects and the other imposes a set of rules, and that's going to be very different. So you quote Leone again in a passage that I think is really interesting. Legislation has undergone a very peculiar development. It has come to resemble more and more a sort of diktat that the winning majorities in the legislative assembly impose upon the minorities, often with the result of overturning long-established individual expectations and creating completely unprecedented ones. The succumbing minorities in their turn adjust themselves to their defeat only because they hope to become sooner or later, a winning majority and to be in the position of treating in a similar way the people belonging to the contingent majority today.

Speaker 1:

Now, that reminds me James Buchanan. One of James Buchanan's interpretations of Eros theorem was well, we shouldn't worry too much about the majority today, because it's likely that we'll see a cycle if there's multiple alternatives, and so it won't last forever. Yes, but the certainty of the law is really important, and Leone here is saying it would be better just to get out of that business altogether. That law is not something that legislatures should be allowed to do. Why did he think that?

Speaker 2:

It was for the, for the reason you're saying, which is, you know, as you talked about with Russ, leone, was one of the first and certainly the first law professor I know of who was aware of public choice theory and understood this idea of law as being sort of the imposition by majorities on minorities, impliedly understanding Eros theorem. So, for example, back in the era in which he was written and in many ways still conventional, was among many law professors, is the idea that you know that legislation has intents right, that you can, there's a purpose to legislation and there isn't. It's just a deal. Right, it's just a deal, it's a compromise and we can talk about the difference between legislation and common law, whereas common law does in fact have a logic. As you said, judges in their written opinions, explain the logic of why they're doing it and it turns out the written verbalations, the formulations, are not or at least historically were not.

Speaker 2:

The law, as Leone and Hayek both sort of say, is their efforts to try to explain the law to people. But the underlying law are the concepts, and the concepts are derived from people's expectations, what people expect. It's quite striking to me how often, when I'm teaching my contracts class and that. I'll just ask my students does this make sense to you? And overwhelmingly 95% of the class says yeah, this makes sense. And it may be as simple as a judge makes an observation and it seems like he's just kind of making it up, but it resonates with people's intuitions and I think that's what Leone and Heiger are getting at. Is that there's these intuitions that are developed from living in society.

Speaker 2:

Additional virtue of juries who were going to bring their own knowledge and experiences to bear on a situation to say was this reasonable or unreasonable? And out of deciding these discrete cases, in particular factual context, then the art of the judge is the way in which you take this opinion and you fit it within this ongoing sort of river of precedent and concepts in that sort of thing, and so it's kind of the river that gives the predictability, that gives the certainty, as opposed to this sort of positivist, verbal sort of thing that Leone is saying, which is there's no logic to what the legislature does. There's especially no logic to what a regulator does. They just do it, and so you don't know when the law is going to change, you don't know why they might change it, you have no idea what they might change it to, because it's just a political bargain. It's not animated by any underlying logic or sense in any meaningful sense.

Speaker 1:

Well, and you hit the other point that I wanted to make. Leone actually anticipates both of the public choice objections. One is the social choice problem, the problem of choosing in groups where you can't attribute any moral or truth value to the fact. What we know is a majority voted in favor of something. They may all have had different reasons.

Speaker 1:

To imagine that there was some underlying intent or reason is just factually mistaken. It's almost literally impossible for that to be true. But the other thing is it's unlikely they had enough information to do it. And so in 1960, there's some of that in the air Hayek had written his famous paper about information. In 1944, as Bruce Caldwell, my Duke colleague, talks about in the biography of Hayek, hayek actually wrote that in so simple and accessible a way because it was on deadline. He didn't have written enough to Hayekify it. It was on deadline, he didn't have enough to hi-yackify it, so he ended up explaining it, really simply because he had to send it out. He never anticipated that that would be his most cited work, and it is by far.

Speaker 2:

I always wondered why that one actually made sense.

