a rule-of-law metric for quantifying and assessing the changing legal environment of business

A Rule-of-Law Metric for Quantifyingand Assessing the Changing LegalEnvironment of BusinessDavid Silversteinn and Daniel C. Hohlernn

INTRODUCTION

In a 1991 address entitled ‘‘Economic Freedom, Human Freedom, Polit-

ical Freedom,’’1 Nobel laureate Milton Friedman delivered his advice for

economic success in the newly emancipated Eastern European and former

Soviet-bloc countries, which he later distilled into three words: ‘‘Privatize,

privatize, privatize.’’2 Ten years later, Professor Friedman amended his

r 2010 The AuthorsAmerican Business Law Journal r 2010 Academy of Legal Studies in Business

795

American Business Law JournalVolume 47, Issue 4, 795–853, Winter 2010

nProfessor and Senior Research Fellow in Ethics, Department of Business Law & Ethics, Saw-yer Business School, Suffolk University; B.S., Cornell University; J.D. (Conc. in Int’l LegalStudies), Cornell Law School; M.A.L.D., Ph.D., The Fletcher School of Law & Diplomacy,Tufts University.

This article is dedicated in memory of Robert F. Meagher, Professor of International Law,The Fletcher School of Law & Diplomacy, for introducing me to the law and social changeliterature on which this article is based.

nnResearch Fellow, Suffolk University, Sawyer Business School; B.A., University of Massachu-setts at Amherst; J.D. Suffolk University Law School.

1Milton Friedman, Address at The Smith Center for Private Enterprise Studies, CaliforniaState University: Economic Freedom, Human Freedom, Political Freedom (Nov. 1, 1991),available at http://134.154.233.108/frlect.html.

2In a preface to the 2002 edition of the Economic Freedom of the World report, Professor Fried-man said, ‘‘Just after the Berlin Wall fell and the Soviet Union collapsed, I used to be asked alot: ‘What do these ex-communist states have to do in order to become market economies?’And I used to say: ‘You can describe that in three words: privatize, privatize, privatize.’ But, Iwas wrong. That wasn’t enough.’’ JAMES GWARTY & ROBERT LAWSON, ECONOMIC FREEDOM OF THE

WORLD: 2002 ANNUAL REPORT xvii (2002).

http://134.154.233.108/frlect.html

prescription, declaring, ‘‘Privatization is meaningless if you don’t have the

rule of law.’’3

More recently, as part of a Wall Street Journal Chief Executive Officer

(CEO) Council on ‘‘How to Rebuild Global Prosperity,’’ economic jour-

nalist Alan Murray asked News Corp. chairman and chief executive Rupert

Murdoch, ‘‘Mr. Murdoch, [w]hich of those countries [Mexico, India, the

U.S., and China] would you invest in right now?’’4 Mr. Murdoch replied,

‘‘Oh, number one would be India. As against China, it has a rule of law, it’s

an infinitely complicated country, but it has a huge advantage over other

developing countries, in that there is a rule of law, and it does work.’’5

Continuing with his answer, Mr. Murdoch further observed: ‘‘China, which

is remarkable . . . But you never know . . . if someone doesn’t like you

somewhere, your partner is in jail on Monday morning or something and

you’ve got no business. For safety, every time [I would choose] India.’’6

Mr. Murdoch’s observations about rule-of-law differences between

India and China, however insightful, must have been based on intuition or,

perhaps, what he considers to be a few representative experiences. Cur-

rently, there is no generally accepted, systematic approach to defining and

quantifying rule of law; without quantification, country-to-country com-

parisons as offered by Mr. Murdoch are at best speculative and imprecise.7

3Id. In response to the question ‘‘How do we measure the ‘rule of law’?’’ and collateral ques-tions, Professor Friedman replied: ‘‘I really don’t know how to answer that.’’ Id. at xviii.

4How to Rebuild Global Prosperity, WALL ST. J., Nov. 23, 2009, at R1, R11.

5Id.

6Id.

7See, e.g., Rachel Kleinfeld Belton, Competing Definitions of the Rule of Law 5–7 (CarnegieEndowment for Int’l Peace, Democracy and Rule of Law Project, Carnegie Papers No. 55,2005) (‘‘ends-based’’ approaches to defining rule of law are compared to and contrasted with‘‘institutional’’ approaches), Carnegie Endowment for International Peace; Margaret J. Radin,Reconsidering the Rule of Law, 69 B.U. L. REV. 781, 791–92 (1989) (questioning whether the term

‘‘rule of law’’ has become so tied to instrumentalist views of law as a set of ‘‘pre-existing formal

rules applied in a value-free manner’’ that it cannot usefully describe the fluid and ‘‘evolving

complex of political commitments to the flourishing of the community’’ characteristic of modern

societies); O. Lee Reed, Law, the Rule of Law, and Property: A Foundation for the Private Market andBusiness Study, 38 AM. BUS. L.J. 441, 470–72 (2001) (arguing that the institutional characteristics

that collectively constitute rule of law are the foundation for property rights, prosperity, and

protection from arbitrary government action); Antonin Scalia, The Rule of Law as a Law of Rules,56 U. CHI. L. REV. 1175, 1186–88 (1989) (arguing for a formalistic view of rule of law that is tied to

specific institutional features and processes). Challenges to traditional concepts of ‘‘rule of law’’ as

a synthesis of legal formalism and legal realism have also emerged from the political left in the

796 Vol. 47 / American Business Law Journal

Although there is widespread acknowledgement about the importance of

rule of law in supporting a successful market-based economy, identifying

and measuring the key elements that collectively constitute what we call

rule of law has proven to be elusive.8

The literature in this field typically identifies sets of characteristics

commonly associated with a rule-of-law system, for example, reliability,

impartiality and efficiency of the judiciary, recognition of private property,

and enforcement of contract rights.9 Constellations of these legal system

Critical Legal Studies movement and from the political right in the Law and Economics move-

ment. See, e.g., Owen M. Fiss, The Death of Law?, 72 CORNELL L. REV. 1, 2–7 (1986).

8See supra note 7. Compare Thomas Carothers, The Rule of Law Revival, FOREIGN AFF., Mar./Apr.1998, at 95–106 (in which the author observed that rule of law seemed to be emergingeverywhere and was seen as the answer to a multitude of diverse policy challenges), withThomas Carothers, Rule of Law Temptations, FLETCHER FORUM WORLD AFF., Winter/Spring 2009,at 49 (in which the same author presents a much less optimistic take on the global develop-ment of rule of law over the last decade). Hamid Sharif, Assistant General Counsel for theAsian Development Bank observed that creating the conditions for economic growth andpoverty reduction necessitates legal reform that takes into account all aspects of the rule of law.The Unbroken Line of Law, ADB REVIEW, May 2005, at 3. Mr. Sharif specifically noted that‘‘[e]ven the indefatigable dean of free enterprise, the Nobel laureate Milton Friedman, hasgiven precedence to law over free enterprise.’’ Id. at 1. In Timothy L. Fort & Cindy A. Schi-pani, An Action Plan for the Role of Business in Fostering Peace, 44 AM. BUS. L.J. 359, 376 (2007)

(part of a special journal issue devoted to ‘‘Peace Through Commerce’’), the authors observed that

‘‘Incidents of Rule of Law, in particular, enforcement of contract rights, property rights, and

dispute resolution predict levels of violence within a society, controlling for economic develop-

ment.’’ See also infra Part II.A.

