Sunday, December 26, 2010

The Rule of Law

I’m reading Road to Serfdom by Hayek and was struck by the chapter on Rule of Law.  While nearly every chapter could be applied to today, I found this chapter particularly applicable.

In a capitalist society, accurately predicting the future is necessary for firms and individuals to plan and deploy their capital and labor.  Uncertainty can easily become an impediment to growth (I think we’re seeing a lot of this happening now).  Of course, no one can predict the future with absolute precision, but in a free society, we have the Rule of Law as a guide.  The Rule of Law serves as a limit to the coercive actions of the state, denying it the authority to act arbitrarily against individuals or firms.  Without this limit, no firm or individual would risk resources fearing the state might act to defeat or confiscate their property.

I’m afraid, though, that over the past two years, the state (federal government) has marginalized this all important referee and encroached into dangerous territory.  The state has done this through a variety of avenues, including direct legislation and by federal rule making.
The several federal agencies, such as the EPA, DHS, and FCC, issue on a regular basis new rules affecting firms and individuals across major sections of the economy.  Think what you will of these new rules (which carry the effect of law), but they inject uncertainty into a once stable business model.  Just this week the FCC granted itself authority to enforce so-called “net neutrality”, despite calls from over 300 congressional representatives and a recent federal appeals court decision.  The action by the FCC will undoubtedly be challenged in court and most likely taken up in the next Congress, but it underscores the danger in allowing unaccountable and unelected bureaucrats to impose arbitrary regulation.

Additionally, this administration has expressed frustration in Congress for failing to adopt national “cap-and-trade” legislation (passed by the House, failed in Senate).  As a result, it has pledged to by-pass Congress and use the EPA to accomplish its climate-change agenda.  As firms sit idly by waiting for the EPA to act, consumers will face less choice, more unemployment, and higher prices.   This shouldn’t be.

As Congress and the administration continue to legislate and rule-make, they can expect firms and individuals to remain on the sideline, reluctant to make economic decisions for fear of state action.


  1. Indeed, this is a great concern, the power of the bureaucracy to effectively legislate, without actual laws needing to be passed.

    At the secret bankers' meeting the other night, we were talking and it became clear that more work by executives and boards is spent on avoiding running afoul of the law than it is on growing the business and creating wealth. Welcome to Europa.

  2. Well, if this is true;

    "In a capitalist society, accurately predicting the future is necessary for firms and individuals to plan and deploy their capital and labor."

    then capitalist societies as you define them will always fail. No one has invented the crystal ball yet and is unlikely to.

    The only reasonable prediction of the future is that it will be on the same trajectory of the past and present, until it isnt.

  3. If government confines itself to the traditional rule of law, firms can predict, with some certainty expected outcomes for financial decisions. Since I can't say it any better than Hayek himself, here's a direct quote:

    "It means, [adherence to the rule of law] not that everything is regulated by law, but, on the contrary, that the coercive power of the state can be used only in cases defined in advance by the law and is such a way that it can be foreseen how it will be used" (Hayek, p120).

    Presidents, via federal agencies, wield tremendous power by way of federal rule making. Congress, through the Administrative Procedures Act, granted this authority to federal agencies, and each administration has used this power differently. The current administration has appointed activists (i.e. Lisa Jackson) who will use their unaccountable power to fashion society into their liking, without regard to the consequences. It is this unpredictable action that businesses fear.

    The phrase "the secretary shall determine" appears 100s of times in the Dodd-Frank bill. That kind of language cannot be reassuring to business.

  4. Who enforces this "Rule of Law" again?

    Oh yeah, its the STATE!

    Look, I can certainly agree that there are dangers/problems with a large state. But there are also problems with a small state that lets private power get too large as well. What is the balance? I do not want unelected people like T Booone or Eisner or Gates or others running roughshod either.

    This uncertainty of govt action is a ruse by the business leaders. They have had 30 years of progressively weaker and weaker oversight prior to our crisis. I care not what rules are enacted but what rules are enforced.

    There is no market without rules. Competitive markets are something that need to be created, they dont happen on their own. Those with power will always keep it form others. The natural tendency of business unregulated is TOWARDS monopoly, thats been shown numerous times.

    Competitive markets, not free markets. They are not the same thing.

  5. Going to dinner. Will pick up the conversation later. Bon Appetit!