Speaker 1:

Yeah, yes, I mean he has a bunch of examples and then some simple statements and had to send it off because it was already late. That's not usually the effect of me writing on deadline I usually just have an even worse paper. So Hayek there had said you know, there's this problem of information. No individual, and in fact no group, could possibly have enough. And this all goes back to the socialist calculation debate, where von Mises had said information is not really calculated, it's generated by market processes. Leone makes and I don't think he's the first, but he is the clearest to make the discovery that there is likewise a discovery process in the law, which he attributes to the process of Roman law. He calls it the processo di scoperto, and the process of judges looking at how people actually do things congeals into a wisdom about how these things are done in our society, and no individual could possibly have known that, in particular, a legislator, a solon sitting in some office looking out the window thinking I wonder how we should do this, has no hope of coming to that realization. And so the other thing that I had wanted to talk about, and you touched on it, was what is Leoni's view of Roman law? And again. I'm just using your citations.

Speaker 1:

In one of your papers you cite this the Roman jurist was a sort of scientist. The objects of his research were the solutions to cases the citizens submitted to him for study, just as industrialists might today submit to a physicist or to an engineer a technical problem concerning their plants or their production. Hence, private Roman law was something to be described or discovered, not something to be enacted A world of things that were there, forming part of the common heritage of all Roman citizens. Nobody enacted that law. Nobody could change it by any exercise of this personal will. It might mean the absence of change, but it certainly meant that nobody went to bed at night making his plans on the basis of a present rule, only to get up the next morning and find that the rule had been overturned by a legislative innovation that should be chiseled in stone somewhere on every legislative building.

Speaker 2:

Right, right, yeah, and one of the things that's interesting about that is that for many lawyers and I think this may even be chiseled on the Supreme Court, thinking about things chiseled the Justinian Code was seen as the apotheosis of Roman law, and Leone basically says that was the end of Roman law. As soon as they decided they could codify this experience of what the Roman law really was, that's when the decline of Roman law began, because it basically froze the process and what we see going on here. And we talked about how Leone influenced Hayek, and Jeremy Shermer suggests that that's not completely true. It is true that Leone influenced Hayek on law, but that what inspired Leone to look at the Roman law in this fashion was that Hayek inspired Leone by explaining the concept of spontaneous order, and so this is what I think gets Leone looking beyond the Justinian code, which, of course, that was what was seen as Roman law, which now provides the basis for the civil law systems that comes through Napoleon and is continental law today, including Italy. So Leoni himself had to kind of step out of the prevailing mode of lawmaking in Italy and throughout Europe today, which is what they call civilian law, which is common law concepts written down and codified and that sort of thing. So he had to kind of step back and look at how this would apply to his process, and most of what he says is applicable to the common law, of course.

Speaker 2:

Right, and the essence of this is this idea of discovering the law, as you said, a scientist, an empirical scientist right, it's not running experiments, but more like a biologist observing the world, an imperialist as an engineer, looking, observing and then just trying to articulate what they are doing. And so this is actually a very important thing, and this is where most law professors today simply don't get it, because they don't understand this. When Leone and then Hayek later talk about discovering the law, or articulating the law, or pronouncing the law, this is what they're getting at, which is this idea that the law is there to be found and not made by judges. And what's happened in legal thinking over the past century is the rise of what we call legal positivism, and it's interesting to observe that in all of law and legislation Can you say what legal positivism is?

Speaker 2:

Absolutely yes, and it's interesting in law, legislation and liberty. Of all the subsections in Hayek's book, his section on legal positive is one of the longest, which illustrates the degree to which Hayek saw that this is where the rot really comes in, that it's an intellectual rot and the idea of legal positivism is the exact opposite of what we've been talking about, which is law essentially is a command backed by the state. The state makes the law, the state enforces the law, and so that's whatever it is, and the law is what the state says it is. The law is what the state says it is. That is actually an accurate description of legislation and regulation. Right, they can just tell you what the law is and they can enforce it.

Speaker 2:

The problem is is that for various reasons, both political and intellectual error people came to think that that also described the common law process, that when you look at the legislator, they make the law, and then you look at the judge and they're writing his opinions like, oh, the judge is doing the exact same thing. When they decide a case, they make the law, and that the legal decisions in the words of the legal decisions now they believe are the law, and that the legal decisions, in the words of the legal decisions now they believe are the law. And so what you get are people parsing the precise language of judicial opinions to see what did they exactly say, rather than what Leonie and Hayek are talking about, which is the law. The common law was this conceptual framework, of which the written decisions were efforts to articulate it. And so what about this idea that it looks like the judge is making the law?