9See supra notes 7–8. For example, the Executive Summary of Belton, supra note 7, stated that‘‘[d]efinitions of the rule of law fall into two categories: (1) those that emphasize the ends thatthe rule of law is intended to serve within society (such as upholding law and order, orproviding predictable and efficient judgments), and (2) those that highlight the institutionalattributes believed necessary to actuate the rule of law (such as comprehensive laws, well-functioning courts, and trained law enforcement agencies).’’ See also Randall Peerenboom,Varieties of Rule of Law: An Introduction and Provisional Conclusion, in RANDALL PEERENBOOM, ASIAN

DISCOURSES OF RULE OF LAW, x–xxiii (2004) (comparing and contrasting different conceptions ofrule of law in twelve Asian countries, the United States, and France); Amanda Perry, An IdealLegal System for Attracting Foreign Direct Investment? Some Theory and Reality, 15 AM. U. INT’L L.REV. 1627, 1627–29 (2000) (contrasting prevailing assumptions about the importance of charac-

teristic rule-of-law features in attracting foreign investment to emerging economies with empirical

data from Sri Lanka). Some well-known legal scholars who have grappled with trying to identify

the key elements of a rule-of-law system and some of their representative writings include LON

FULLER, THE MORALITY OF LAW (1976); GEOFFREY DE Q. WALKER, THE RULE OF LAW (1988);

Joseph Raz, The Rule of Law and its Virtue, in JOSEPH RAZ, THE AUTHORITY OF LAW (1979); Richard

Fallon, The Rule of Law as a Concept in Constitutional Jurisprudence, 97 COLUM. L. REV. 1 (1997);

Robert S. Summers, A Formal Theory of Rule of Law, 6 RATIO JURIS 127 (1993).

2010 / Rule-of-Law Metric for a Changing Legal Environment 797

characteristics almost invariably correlate highly with successful, well-de-

veloped economies and positive business climates.10

On the other hand, many societies lacking in one or more of the

supposed minimum set of legal criteria nevertheless exhibit a thriving

business sector, high levels of foreign investment, and clear paths toward

sustainable economic growth.11 In some cases, the seemingly missing

elements in the country’s legal system can be explained by the existence

of alternative institutions or practices functionally equivalent to the missing

elements.12 In other cases, however, such legal institution substitutes are

difficult to identify, and these deficiencies severely challenge underlying

law and development models, particularly the ‘‘liberal legalism’’ orthodoxy

that rule of law goes hand-in-hand with democratic government and re-

spect for basic human rights.13 Thus, there may be a fewer number of even

10See supra notes 7–9. For comments on the potential benefits of rule of law to emergingeconomies, see also THOMAS CAROTHERS, PROMOTING THE RULE OF LAW ABROAD: IN SEARCH OF

KNOWLEDGE (2006); GLOBAL PERSPECTIVES ON THE RULE OF LAW (James Heckman et al. eds.,2009).

11Compare David M. Trubek, Toward a Social Theory of Law: An Essay on the Study of Law andDevelopment, 82 YALE L.J. 1, 18 (1972) (arguing that the objective of law and change studies in

emerging societies should be to overcome the ‘‘gaps’’ which are perceived to exist between the

present state of the law and that needed to support a modernized political-economic system), withDavid M. Trubek & Marc Galanter, Scholars in Self-Estrangement: Some Reflections on the Crisis inLaw and Development Studies in the United States, 1974 WISC. L. REV. 1062, 1062–64 (1974) (la-

menting that the ‘‘core conception’’ model once espoused by these authors could, in at least some

cases, lead to authoritarian government). See also KENNETH L. KARST & KEITH S. ROSENN, LAW

AND DEVELOPMENT IN LATIN AMERICA: A CASE BOOK (1975) (describing case studies of economic,

political, and legal development in various Latin American countries during the twentieth cen-

tury); Robert B. Seidman, Law and Development: A General Model, 6 L. SOC’Y REV. 31 (1972)

(presenting Professor Seidman’s effort to construct a development model not tied to conventional

development assumptions or colored by Western culture).

12See supra note 11. Compare E. Adamson HOEBEL, THE LAW OF PRIMITIVE MAN (1954) (arguingthat ‘‘law’’ requires certain institutionalized elements, e.g., courts and sanctions), with LeopoldPospisil, The Attributes of Law, in LAW AND WELFARE (Paul Bohannan ed., 1967) (taking a moreflexible, human interaction/custom approach to law).

13See, e.g., Carothers, supra note 8, at 54–60 (expressing disappointment that rule of law hadnot developed as rapidly or in the beneficent forms he had optimistically envisioned); see alsoBrian Z. Tamanaha, The Dark Side of the Relationship Between the Rule of Law and Liberalism, 3NYU J. L. & LIBERTY 516, 519 (2008) (commenting on the potential for top-down instrumentalist

lawmaking often associated with rule of law to be abused by governments); Luz E. Nagle, OnArmed Conflict, Human Rights, and Preserving the Rule of Law in Latin America, 27 PENN. ST. INT’L

L. REV. 1, 7–9 (2008) (commenting on the difficulty of preserving rule of law under unstable or

frequently changing governments). For a fascinating historical perspective on these issues, see


more basic commonalities that are shared by rule-of-law systems. Identi-

fying such minimum legal characteristics and developing a system to mea-

sure or quantify those characteristics are necessary prerequisites for

quantifying rule of law and for using a metric to compare and contrast

the legal environment of business in different countries and over different

time periods.

The complex role of legal change in a rule-of-law legal system is typ-

ically overlooked or simply ignored in studies of legal institutions. Al-

though legal change might appear to be at odds with the predictability that

is key to a rule-of-law system, constancy does not equate with stability in a

legal system. Nineteenth-century English legal scholar Henry Maine rec-

ognized that societal stability depends on how quickly a legal system can

adapt to what he saw as unstoppable social change.14 Maine identified

‘‘legal fictions’’ and the doctrine of equity as judicial sleights of hand that

could pave the way for eventual legislative change to accommodate social

and technological evolution.15 The gradualism implicit in this system made

it possible to balance adaptability with predictability in the English legal

system. Modern legal scholars have noted practices in other stable legal

systems around the world that similarly provide for evolutionary change

without upsetting the predictability apple cart.16 Thus, the effort to char-

acterize rule of law must include key aspects of legal change theory.

generally Elliot Burg, Law and Development: A Review of the Literature and a Critique of ‘Scholars inSelf-Estrangement,’ 25 AM. J. COMP. L. 492 (1977); John Merryman, Comparative Law and SocialChange: On the Origins, Style, Decline and Revival of the Law and Development Movement, 25 AM. J.

COMP. L. 457 (1977).

14HENRY SUMNER MAINE, ANCIENT LAW 20–41 (Beacon Press ed., 1970) (1861). Maine’s six‘‘stages’’ of legal development are critically discussed in LON FULLER, ANATOMY OF THE LAW 49–57 (1968). As observed by Roscoe Pound, ‘‘Law must be stable, and yet it cannot stand still.’’ROSCOE POUND, LAW FINDING THROUGH EXPERIENCE AND REASON 23 (1960).

15Maine argued that the three instrumentalities ‘‘by which Law is brought into harmony withsociety . . . [are] Legal Fictions, Equity and Legislation.’’ MAINE, supra note 14, at 24. See alsoROSCOE POUND, INTRODUCTION TO THE PHILOSOPHY OF LAW 48–71 (rev. ed. 1954) (discussing theintersection between the doctrine of equity in Anglo-American law and the step of rule inter-pretationFthe second of Pound’s three steps of adjudicationFin the judicial process).

16See, e.g., SALLY FALK MOORE, LAW AS PROCESS: AN ANTHROPOLOGICAL APPROACH 17 (1978) (de-scribing what she calls ‘‘reglementation’’ or the rules of the game according to which indi-viduals function in society and how this establishes ‘‘semi-autonomous social fields’’ thatimpact the implementation of legislation); ROBERTO M. UNGER, LAW IN MODERN SOCIETY:TOWARD A CRITICISM OF SOCIAL THEORY 242 (1976) (arguing that communal consensus embo-died in custom is the foundation of a society rather than a bureaucratic rule of law).


