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Commerce Without Law

posted by Mark Weidemaier

Mitu Gulati and Mark Weidemaier

We are gearing up to teach our joint class on sovereign debt next term and, as usual, are mulling over background readings to provide context for the work we ask of students—which typically involves designing a restructuring plan. To do this, students must read many long bond indentures and other financial contracts. Occasionally, we show students historical examples of such contracts, often from the era of absolute sovereign immunity, when sovereigns couldn’t be sued in national courts. Often, students ask why lawyers bothered with such extensive documents when there were no courts to interpret and enforce them. Which gives us an opportunity to talk about reputational and other non-legal mechanisms for enforcing promises, which we and many others have written about, probably more than is, strictly speaking, necessary.

Nothing in the sovereign debt literature, however, is as interesting and immediate as Barak Richman’s new book, Stateless Commerce, which explores how a robust system of international commerce can work for hundreds of years without any state involvement. His exemplar, building on classic work by Lisa Bernstein, is the diamond trade. In theory, opportunistic breach of contract should be endemic, given the ease of theft, the highly subjective nature of quality assessments, and the need for credit to acquire such expensive products. So one might expect the trade to flourish only if there are strong legal institutions capable of rigorously enforcing deals. Instead, the enormously profitable global diamond market has operated for decades largely independent of the state.

Barak carefully documents how the diamond the industry has evolved and thrived without state enforcement. Firmly grounded in institutional economics, his account also draws insight from sociology, religion, economics, management, history, anthropology, and law. The core narrative is that the combination of strong religious institutions and thick ethnic ties (such as those found in the Orthodox Jewish community in New York or the Palanpuri Jains in Gujrat) can operate to create a system of law that enables commerce across borders in a way that state-centered legal systems find hard to duplicate. Yet the picture is not entirely rosy, as he also explains how thick ethnic ties and strong religious institutions can be vulnerable to capture by insiders, lack transparency, and exhibit hostility to outsiders and unwillingness to innovate.

Sovereign loans feature few of the mechanisms on display in Stateless Commerce. But there are still interesting parallels, including questions about the extent to which monopolists can facilitate non-legal enforcement (De Beers in the diamond trade; major stock exchanges at times in the sovereign debt markets, such as the London Stock Exchange in the first era of bond lending). And the core question—which explores the circumstances under which market participants can collectively generate potent enforcement mechanisms—is central to both contexts. So perhaps we will assign Barak's book to our students. Certainly we would recommend it to anyone interested in contracts as social and economic phenomena (rather than simply as legal instruments).

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