Speaker 2:

And I draw the analogy that I know we're going to discuss further. He draws the analogy between the market and the judge, what the judge is doing right and discovering the law, just as they talk about and you talk about with Russ. I don't think it's a coincidence that they use the term Hayek and Leone use the term discover in terms of prices and the law also being a discovery process, and so here's where I think those people go wrong. You could walk into the grocery store today and you could see a sales clerk changing the price of apples from $1.99 a pound to $2.39 a pound.

Speaker 1:

And you say oh look, the boss told him to do that.

Speaker 2:

Yeah, right, you could look. You say, oh look, that clerk is setting the price of apples, right, he's deciding what the price of apples shall be, right? Well, everybody understands that's nonsense, right? The price of apples is said by billions of transactions, by billions of people around the world, and when the sales clerk announces that the price is now $2.39 rather than $1.99, nobody thinks he's making the price of apples. Well, some people do. Some people would call that price gouging. Some people call that price gouging. It's not true. Nobody thinks that that's just not true.

Speaker 1:

Nobody sensible thinks, that's true.

Speaker 2:

Nobody sensible thinks that's true. Right, and this is so. When you think about what is the judge doing? What do they mean when they talk about discovering or articulating that's what I think they mean which is the judge is tapping into this stream, this conceptual stream of which cases decided over time on discrete fact bases that actually make sense add up into something larger, right? And then when the judge gets a new case with new facts and applies these principles to it and has to decide which principle applies, how does it apply? What's the difference in the facts of this case versus that case? It's like the sales clerk announcing the price of apples there's now $2.39 rather than $1.99 a pound. They're not actually making that price.

Speaker 1:

But you make it sound almost mystical what happens with mistakes. So some, the store, may make a mistake about the price of apples and then they get more information and that there's maybe somebody bought the apples at the wrong price, but that's not such a big deal in the legal system. The judge makes the wrong decision. What happens then? How is it corrected?

Speaker 2:

so this is where it's really important that modern law is so messed up and that so many law professors today literally do not understand the traditional common law process, which is in the common law process. We had a concept of precedent, but precedent was not binding like it is. Today. We've got this concept called stare decisis.

Speaker 1:

The precedent is available. This is a template for resolving this dispute.

Speaker 2:

Yeah, and the precedents again were reflections of the underlying logic. So if you go back and you look at the early days of the common law, here's what's interesting is that we had the common law for hundreds of years before we even had printing presses to make judicial decisions widely available, and it was another couple of hundred years before we even had printing presses to make judicial decisions widely available. And it was another couple of hundred years before we had standardized case reporters. And so a lot of what the precedents, what we would call precedents nowadays, were like lawyers just tell judges, like telling stories about. Here's a case I decided Do you remember, judge, you ought to remember this case. You decided, and these were what the facts were right. It was clear that what they were appealing to was the logic of the case, the principle of the case, not the literal language of the decisions. And so what would happen over time was independent judges applying their independent logic to new sets of facts would create these patterns. But the patterns were always being tested, always being analyzed, always changing at the margins, being developed, clarified, distinctions being made.

Speaker 2:

What happens when you get this concept of positivism, that when a state actor declares the law, this is it you get along with this, this idea of stare decisis One case makes the law, and so that becomes a big problem for what you're saying, which is, once you have an error, it's hard to correct the error because all the subsequent courts have to follow it. Second, what that has ended up doing is created incentives for parties to engage in rent-seeking litigation to try to capture that valuable precedent, whereas the traditional common law process understanding this notion of a looser form of precedent where the concepts were the law, that is kind of self-correcting. Unless you can persuade several different judges to go along with a mistake, which is very hard, it's not likely to happen. And there was this great phrase I believe it was Sir Edward Cook who used this phrase the common law works itself pure. That, just like water as it flows along, it gets rid of impurities, it oxygenates.