This article incorporates legal change theory as an integral element in

the process of developing a metric for quantifying rule of law. In Part I, this

article identifies two fundamental types of legal change and relates these

types of legal change to one of the few models of business responsiveness

that explicitly incorporates legal change into a strategic framework.17 In

Part II, this article utilizes two fundamental characteristics of a rule of law

system derived from the pioneering work of Max WeberFnamely, auton-

omy and generality/universalityFto construct a two-axis graph where

each point can be characterized by an (x, y) coordinate pair that functions

well as a rule-of-law metric. Based on this model, four types of legal sys-

tems can be identified, only one of which is compatible long term with

market capitalism.18 Within the preferred legal model, variations in the

legal environments of different countries at a given time and evolution of

those legal environments over time can be identified and analyzed using this

approach. Finally, in Part III, this article demonstrates applications of the

rule-of-law metric in tracking the evolution of a country’s legal environment

over time, in evaluating and comparing the legal environments of business in

different countries at a particular time, and in devising strategies for a com-

pany’s foreign investment decisions to better anticipate and cope with the

evolving legal environments encountered around the globe.19

I. TWO DIMENSIONS OF LEGAL CHANGE

Management models that addressed business responsiveness to social issues

began to emerge in the 1960s and 1970s.20 Legal change, however, had little

17Robert W. Ackerman, How Companies Respond to Social Demands, HARV. BUS. REV., Jul.-Aug.1973, at 91–92. See also, ROBERT W. ACKERMAN & R.A. BAUER, CORPORATE SOCIAL RESPONSIVENESS:THE MODERN DILEMMA 348, 351–53 (1976) (contending that social demands have a life cycleover time during which public awareness and expectations for the enforcement of standardsgrow from a low point to a point when legal/regulatory compliance is forced upon a firm or anindustry); Francisco J. Arcelus & Norbert V. Schaefer, Social Demands as Strategic Issues: SomeConceptual Problems, 3 STRAT. MGMT. J. 347, (1982) (arguing that ‘‘[r]esponding to social demands

before required by law can have a number of distinct advantages for the firm.’’).

18See infra Parts II.C–D.

19See infra Part III.

20See, e.g., Keith Davis, The Case for and Against Business Assumption of Social Responsibilities, 16ACAD. MGMT. J. 312, 312–13 (1973) (comparing and contrasting the Milton Friedman ‘‘profit

maximization’’ approach with Paul A. Samuelson’s ‘‘social responsibility’’ approach); Robert


if any explicit role in most of these early models.21 Instead, the law was typ-

ically assumed to be static and more or less stable for purposes of formulating

business strategy.22 Thus, if the projected cost of correcting a business prob-

lem exceeded the anticipated legal/damages costs associated with not ad-

dressing the problem, conventional cost–benefit analysis supported taking no

action until changes in the applicable legal rules clearly mandated action or

raised the cost of not acting sufficiently to change the cost–benefit calculus.23

A. The Principle of ‘‘Living by Tomorrow’s Law’’

The shortsightedness of management approaches to social responsibility

that ignored legal change soon became evident. In one of the product

Hay & Ed Gray, Social Responsibility of Business Managers, 17 ACAD. MGMT. J. 135, 141–43 (1974)

(arguing that business approaches to social responsibility have evolved through three phases: the

profit maximize style, the trusteeship style, and the quality of life style); Rama Krishnan, BusinessPhilosophy and Executive Responsibility, 16 ACAD. MGMT. J. 658, 665–68 (1973) (surveying execu-

tives on their changing attitudes toward business responsibilities owed to employees, customers,

and the public). See generally Corporate Social Responsibility Symposium, 30 HASTINGS L.J. 1247

(1979).

21See, e.g., Lynn Sharp Paine, Law, Ethics, and Managerial Judgment, 12 J. LEGAL STUD. EDUC.153, 165 (1994) (in critiquing both the ‘‘correspondence’’ and ‘‘separate realms’’ views of the re-

lationship between law and ethics, the author observes that ‘‘what is legally permissible but eth-

ically questionable today may be legally restricted or prohibited tomorrow’’); David Silverstein,

Managing Corporate Social Responsibility in a Changing Legal Environment, 25 AM. BUS. L.J. 523,

526–27 (1987) (discussing the need for managers to better understand the changing legal envi-

ronment of business).

22See, e.g., Archie B. Carroll, The Four Faces of Corporate Citizenship, 100/101 BUS. & SOC’Y REV. 1, 7(1998) (describing why an astute manager ‘‘must go beyond mere compliance with the law’’); Edwin

M. Epstein, The Corporate Social Policy Process: Beyond Business Ethics, Corporate Social Responsibility,and Corporate Social Responsiveness, CAL. MGMT. REV., Spring 1987, at 100–01 (comparing and dis-

tinguishing the concepts of ‘‘business ethics,’’ ‘‘corporate social responsibility,’’ and ‘‘corporate social

responsiveness’’); Daniel W. Greening & Barbara Gray, Testing a Model of Organizational Response toSocial and Political Issues, 37 ACAD. MGMT. J. 467, 488–92 (1994) (‘‘. . . when legal coercion is absent

from institutional pressures, resistive responses are more likely.’’).

23A good summary of the Ford Pinto case and the disastrously backward-looking cost–benefitcalculations underlying this tragedy and public relations nightmare is found in MARIANNE M.JENNINGS, BUSINESS ETHICS: CASE STUDIES AND SELECTED READINGS 516–20 (6th ed. 2009). An-other good report of the Ford Pinto case is found in W. MICHAEL HOFFMAN, THE FORD PINTO

(1984). In Daniel T. Ostas, Legal Loopholes and Underenforced Laws: Examining the Ethical Di-mensions of Corporate Legal Strategy, 46 AM. BUS. L.J. 487, 491–98 (2009), the author criticizes the

familiar business practice of firms seeking to maximize profits utilizing a strategy of ‘‘breach and

pay,’’ where the firms intentionally violate law because inadequate penalties render the law

‘‘underenforced.’’


liability lawsuits involving the Ford Pinto, a sympathetic jury awarded total

damages exceeding $125 million,24 far in excess of the modest sum Ford

had used in its cost–benefit calculations.25 Many U.S. chemical/industrial

companies that initially gave at most lip service to the Environmental Pro-

tection Agency regulations of the early 1970s, when the penalties for

violations were still minimal, seemed stunned when increasingly strength-

ened federal legislation subsequently saddled them with staggering mon-

itoring, disposal, and cleanup costs.26

24In Grimshaw v. Ford Motor Co., the trial court entered a judgment for the plaintiffs but re-quired the passengers to remit all but $3.5 million of the jury’s original $125 million punitivedamages award as a condition of not granting a new trial. 119 Cal. App. 3d 757, 771–72 (4thDist. 1981). On appeal, the appellate court determined that the punitive damages award of$3.5 million was not excessive, and it also affirmed that the trial judge’s reduction of the juryaward was not an abuse of discretion. Id. at 818–24.

