Commerce Without Law
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.
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).