Speaker 2:

The common law had that same dynamic to it and this is one of the early great insights of guys like George Priest and why the common law tended to the production of efficient rules is bad rules going where we started off. Rules that create conflict rather than coordination just tend to create more conflict, which leads to more litigation, which leads to their reconsideration and the common law works itself pure. But if you're bound in by this desiccated view that when a judge says something that's binding forever, just because the judge said it, regardless of whether it makes sense or not, you don't get the self-correcting mechanism. So it requires you to not only appreciate the common law process but also the extent to which what we call the common law today is only a dim reflection of the common law process of the past, and that's largely an intellectual error. By misunderstanding what the law is and what these guys are saying about the law. That's led us astray.

Speaker 1:

Well, and so you almost used the word, and you certainly suggested the concept of emergence. You said that these things develop. So prices are not planned by anyone and the set of principles are not planned by anyone they emerge. If I look at a bunch of these patterns, a pattern by its nature is an emergent thing, but then once I recognize okay, that's how we do things.

Speaker 1:

Well, this has come to a head on two grounds, both of which you have commented on, I think, very effectively and interestingly in your publications. One is the role of a Supreme Court. That is something to decide once and for all about which of these patterns or principles will be used, or bureaucratic rules as a source of new legislation. In effect, because the administrative law judges, in interpreting these rules, are giving opinions that again have binding force of law, and we have to pour through literally thousands it's not an exaggeration Literally thousands of pages of administrative law in order to find out what the law is. So my two questions are the Supreme Court and the bureaucracy. Those are both things that you've talked about. What effect do those things have about the transactions, cost of knowing what the law is?

Speaker 2:

Yeah, and the Supreme Court has a point that, Leone. It's somewhat surprising when you see it, because it strikes people's uh, the, um, the, the is so striking.

Speaker 1:

It can't be right.

Speaker 2:

That can't be right. Yeah, right, right. And and the way you can think about this is in law we talk about there, there's two forms of uh, of precedent. We talk about horizontal precedent, which is across time, and then vertical precedent, which is superior courts bind lower courts. In the Roman law system that Leonie was describing, and to a large extent the common law system, for reasons we'll talk about, you did not have that hierarchical court system or a permanent hierarchical court system where you could have, say, a supreme court that then binds every court below it. In the Roman law system it was very flexible. You know there were multiple different judges, multiple different lawyers, right, multiple different courts that were kind of deciding these cases. Leone is not quite clear about the institutional structure of the jurors' consulates and that sort of thing, but it's clear. It's a very flat horizontal system where it's kind of an ongoing dialogue with no Supreme Court. And of course the problem with the Supreme Court is once you have a court that combined all the courts below it, then you get all the problems I was talking about. Right, you get the rigidization of precedent, you get the ability to engage in strategic litigation to get that court to impose its view on other courts, but we do understand better, and understand better in the context of the common law is the structure of the institutional structure of courts.

Speaker 2:

When the common law emerged and for those who are familiar with Harold Berman or others this was essentially the polycentric legal order of the Middle Ages and in England.

Speaker 2:

So, for example, england had three royal courts, but there was the law merchant courts where most commercial law was created all throughout the Middle Ages.

Speaker 2:

And modern English commercial law was created when Lord Mansfield looked at the law merchant and said, okay, I'm taking all these and put them in the common law, and these were a set of principles that were grounded in merchant custom, and we could go into detail about this. But you had multiple different royal courts. You had the law merchant, you had the church courts. Right, the church, being universalistic, complied its own law, and so, for example, the practice of shaking hands was created in the church courts, in the canon courts, as a way of basically pledging your honor or pledging to God and that sort of thing. And so and the one who really noticed this that's often overlooked is Adam Smith himself. Smith observed that the reason why the English courts were so good at the time was because they had to compete for business. The judges were paid partly out of the filing fees of lawyers, and so he said they would compete to give the fairest, quickest and highest integrity results to people who came before Now, if you think about that.

