21 Legal Foundations of Capitalism

Mitchell on Commons: ‘Legal Foundations of Capitalism’

The “substance of Capitalism,” as distinguished from Feudalism, is “production for the use of others and acquisition for the use of self.” Production for others and acqui- sition for self involve the denizens of a capitalistic state in a never- ending round of transactions with each other. The unit of behavior under these conditions is not an individual pondering his problems alone. Nor is it merely two individuals dealing with each other. It is rather two individuals dealing with each other, each conscious of alternative deals which he may make with some other person, and conscious also that at need he can invoke a court to see that the deals are made and carried out according to the current rules of law. Hence Professor Commons’ dictum quoted above: The ultimate unit of economics, ethics and law is a transaction involving a minimum of five persons. On this fundamental point economic theory made a wrong start. The physiocrats, Adam Smith and Ricardo, took a commodity as their ultimate scientific unit. Then the hedonists shifted to a feeling of pleasure or pain. Neither line of analysis has value except as it con- tributes toward the understanding of a transaction. In this respect the judges have given the right lead. While the economists start with a commodity or an individual’s feelings towards it, the court starts with a transaction. Its ultimate unit of investi- gation is not an individual but two or more individuals-plaintiff and defendant-at two ends of one or more transactions. Commodities and feelings are, indeed, implied in all transactions, yet they are but the pre- liminaries, the accompaniments, or the effects of transactions. The trans- action is two or more wills giving, taking, persuading, coercing, defraud- ing, commanding, obeying, competing, governing, in a world of scarcity, mechanism and rules of conduct

Mitchell (1924) Commons on the Legal Foundations of Capitalism (pdf)

Deakin Abstract

Social scientists have paid insufficient attention to the role of law in constituting the economic institutions of capitalism. Part of this neglect emanates for inadequate conceptions of the nature of law itself. Spontaneous conceptions of law and property rights that downplay the role of the state are criticized here, because they typically assume relatively small numbers of agents and underplay the complexity and uncertainty in developed capitalist systems. In developed capitalist economies, law is sustained through interaction between private agents, courts and the legislative apparatus. Law is also a key institution for overcoming contracting uncertainties. It is furthermore a part of the power structure of society, and a major means by which power is exercised. This argument is illustrated by considering institutions such as property and the firm. Complex systems of law have played a crucial role in capitalist development and are also vital for developing economies.

Deakin (2017) Legal Instititionalism: Capitalism and the constitutive role of law (pdf)