25Ford’s analysts, who performed the risk analysis on the defective Pinto fuel tank design,used a 1972 National Highway Traffic Safety Administration study that was already out of datewhen they used it and, on this basis, concluded that, on average, the total damages associatedwith one loss of life caused by a defective fuel tank would be only $200,725. See JENNINGS, supranote 23, at 519. But, seemingly unbeknownst to Ford, a revolution in U.S. product liabilitylaws was underway during this critical period, including both the transition from negligence-based product liability to strict products liability and a rapid escalation in product liabilitydamages throughout the 1970s. For example, in Note, Just What You’d Expect: Professor Hen-derson’s Redesign of Products Liability, 111 HARV. L. REV. 2366, 2366 (1998), the author observed,‘‘Through most of the twentieth century, products liability law steadily evolved toward[greater] protection of consumers, culminating in the 1960s and 1970s with widespread ju-dicial acceptance of [the strict products liability principle] which imposed liability on manu-facturers for injuries caused by dangerous products, without regard to fault.’’ By the time theGrimshaw case came to trial, Ford was facing a radically altered legal landscape. Clearly, sub-stituting $125 million for $200,725 in the cost–benefit analysis would have dramaticallyaltered the outcome. See generally Steven Kelman, Cost-Benefit Analysis: An Ethical Critique (withReplies), AEI J. ON GOV’T & SOC’Y REG., Jan.-Feb. 1981 (arguing that a cost–benefit analysis isnever an appropriate decision-making tool when there is a risk of serious human injury ordeath).

26The Toxic Substances Control Act of 1976, 15 U.S.C. § 601 (2006), authorized the EPA tocontrol the manufacture, use, and disposal of toxic substances. The companion ResourceConservation and Recovery Act of 1976, 42 U.S.C. § 6901 (2006), established a permit systemfor storage or transfer of hazardous wastes. The 1980 Comprehensive Environmental Re-sponse, Compensation, and Liability Act (CERCLA), 42 U.S.C. § 9601 (2006), also commonlyknown as the ‘‘Superfund’’ law, provided for government funding for cleanup of areas thatonce were used as hazardous waste disposal sites. This legislation created a Hazardous Sub-stance Response Trust Fund and authorized the federal government to sue the company re-sponsible for the hazardous waste dumping for reimbursement of the cleanup costs. Id. In1986, CERCLA was amended by the Superfund Amendment and Reauthorization Act to ex-pand the scope of liability for improper hazardous waste disposal. Id. In U.S. v. Olin Corp., 927F. Supp. 1502, 1516 (S.D. Ala. 1996), the district court held CERCLA’s retroactive effect


The new management reality concerning legal change was

recognized by Tom Stephens who took over in 1986 as president

and CEO of the Johns Manville Corporation as it was emerging from its

disastrous asbestos-related bankruptcy.27 Many executives regarded

Manville as the unfortunate victim of an arbitrary and capricious legal

system because the avalanche of lawsuits that drove Manville into bank-

ruptcy were premised on workplace conditions that were in compliance

with existing law and occurred before the full hazardousness of asbestos

was appreciated.28 But, instead of just bemoaning Manville’s bad luck,

Stephens was forward looking when he pragmatically observed in a mag-

azine interview, ‘‘The key to survival in today’s climate is to live by tomor-

row’s law.’’29

unconstitutional, but this decision was reversed in U.S. v. Olin Corp., 107 F.3d 1506, 1515 (11thCir. 1997). See also Martin A. McCrory, Who’s on First: CERCLA Cost Recovery, Contribution, andProtection, 37 AM. BUS. L.J. 3, 4 (1999) (discussing the impact that CERCLA has had on the

cleanup of hazardous waste sites). As in the Johns Manville asbestos case (see David Silverstein,

supra note 21, at 530–34; infra notes 27–29), management failed to appreciate the potential for and

consequences of legal change in the environmental field. Jonathan Harr’s book, A Civil Action, is agripping account of the victimization of a Massachusetts community (Woburn) by a long history

of reckless industrial waste disposal practices leading to a legacy of cancer, birth defects, and other

health problems for the residents. JONATHAN HARR, A CIVIL ACTION (1996).

27A good account of the Johns Manville case and the aftermath of the bankruptcy is found inGEORGE A. STEINER & JOHN F. STEINER, BUSINESS, GOVERNMENT AND SOCIETY: A MANAGERIAL

PERSPECTIVE 528–35 (2003).

28Silverstein, supra note 21, at 527–30. In MARIANNE M. JENNINGS, BUSINESS: ITS LEGAL, ETHICAL

AND GLOBAL ENVIRONMENT 58–59 (8th ed. 2009), Professor Jennings observed that ‘‘[f]irms canchoose to go beyond the law and perhaps avoid regulation that might be costly or litigationthat can be devastating.’’ But, even though at least some of ‘‘the issues relating to the prob-lems with asbestos dust in the lungs of asbestos workers and installers were clear in the 1930s,’’instead of seizing ‘‘the opportunity to take preventive actions, [Manville] chose to wait out thecycle. The result was a ban on asbestos and litigation . . . that forced the largest producer,Johns Manville (now Manville), into bankruptcy. Leadership choices were available in the1930s . . .’’ but that leadership was not forthcoming from the management of that earlier era.Id. But see Daniel T. Ostas, Cooperate, Comply or Evade? A Corporate Executive’s Social Responsi-bilities with Regard to Law, 41 AM. BUS. L.J. 559, 574 (2004) (arguing that, even when business

executives are operating in a relatively predictable legal environment, they confront nuances in

diverse fact situations that present difficult decisions about whether to comply, cooperate, or

evade the legal rules).

29See Jagannath Dubashi, Insulated From Reality, FIN. WORLD, June 27, 1989, at 65 (discussingthe lessons that CEO Tom Stephens learned from watching the company go through bank-ruptcy proceedings).


B. Ackerman’s Effort to Introduce Legal Change into Management Models

Although Tom Stephens may have been the first CEO to articulate the

principle of ‘‘living by tomorrow’s law,’’ a similar concept was expressed

a decade earlier. Robert Ackerman’s 1973 Harvard Business Reviewarticle, ‘‘How Companies Respond to Social Demands,’’30 has been

called a ‘‘groundbreaking work on corporate responsiveness.’’31 As

noted by William C. Frederick, a recognized authority in the field,

Ackerman’s model also came closer than most to presenting a dynamic

system that incorporates elements of change into a model of social respon-

siveness.32 Ackerman’s model squarely rejected a static view of law. Instead

of the conventional black-and-white management view of legal issues,

Ackerman argued that they fall along a spectrum as illustrated in Figure 1

above.

Ackerman argued that managers tend to view legal issues too sim-

plistically as falling either at one end of this spectrum or the other. By

treating a legal environment issue in this way, however, a manager may be

forfeiting the opportunity to exercise influence during the most critical

Ackerman's

100% Discretion0% Regulation

0% Discretion100% Regulation

ZONE OF DISCRETION SPECTRUM

Zone of Discretion

Figure 1. Ackerman’s Zone of Discretion.

30Ackerman, supra note 17.

31Steven L. Wartick & John F. Mahon, Toward a Substantive Definition of the Corporate Issue Con-struct: A Review and Synthesis of the Literature, 33 BUS. & SOC’Y 293, 294 (1994).

32William C. Frederick, From CSR1 to CSR2, 33 BUS. & SOC’Y 150, 152 (1994) (a belated pub-

lication of Professor Frederick’s well-known and often-cited 1978 Working Paper). For an en-

lightening discussion of a later, somewhat controversial work by Dean Frederick on business

ethics, see Robbin Derry et al., Nature’s Place in Legal and Ethical Reasoning: An Interactive Com-mentary on William Frederick’s Values, Nature and Culture in the American Corporation, 36 AM. BUS.