Speaker 1:

Let me ask when you say fairest, this actually is surprising because most people don't know about the Lumberjee. This is surprisingly close to the cake cutting problem. So the cake cutting problem is we want a fair allocation. If I cut first and then you choose, we're likely to get something fair. Well, in the case of the law merchant, there are several that we could choose from you and I have to agree that this is going to be a binding adjudication. So if either of us think this person is biased or in any way unfair, we won't agree, and so I actually literally have to strive to have a reputation for cutting the cake metaphorically fairly. It's a very interesting way of assuring fairness. That's not professional norms. We'll interview you about whether you have shown yourself over time to make decisions fairly. It's an incentive.

Speaker 2:

Right, yeah, because when we enter into a contract, we're both expect 99.9% of contracts go off without a hitch. So if we enter in a contract, we both think it's going to go fine. We're both going to benefit from it. But if it doesn't go fine, we don't have any idea whether you or I are going to be the one who tries to get out of the contract.

Speaker 2:

Or for what reason, or for what reason, and so you have to think of the term of reciprocity, right. What would you choose ahead of time? You'd want a court that was fair and in particular, you'd want a court that would reduce the transaction cost again of contracting. So you'd want a rule that facilitates commerce and resolve disputes at the lowest cost. Now, what's great about this system? For what we're talking about, when you understand, then, this polycentric legal order where the parties could choose ahead of time, essentially which court they were going to be in Do we want to be in the law merchant courts or do we want to be in the English courts? And all the merchants wanted to be in law merchant courts because the English courts were kind of backwaters at the time. They were basically just debt collection courts. Essentially.

Speaker 2:

There's this great legal scholar, thomas Scruton, who said if you read the records of, I think, 17th century or 18th century English common law courts, you'd think there was no commercial activity going on in England, because there's nothing, there's no case reports of like contracts and stuff. It's all land disputes and stuff. And he says, well, that's because all the commerce was going on in the law merchant courts, right, or in private arbitrage courts, like the Liverpool Cotton Exchange, right. All the different exchanges had their different rules In different cities. No-transcript. What that does is it conduces to this process of horizontal precedent. We're talking about right, which is no court can actually drag you in and impose some rule you don't like on them. Right, you can always exit and leave somewhere else. The other beauty of the common law is that these are all default rules, as we started off. Talking about. A decision by a court doesn't bind anybody else. You can always contract around it. So if they do give you a bad rule, you just contract around it. And maybe, instead of the contract around, you can just increase the price, for example, or you can change the way the con you can vertically integrate if the contracts aren't enforceable. So there's a limit to what you can do in terms of trying to redistribute wealth, for example, through the traditional common law process.

Speaker 2:

In a world of the Supreme Court, a lot of those restraints come off. You can engage in strategic litigation. It starts to look more like like legislation. So I give the example in my paper. Think about if you and I entered a contract that I'll pay you $5 an hour to break the leaves of my lawn or something right. If we're both happy with that. We're both happy. Nobody's going to bother us. But if the legislature comes in, the whole point is to interfere in our contract by imposing a minimum wage. And that's kind of what I think Leone is getting at.

Speaker 2:

When you talk about a Supreme Court is, when a court comes in, they could start imposing rules on people that are harder to escape because you don't have a different court system or a different set of precedent that you can opt to, like you did back when parties were empowered to do things by choosing their court. And one last thing I'll say is exactly what you saw in the law merchant was this conceptual framework right, which is a lot of times. The judges weren't even lawyers. They were just articulating the basic practices of merchants that all good merchants were expected to adhere to. Maybe sometimes you needed somebody to clarify how it played in a particular context, but they weren't writing binding opinions and parsing language and doing all that sort of stuff opinions and you know parsing language and doing all that sort of stuff.

Speaker 1:

One last thing about the Supreme Court depending on its jurisdiction. If it has a constitutional jurisdiction, if the Supreme Court makes an interpretation of a statute that is incorrect, the legislature doesn't like they can actually pass new legislation. If the Supreme Court makes an interpretation of the Constitution, that's it, we're done. It actually has more power than the legislature, and it is. It is an awesome power to confer on a group of unelected people. Now, under some circumstances it might work out pretty well, but it's not what Leone had in mind only had mine.

Speaker 2:

And so he says, essentially the idea of a Supreme Court is kind of a bastardization of what we think of as the common law or what we think of what a proper lawmaking process for a court is. For the reasons you say In legislation itself yeah, you can in theory pass a new law, but we know how difficult that is, and so I think that's you know, and so I think that's Leone's point right, which is when you have a law that coheres with people's expectations, that draws on people's common experiences. It's odd to think and a lot of people don't understand this but to talk about reasonable behavior, for example, whether somebody acted reasonably, whether somebody acted negligently. What's interesting about that? And if you put yourself in the mindset of being a juror, people usually know right, you know whether somebody's acted reasonably, people know whether somebody is negligent, right, and legislation has none of that.

Speaker 2:

Like you said, legislation is lining up this provision of this statute over here with some other provision of another statute that was passed 30 years ago, trying to figure out how you jam those two things together, how a court might interpret all those sorts of things. There's no logic to it at all. All those sorts of things. There's no logic to it at all. And so you know, and Supreme Courts are doing a lot of that sort of thing of trying to jam pieces together and decide one thing or the other. And when people endorse Supreme Courts, this idea that it'll give finality and certainty and resolve these sorts of things, but, as you said, it also fixes it in place and there's not a natural error correction type mechanism like there was on the traditional common law.

Speaker 1:

Which brings us we're almost out of time, but it does bring us to a point that you made, which is sort of pathetic in retrospect. You sort of sounded the alarm 10 years ago that Leone was actually more important than ever because we were in an era when presidential decrees and bureaucratic administrative law was actually more important than ever, because we were in an era when presidential decrees and bureaucratic administrative law was becoming more important. Would that it was only as important as it was in 2014? Because in 2024, both of those things and the sort of impermanence, ephemerality, evanescence. My thesaurus fails me. We can no longer rely on any kind of certainty of these laws and I no longer have to look at statutes. I have to look at bureaucratic rulemaking procedures. If I'm in a business to find out I want to build something, I want to make something and sell it. I have no idea whether it's going to be legal or not.

Speaker 2:

Yeah, I mean, just think about swings back and forth on things like the internet rules and stuff like that. And it's quite striking to close on that, mike, because one of the most important cases in the Supreme Court this term was the Loperbright case, which reversed the Chevron case. And the Chevron case, just to remind readers or listeners was the idea that when a new administration comes in, they can change a regulation and essentially do A and then do not A, if both are permissible under the language of the statute. And one of the reasons why the Supreme Court changed, got rid of that, was precisely because it's been so chaotic and everybody understands there's no logic to what they were doing. You know it undermines predictability rather than increasing predictability. One of the arguments at the time was we're not going to second guess this because it'll create things that are more predictable. And what we see now is more and more larger pendulum swings back and forth. And, of course, the Supreme Court was criticized by progressives, mainly because they were reversing precedent.

Speaker 1:

Precisely, it makes it more unpredictable, because now we can't do what we were doing before.

Speaker 2:

Yeah, right, and so, and of course the answer is well, putting some constraints on the bureaucracy will make it more predictable. But here's what's interesting and we could close on an optimistic note, which is an underappreciated observation is Neil Gorsuch wrote a concurrence for himself in the Loperbright case. And guess what Gorsuch's opinion is about?

Speaker 1:

I haven't seen it.

Speaker 2:

That for decades now we've misunderstood the nature of precedent. And he goes back and he talks about we're going to talk about precedent and he goes back and he talks about we're going to talk about precedent in the context of overruling Chevron. Let's talk about precedent really means and what precedent meant at the time of the framers, which is exactly the conversation we've been having the last half hour. Which is precedent is not this idea of stare decisis, that because 50 years ago or what it'd be 40 years ago, the Supreme Court decided a case and that means it's fixed forever.