L.J. 633, 634–35 (1999).


time periodFthat period when the legal issues are neither black nor white,

which Ackerman called the ‘‘Zone of Discretion.’’33

Some legal environment issues, for example, equal employment op-

portunity and protection of the environment, according to Ackerman,

‘‘have progressed so far through the Zone of Discretion that their final

dimensions are beginning to take shape.’’34 Areas that are heavily regu-

lated by legislation, administrative regulation, and judicial decisions leave

little room for the exercise of managerial discretion. Other less-well-

defined issues, however, may still be located in the middle of the Zone of

Discretion. For these issues, astute and perceptive managers have consid-

erable opportunities to slow or, perhaps, even reverse emerging legal reg-

ulation. At least they might participate in shaping its dimensions and

prepare their firms to deal with the consequences.35 Thus, forecasts of

33Ackerman, supra note 17, at 91–92. Ackerman described this middle period as follows:

There is an argument that appears to justify ignoring . . . corporate responsiveness. Itholds that social expectations for business’s behavior become legitimate only when thegovernment requires compliance, and to the extent that governmental regulations exactpenalties, a social issue . . . can be managed just like any other business problem. Thefallacy in this reasoning lies in the premise that corporate action on social issues is eithervoluntary or required. In fact, during the period when responsiveness is most important,it is neither. For every issue there is a time period before it becomes a matter of socialconcern, and espousing the issue may even arouse economic and social sanctions. Thereis also a time when its acceptance is so widespread that adherence is an unquestionedpart of doing business (child labor laws create little anxiety in 1973). Between those twopoints there is a period . . . [that] might be called a zone of discretion in which . . . thecompany . . . still has discretion in the timing and strength of [its] response.

Id.

34Id. at 92.

35Id. The Ackerman model has not received a lot of attention in the field of business ethics andcorporate social responsibility, possibly because it implies two realities that may be anathemato some business ethicists: first, there may be a point in time when it is too soon for business tobe proactive on a social issue; second, shrewd and timely preemptive business strategy may beable to reverse a regulatory trend. For example, in Daniel T. Ostas, Legal Loopholes and Un-derenforced Laws: Examining the Ethical Dimensions of Corporate Legal Strategy, 46 AM. BUS. L.J.487, 487–88 (2009), the author is critical of business strategies by which ‘‘firms routinely seek to

influence changes in the law through the lobbying process [and other] legal strategies [such as the]

myriad of precautionary actions taken in anticipation of legal claims . . . .’’ Although this article

discusses the ethics of business lobbying activities in the context of ‘‘public relations,’’ the analysis

does not directly address the more difficult ethical question of business efforts to shape law by

influencing public opinion. In comparison with the Ackerman model, Professor Marianne M.

Jennings, a well-recognized business ethics scholar, has for many years utilized a different graph-

ical approach to illustrate the principle of ‘‘living by tomorrow’s law.’’ A graph by Jennings plots


legal change are an indispensable element of successful management un-

der the Ackerman paradigm.

C. Disaggregating Two Types of Legal Change

Ackerman’s Zone of Discretion paradigm can be used as a prism to disag-

gregate and analyze change along two key dimensions as recognized in the

law and change literature, namely (1) society-wide epochal social change

based on macroeconomic development stages and (2) limited, issue-

directed change based on a society’s changing receptivity to legal inter-

vention in specific subject areas.36 These two change dimensions correlate

respectively with two traditional rationales for government intervention in

the commercial system: first, to redistribute costs (losses, risks) that would

otherwise fall unfairly on a particular individual or group under a laissez-

faire, ‘‘let the losses fall where they may’’ system and, second, to establish

deterrence against repetition of undesirable social conduct.37 For example,

product liability evolution in the United States can be viewed as, first, a

shift from a personal responsibility based doctrine of caveat emptor,38 to a

management options and company costs over time, showing that options rapidly and progres-

sively decrease while costs rapidly escalate. See MARIANNE M. JENNINGS, BUSINESS: ITS LEGAL,

ETHICAL AND GLOBAL ENVIRONMENT 60 (8th ed. 2009). The Jennings model implies that it is never

‘‘too soon’’ for proactive business responses to social issues, and there is no suggestion that public

sentiment can be altered sufficiently to actually reverse the direction of an evolving social issue.

36See Arcelus et al., supra note 17, at 349–51(arguing that ‘‘strategic’’ corporate responsivenessto social issues is not a simple choice between whether corporate action should ‘‘lead or lag’’the evolution of a social demand, as suggested by Ackerman and Bauer, but rather a dynamicdetermination of ‘‘what response to make at any given point in time during the evolution ofthe demand’’); David Silverstein, A Model for Integrating the Legal Environment of Business intoCSR Analysis, 32 BUS. L. REV. 117, 124–32 (1999) (describing legal changes typically associated

with epochal, macrolevel social change and with issue-directed microlevel social change).

37See Dix W. Noel, Manufacturers of ProductsFThe Drift Toward Strict Liability, 24 TENN. L. REV. 963,1009–11 (1957) (‘‘First, . . . such [strict] liability would tend to promote product safety by correction

of defects at their source . . . Third, . . . a strict liability of the manufacturer would serve to provide a

desirable spreading of the risk or of the loss caused by defective products [which would] be

accomplished by . . . the manufacturer [passing] on the costs to the users of the product by raising

prices . . . .’’); William L. Prosser, The Fall of the Citadel (Strict Liability to the Consumer), 50 MINN. L.

REV. 791, 799–800 (1966) (‘‘the public interest in human safety requires the maximum possible pro-

tection for the user of the product, and those best able to afford it are the suppliers of the chattel.’’).

38See supra note 37. For a discussion of social changes associated with the evolution of modernproduct liability law in the United States, see also LAWRENCE M. FRIEDMAN, A HISTORY OF AMERICAN

LAW 684–85 (1985); LAWRENCE M. FRIEDMAN, AMERICAN LAW IN THE 20TH CENTURY 349–76 (2002).


largely deterrence-based negligence (fault-based) standard,39 and later to a

redistribution of wealth oriented strict products liability (liability without

fault) approach.40

Change in macroeconomic development stages (the first type of legal

change) is correlated with a society’s willingness to embrace legal mecha-

nisms as a way to redistribute society’s wealth and financial burdens.41 In-

tervention in specific subject areas is correlated with a society’s willingness

to yield personal freedom and responsibility when it believes that govern-

ment is needed to meet a perceived social threat.42 Disaggregation of

change through the prism of Ackerman’s paradigm permits better iden-

tification of and sharper differentiation among the principal forces that

drive social change. Disaggregating and separately analyzing the two types

of legal change leads to important management insights and implies differ-

ent management response strategies.

1. Applying Ackerman’s Paradigm to a Stages of Development Change Model

A first category of social/legal change is large-scale macrolevel change oc-

casioned by periodic epochal shifts in a society’s culture. One familiar ver-

sion of epochal change is the three-stage economic development model of

economist W.W. Rostow in his 1956 work The Take-Off into Self-Sustained

39See supra notes 37–38.

40See supra notes 37–39; see also PETER W. HUBER, LIABILITY: THE LEGAL REVOLUTION AND ITS

CONSEQUENCES (1990) (presenting a comprehensive review of the evolution of product liabilitylaw in the United States during the twentieth century); RICHARD NEELY, THE PRODUCT LIABILITY

MESS (1988) (product liability law as seen through the eyes of a former state supreme courtjudge who, despite personal reservations about the legal foundations of ‘‘strict liability’’ doc-trine, readily acknowledged its utility in compensating injured plaintiffs).

41See Carl Auerbach, Law and Social Change in the United States, 6 UCLA L. REV. 516, 529–32(1959) (describing how the excesses of nineteenth-century capitalism in the United States paved

the way for twentieth-century legislative reforms); Wallace Mendelson, Law and the Development ofNations, 32 J. POL. 223, 226–29 (1970) (comparing a country’s prevailing legal rules during an ‘‘era

of industrialization’’ with those during an ‘‘era of the welfare state’’). Whereas Mendelson focused

on legal rules being affirmed or modified by court decisions to accommodate the social needs of a

particular stage of development in U.S. history, Auerbach analyzed the changing social forces that

motivated legislative reforms.

42See, e.g., LAWRENCE M. FRIEDMAN, LAW AND SOCIETY: AN INTRODUCTION 57–59 (1977); KARL

POLANYI, THE GREAT TRANSFORMATION 201–08, 223–36 (1944); William M. Evan, Law as anInstrument of Social Change, in APPLIED SOCIOLOGY: OPPORTUNITIES AND PROBLEMS 285–93 (AlvinW.Gouldner & S.M. Miller eds., 1965).


Growth.43 Rostow argued that modern, developed societies evolved from a

primitive, less-developed stage, through a successful ‘‘take-off ’’ stage (dur-

ing which rapid economic development occurred over a relatively com-

pressed timeframe), before eventually leveling off into a stage of sustained

economic maturity. In Rostow’s development model, an essential prereq-

uisite to a successful take-off was for a society to first accumulate an

adequate capital excess or reserve with which to finance the heavy costs of

industrialization.44 Analogous to the challenge of successfully launching a

satellite into orbit, the Rostow model suggested that, if a society attempted

a premature take-off before accumulating sufficient ‘‘fuel’’ (capital), the

result could be an abortive launch leading to a social and economic ‘‘crash’’

instead of attaining sustained economic maturity.45

Wallace Mendelson offered a parallel stages-of-growth model that

linked legal change, principally through the judicial process, to Rostow-

like economic development stages.46 Mendelson’s development model for

the United States was based on three periods of evolution of the business–

government interface: Stage 1Fthe era of nationalism, Stage 2Fthe era

of industrialization, and Stage 3Fthe era of the welfare state.47

Stage 2 in Mendelson’s development model, comparable to Rostow’s

take-off into sustained economic growth,48 was characterized by a laissez-

faire legal system that Mendelson argued was intentionally designed

‘‘to increase production by promoting economic freedom.’’49 Examples

of such laissez-faire legal rules included ‘‘caveat emptor’’ (let the buyer

beware), ‘‘privity of contract’’ that ‘‘protected manufacturers of defective

43Walt Whitman Rostow, TheTake-Off into Self-sustained Growth, 65 ECON. J. 25 (1956).

44Id.

45For example, in Rostow, supra note 43, at 29–30, the author argued that ‘‘a necessary but notsufficient condition [is] the fact that the proportion of net investments to national income risesfrom (say) 5 per cent to over 10 per cent, definitely outstripping the likely population pressure[for consuming that income].’’

46Mendelson, supra note 41, at 226–29.

47Id.

48See generally Rostow, supra note 43.

49Mendelson, supra note 41, at 226. As observed by Karl Polanyi, ‘‘[t]here was nothing naturalabout laissez faire: free markets could never have come into being merely by allowing things totake their natural course . . . laissez faire itself was enforced by the state.’’ KARL POLANYI, THE

GREAT TRANSFORMATION 139 (1944).


goods from liability to third-party consumers, and . . . [the fellow servant

doctrine] that all but freed employers from the cost of industrial accidents.’’50

The objective of this laissez-faire legal system according to Mendelson was to

promote the accumulation and preservation of capital. ‘‘[Legal rules] that

block the claims of labor and consumer,’’ argued Mendelson, ‘‘promote the

growth of investment capital. And if a ‘traditional’ society wants mass pro-

duction, its first economic task is to accumulate capital.’’51

But, Mendelson asked, ‘‘how does a developing nation accumulate

capital?’’52 Although some of the necessary capital can be borrowed, a

country must save which, Mendelson said, ‘‘means much more than

putting money in a bank.’’53 He argued that legal rules that ‘‘suppressed

worker and consumer claims . . . fostered capital accumulation. [These

rules] were part of a socialization process that glorified private enterprise

and for a time at least kept the common man in his humble place.

This, with the resulting stimulation of business energy and appetite,

is the crux of economic modernization.’’54

Carl Auerbach, another scholar who explicitly linked legal change (es-

pecially legislative reform) to epochal social change, noted that the latter

nineteenth/early twentieth century was a period of growing social unrest

in the United States.55 This marked the beginning of a lengthy transition

period of the United States from Mendelson’s Stage 2 into Stage 3, the era of

the welfare state.56 By this time, the industrialization of America was well

underway and the position of business was secure. According to Mendelson:

Having achieved mass production, the United States entered stage threeFtheera of the welfare state. Consumer goods were so potentially plentiful and sonear at hand that there was less need to restrain consumption. We could [atlast] afford Social Security, collective bargaining, minimum wages, the forty-hour week, Medicare, and similar measures. The common element in these

50Mendelson, supra note 41, at 226.

51Id.

52Id. at 227.

53Id.

54Id.

55Auerbach, supra note 41. A dramatic portrayal of business abuses of employees, consumers,and the general public during this timeframe is found in the famous novel by UPTON SINCLAIR,THE JUNGLE (1906).

56Mendelson, supra note 41, at 228.


programs is a redistribution of wealth. Income that earlier might have beenchanneled toward capital formation was now diverted to provide goods andservices for the common man. His father’s unwilling investment in Americanplant capacity began at last to pay him dividends.57

Summarizing the achievements of Stage 3, Mendelson observed: ‘‘The

weak have inherited the judicial world just as the nationalists did in stage

one, and the industrialists in stage two.’’58

Applying Ackerman’s paradigm to Mendelson’s stages-of-develop-

ment model leads to Figure 2 above.

Figure 2 clarifies Ackerman’s observations about the timeliness of

management intervention in an evolving social issue along a first dimen-

sion of legal change. Ackerman’s reference to a ‘‘time period before [a so-

cial issue] becomes a matter of social concern, and espousing the issue may

even arouse economic and social sanctions’’59 corresponds to Mendelson’s

Stage 2 era of industrialization.

Ackerman’s example of child labor laws is particularly apropos. Early

twentieth century efforts in the United States to regulate child labor ini-

tially provoked hostile responses in many quarters, including families as

well as employers.60 At that time, it was arguably too soon for business to

Figure 2. Zone of Discretion Along a Stages-of-Development Scale.

57Id.

58Id. at 229; see also A.V. DICEY, LAW AND PUBLIC OPINION IN ENGLAND 9–16 (1905) (chroniclingthe legal changes associated with the transition of England from Mendelson’s era of indus-trialization into the era of the welfare state).

59Ackerman, supra note 17, at 92.

60See, e.g., HUGH D. HINDMAN, CHILD LABOR: AN AMERICAN HISTORY 4–7 (2002) (presenting acomprehensive description of the gradual evolution of child labor protections in the twen-tieth-century United States and the parallel development of a social consciousness supportive


take a lead on this controversial social issue. On the other hand, by the

1970s, child labor regulation was firmly established. Ackerman’s Zone of

Discretion, where the company ‘‘still has discretion in the timing and

strength of the response,’’61 corresponds to a transition period between

Mendelson’s era of industrialization and his era of the welfare state.

2. Lawrence M. Friedman’s Model

A second category of social/legal change is more limited and issue-specific.

Within any macro stages-of-development epoch, issue-directed types of

social/legal change may occur depending on a society’s openness or resis-

tance to the specific change. The literature in this field recognizes two

types of what might be called Susceptible-to- Change (SC) issues where

change may be readily effected by ordinary legal processes.62 The litera-

ture also recognizes what might be called Resistant-to-Change (RC) issues

that tend to be stubbornly resistant to traditional top-down lawmaking.63

Drawing on the work of Stanford Law Professor Lawrence M. Fried-

man, SC issues are those that a society either does not feel strongly about

(thereby leaving a vacuum where top-down lawmaking can easily lead the

way) or, alternatively, issues that a society cares deeply about and welcomes

government intervention to address a particular problem.64 The rapid ac-

ceptance of the Uniform Commercial Code (UCC) during a relatively

brief period illustrates the first variety of SC issues.65 Although the UCC

provoked controversy among attorneys, judges and law professors, it was

of those protections). For accounts of child labor abuses in the United States during the earlytwentieth century, see EDWIN MARKHAM ET AL., CHILDREN IN BONDAGE 15–39 (Arno & The NewYork Times 1969) (1914).