Speaker 2:

Precedent is subject to constant revision. It's subject to constant trimming. You know it's reevaluation if you think it was wrong, and so I think it's quite fascinating you know Gorsuch didn't cite me, but he could have, but he's sounding exactly the same notes that we've been sounding, which is that what we call precedent today is a desiccated form of what precedent really was under the common law, that it's not just a decision of a court that's fixed forever, that then you read like some Talmudic scroll to try to determine what they meant in 1984 in the Chevron case. But it's an articulation of concepts and those concepts get tested over time and as we get more experience and we can reevaluate it and that sort of thing. So maybe that's a note of optimism that Gorsuch is sounding a call to rethink what case law has become, to rethink what precedent has become and the like, and hopefully initiate a new conversation about all of this.

Speaker 1:

That's great. I did not know that Sometimes today's concurrences or dissent become tomorrow's majority opinion, so maybe it will expand. I'll put up a link to that concurrence in the show notes. Todd Zwicky, thanks so much for being a guest on. The Answer is Transaction Costs.

Speaker 2:

Thanks, absolutely Good to be with you, mike.

Speaker 1:

Whoa. That sound means it's time for the twedge. Two landlord jokes in honor of Bruno Leone. Two landlord jokes in honor of Bruno Leone. Joke one Landlord says you know, the other day I found a dozen ants running around frantically in one of my rental properties. I felt bad for them but they needed to be removed. Fortunately, I found a cardboard box and I made kind of a makeshift house for them. Two of them died, but the rest are doing okay Now I'm their landlord and they are my tenants. Remember? He said there was started out a dozen and two died. So it's their tenants.

Speaker 1:

Joke number two my landlord walked in the other day threatening to kick me out. Her reason? Well, she said I hadn't made a single rent payment in years. Look, just listen what she had to say. She said come on, son, you're 35. Don't you think it's time you moved out and found a place of your own? This week's letter. Hello Mike, I've been catching up on your Tidy C podcast and enjoyed price gouging or private information. I thought you'd enjoy hearing the Massachusetts version of your bottled water gouging story.

Speaker 1:

On May 1st 2010, a major water line break in Boston led to a boil water emergency for part of the city and for surrounding areas, areas. State and local officials, including the governor, attorney general and on down to the director of the division of standards, warned against price gouging on bottled water. The director of the division of standards said it was sending out inspectors to check on prices. There were media reports that a woman complained her son was charged $23.76 for a 24-pack of bottled water and the family has since contacted the Attorney General's office. Another example reported by the Boston Globe said Boston police were sent to a Tedeschi food shop in Hyde Park at 8.57 am after the mayor's office reported the store was charging $16 for a case of water, according to police and a mayoral spokesman.

Speaker 1:

Now, interestingly, massachusetts price gouging law at the time only applied to petroleum products. It was later expanded, but at the time it was only petroleum products. What were Division of Standards inspectors checking for? Turns out they were looking for violations of a state law requiring electronic cash registers to match shelf prices. Exactly the twist. Well, in at least one case the accused convenience store didn't have a case price in their system. By law they could only charge a price of 99 cents each, or, you guessed it, exactly $23.76 if you buy a 24-bottle case Discounting, as some consumers apparently expected actually would have violated the state law on pricing Further, since almost every consumer would have had easy access to the means to boil water. Bottled water was not even a good necessity for consumer health, safety or welfare, so again, it didn't really satisfy the anti-gouging law. In a final, ironic twist, the White House declared a state of emergency on May 4th for the water main break, but by that time the break had already been repaired and it didn't matter. Regards MG Well, thanks MG for that letter. Regards MG Well, thanks MG for that letter. I appreciate the examples and it is interesting to think about the problems that conflicting regulations create for someone who may not even be sure what the law is. It actually connects well with my conversation with Todd Zwicky and the problem of certainty in the law.

Speaker 1:

Well, this month's Book in a Month is in honor of Derone Ajemolu and Simon Johnson. The book is Power and Progress. It was published in 2023. And I'm trying to have a public service announcement here. I don't know Derone well, but I know him well enough to know how he pronounces his own name. Nobel Prize winner Derone Acemoglu pronounces it that way, not Deron Acemoglu, so you can be the cool kid on your block. The next episode will be released on Tuesday, november 19th, the week before Thanksgiving. We'll have a new topic, some letters and, of course, a new hilarious twedge. All that and more next month on Tidy C.