62See, e.g., Robert F. Meagher & David Silverstein, Law and Social Change, in LAW AND SOCIAL

CHANGE: INDO-AMERICAN REFLECTIONS 1, 22–25 (Robert F. Meagher ed., 1988) (describing howsometimes law can lead change while in other cases law can only follow change).

63Id.

64Professor Lawrence M. Friedman coined the term ‘‘zone of slack issues’’ to identify socialissues which are receptive to change. See LAWRENCE M. FRIEDMAN, LAW AND SOCIETY: AN INTRO-

DUCTION 166–68 (1977).

65Id.; see also LAWRENCE M. FRIEDMAN, A HISTORY OF AMERICAN LAW 674–76 (1985) (describingthe emergence of modern commercial law in the United States).


mostly a nonevent to the average American, and businesses generally wel-

comed a more homogeneous body of commercial law.66

The landmark National Environmental Policy Act of 196967 (legisla-

tion that created the Environmental Protection Agency) illustrates the sec-

ond variety of SC issues. Following a tumultuous decade of environmental

awakening, marked by Rachel Carson’s clarion warning about pesticides in

Silent Spring68 and one particularly dramatic oil spill,69 the American peo-

ple welcomed government intervention in a problem they saw as being

beyond individual control.70

By contrast, RC issues are those that a society cares deeply about

where intervention by government is seen as a threat to freedom and per-

sonal choice. RC issues commonly concern such intensely personal matters

as family, religion, nationalism, ethnicity, and custom.71 Many seemingly

senseless ethnic and nationalistic conflicts around the world are compre-

hensible only in terms of the concept of RC issues. If change is going to

come to an RC issue, the change is going to have to come from the grass-

roots up, that is, from the people themselves.72


6742 U.S.C. §§ 4321–4370f (2006).

68RACHEL CARSON, SILENT SPRING (1962). It has been said that ‘‘[t]he environmental movementin the United States began in 1962 with the publication of Rachel Carson’s book, Silent Spring.’’JEFFREY F. BEATTY & SUSAN S. SAMUELSON, BUSINESS LAW 965 (3d ed. 2004).

69The American public did not pay much attention to oil spills until the shocking Torrey Canyondisaster, a supertanker that ran aground on Pollard Rock off the coast of England on March18, 1967. At the time, this resulted in the largest oil spill in history, and it made headlinesaround the world. See EDWARD COWAN, OIL AND WATERFTHE TORREY CANYON DISASTER (1968);RICHARD PETRO, IN THE WAKE OF THE TORREY CANYON (1968). The Torrey Canyon spill was spe-cifically cited in the U.S. Senate Congressional Record, 115 CONG. REC. 33854 (1969), duringpassage of the National Environmental Policy Act.

70See FRIEDMAN, supra note 65, at 680–81 (describing how changing social attitudes paved theway for important legal changes); James Q. Wilson, The Politics of Regulation, in THE POLITICS OF

REGULATION 357 (James Q. Wilson ed., 1980). The ‘‘EPA was born not because scores of peoplewere dying from pollution, but because the potential (and possibly large) effects of pollutionhad become a matter of concern.’’ Id. at 384. See also Alfred Marcus, Environmental ProtectionAgency, in POLITICS OF REGULATION, supra, at 267.

71Professor Lawrence M. Friedman coined the term ‘‘zone of deep defense issues’’ to identifysocial issues which are resistant to change. FRIEDMAN, supra note 64, at 166–68.

72A dramatic, uplifting example of a zone of deep defense issue (religion) was the immediateflourishing of religion in the countries formerly dominated by the Soviet Union as soon as


3. William M. Evan’s Continuum of Resistance to Law

Although his writings somewhat preceded those of Lawrence M. Fried-

man, as discussed above, William M. Evan’s description of a ‘‘Continuum

of Resistance to Law’’73 perfectly captures and applies Friedman’s ideas

about ‘‘zone of slack issues’’ (SC issues) and ‘‘zone of deep defense issues’’

(RC issues).74 Evan utilized his Continuum to address whether the judicial

or legislative branch of government was more likely to be effective as a

vehicle for initiating legal change.75 ‘‘The opposing views of the function of

law,’’ Evan wrote, ‘‘suggest a hypothetical continuum of the amount of

potential resistance to the enactment of a new law.’’76

On the one hand, he argued, ‘‘[w]hen there is likely to be zero per cent

resistance to a law, one would question the need for it, since complete agree-

ment between the behavior required by the law and the existing customs or

morals apparently exists.’’77 On the other hand, he continued, ‘‘[a]t the other

extreme, where there is likely to be 100 per cent resistance to a law, one would

expect the law to be totally ineffective, because nobody would enforce it.’’78

As Evan observed, ‘‘[n]o law would ever emerge if these two extremes

existed at all times.’’79 But, in the real world, a society is never located at

Soviet hegemony collapsed in 1990. Seventy years of brutal Stalinist religious repression hadmerely driven religious practice underground, but did not stamp it out. But, zone of deepdefense issues have a dark face as well. Thus, more than fifty years after passage of India’santi-dowry law, this much-criticized Hindu tradition, linked over the years to numerouswomen’s deaths, continues to be widely practiced. In another example, a recent news article,Mark Magnier, Child Marriage Still Common in India, BOSTON GLOBE, Nov. 27, 2009, at A22,reported that a 2006 law which set the legal ages of marriage in India at eighteen for womenand twenty-one for men has thus far had only ‘‘limited impact’’ on curbing a ‘‘centuries-oldtradition of [parent-arranged] child marriage . . . .’’ Modern terrorism as well can be seen asan expression of zone of deep defense issues. For an insightful analysis of how the ‘‘living’’ orcustomary law practiced in a society can be radically at variance with the formal ‘‘top-down’’law, see Eugen Ehrlich, The Study of the Living Law, in SOCIETY AND THE LEGAL ORDER 149–54(Richard D. Schwartz & Jerome H. Skolnick eds., 1970).

73Evan, supra note 42, at 556.

74See supra notes 62–72 and accompanying text.

75Evan, supra note 42, at 557–58.

76Id. at 556.

77Id.

78Id.

79Id.


one of those extremes, but rather is located somewhere in between. Evan

explained that

[b]etween these ends of our continuum, there are evidently two importantthresholds . . . [one] at the lower end of [the] continuum . . . where a certaindegree of nonconformity [forces society to try] to control it by codifying mores[and] at the higher end of our continuum there is a threshold of such massiveresistance to a new law that enforcement is impossible.80

In focusing on the intermediate portion of the continuum of resistance to

law, Evan believed that ‘‘the legal system becomes involved in an educa-

tional as well as in a social control task.’’81 Thus, for a legal change to be

successful in the face of some substantial, but not insurmountable, public

resistance, Evan argued that ‘‘the source of the new law [must] be author-

itative and prestigeful.’’82

Furthermore, he continued, ‘‘the more drastic the social change to be

effected by law, i.e., the higher the proportion of potential resistance . . .,

the more authoritative and prestigeful the lawmaking agency should be to

effect the change.’’83 Because Evan considered ‘‘legislative lawmaking’’

more authoritative and prestigeful than ‘‘judicial lawmaking,’’ in the Amer-

ican system of government, he urged that ‘‘legislative lawmaking’’ be em-

ployed ‘‘when there is a low degree of [social] consensus regarding the

norms involved.’’84 On this basis, for example, Evan argued that school

desegregation would have proceeded more smoothly and effectively if

Congress had been courageous enough to act instead of forcing this con-

troversial issue on the Supreme Court in the 1954 Brown case.85

80Id.

81Id.

82Id. at 557.

83Id.

84Id. at 557–58.

85Id. at 558 (referring to Brown v. Bd. of Educ., 347 U.S. 483 (1954)). It is interesting toconsider currently controversial social issues in the United States, for example, abortion andgay marriage, through the lens of Evan’s ‘‘continuum of resistance to law’’ and whether suchsocial issues would not be better addressed by the legislative rather than the judicial branch ofgovernment. But, as observed by a noted constitutional law scholar, ‘‘[t]he Supreme Court is atleast nominally a court but in some respects is certainly a legislative body.’’ Geoffrey C. HazardJr., The Supreme Court as a Legislature, 64 CORNELL L. REV. 1, 1 (1978). Cf. JEFFREY ROSEN, THE

MOST DEMOCRATIC BRANCH xv (2006) (urging Supreme Court justices to be sensitive to main-

stream politics and public consensus).


4. Applying Ackerman’s Paradigm to Evan’s Continuum

Evan’s Continuum of Resistance to Law can alternatively be considered a

‘‘continuum of receptivity to legal change,’’ and this model can readily be

integrated with the concept of RC and SC issues. Ackerman’s framework

can then be superimposed on the Receptivity-to-Change Scale, leading to

Figure 3 above.

On the left side of the Receptivity-to-Change Scale are ‘‘new’’ and RC

issues. When a new social issue arises, based on new technologies or new

social organizations, for example, existing law often fails to address it.86

Thus, for at least a period of time, the new issue may reside in the left

region of the scale. Businesses founded on new technologies, for example,

bungee jumping or electronic commerce, often thrive initially in the ab-

sence of restrictive government regulation.87 Whereas RC issues remain

Figure 3. Zone of Discretion Along a Receptivity-to-Change Scale.

86A good example is the near-anarchy that prevailed on city streets in the early days of theautomobile, prior to enactment of any significant automobile regulation. See, e.g., PeterDeMarco, A Century Ago, Driving Laws Tamed Boston’s Wild Streets, BOSTON GLOBE, Oct. 13, 2009,at B1. ‘‘Back then [1909] there were no street signs, no stop signs, no traffic lights, no doublecenter lines, no traveling lanes, and no yield signs. Automobiles had to battle horse-drawncarriages and wagons, bicyclists, trolleys and pedestrians for space on the road . . . [and] therewere scarcely any laws to obey.’’ Id. at B1, B5. By the 1920s, however, most of the automobileand traffic control regulations familiar to us today were in place.

87A 1992 newspaper article commented on rapidly evolving regulation of what was then still arelatively new phenomenonFthe bungee-jumping business. Paul J. Lim, Bungee Jumping’sUnencumbered Cord Gets Tangled, WALL ST. J., Aug. 11, 1992, at B2. After noting how this dare-devilish fad had quickly ballooned into a $70 million-a-year nationwide industry ‘‘unencum-bered by regulatory measures or steep start-up costs,’’ the article described how a string ofrecent accidents was leading states to regulate or even ban some forms of the sport. ‘‘As oftenhappens in a fledgling industry, bungee jumping has come to the end of its period of un-trammeled growth and is entering an uncertain phase of government supervision.’’ Id. For


stuck in the left region of the scale, resistant to regulatory attempts, how-

ever, SC issues will shift to the right, sometimes slowly, sometimes more

rapidly, along the scale in response to some combination of social and reg-

ulatory pressures.

Ackerman’s Zone of Discretion corresponds to a transition zone

along the Receptivity-to-Change Scale where social issues may be in flux

between RC and SC issues and where, based on Evan’s analysis, legal

change can be accomplished if properly approached. For a social issue that

remains firmly rooted as an RC issue, change efforts are likely to be futile

and, as observed by Ackerman, ‘‘espousing the issue may even arouse

economic and social sanctions.’’88 Again drawing on Ackerman’s child

labor example, in the early part of the twentieth century, child labor in the

United States was still largely an RC issue to families who were reliant on

their children’s help running the family farm or alternatively on their

factory earnings, however meager, and many of these families deeply

resented early efforts by government elites to establish age and working-

hour limits.89 At this point, according to the Ackerman model, it was still

too soon for business to try to be proactive or to be too far in advance of

prevailing social mores.

Based on the two dimensions of legal change as discussed above, it

is possible to construct a two-dimensional matrix of Ackerman’s Zone of

Discretion which can be utilized as a guide for incorporating legal change

similar reasons, many investors and financial analysts link the disastrous 2000–2001 ‘‘crash’’ ofU.S. technology company stocks to the U.S. Justice Department’s initiation of an antitrustaction just two years earlier against Microsoft Corp. For example, in James K. Glassman, IsGovernment Strangling the New Economy?, WALL ST. J., Apr. 6, 2000, at A22, in commenting on anunfavorable court ruling in the U.S. Department of Justice antitrust suit against Microsoft, theauthor observed: ‘‘What investors are realizing is that the environment that helped producethe high-tech boomFlow regulation, low taxes, minimal government intervention . . . Fischanging profoundly.’’ This step sent an unmistakable signal that the technology industry wasnow in the government’s crosshairs.


89Id.; see also supra note 60 and accompanying text. Child labor continues to be a serious andcontroversial issue in modern emerging economies. See, e.g., Timothy A. Glut, Changing theApproach to Ending Child Labor: An International Solution to an International Problem, 28 VAND. J.TRANSNAT’L L.J. 1203, 1204–10 (1995) (discussing the slow progress toward establishing a cus-

tomary international law rule against the exploitation of child labor). Some U.S. companies have

been the target of consumer protests and boycotts over their sale of imported products allegedly

produced in factories using child labor or guilty of other human rights abuses. A good description

of growing consumer consciousness about these issues is found in JENNINGS, supra note 23, at 234.


considerations into management strategy.90 The management response strat-

egies appropriate to an anticipated social transition along the macro-change

scale (Figure 2) may not also be the most appropriate responses to an antic-

ipated transition along the micro-change scale (Figure 3). Because epochal,

macrolevel change is ordinarily beyond the control of any industry, much less

one firm, a preferred response to anticipated macrolevel change is typically to

adapt the firm and its operations to accommodate the expected change.91 On

the other hand, a microlevel, issue-directed social change, still located in

Ackerman’s Zone of Discretion, may well be amenable to carefully designed

preemptive action.92 Timely industry self-regulation, for example, well pub-

licized to the intended audience, coupled with public education/awareness

campaigns, often can slow or even reverse growing public support for formal

legislative, regulatory, or judicial intervention by alleviating public concerns

and raising doubts about the desirability of more government involvement,

thereby reducing society’s receptivity to the developing legal change.93

The rule-of-law metric, as described in Part II below, can be used in

conjunction with these models of legal change to trace the evolution of the

legal environment over time and to guide managers in ‘‘living by tomor-

row’s law.’’

90See Silverstein, supra note 36, at 133–34 (describing a ‘‘Management Strategy Matrix’’ inwhich Ackerman’s Zone of Discretion is a two-dimensional, hexagonally shaped region on agraph, and management response strategies to a changing legal environment can be tailoredaccording to whether the principal driver of legal change is epochal, macrolevel developmentchange or microlevel issue-directed change).

91Id. at 135.

92Id. at 135–36.

93Id. A good example of such a strategic business response has been the reaction of the fastfood industry to charges that it promotes unhealthy eating habits and obesity. Faced withlawsuits, for example, Pelman v. McDonald’s Corp., 237 F. Supp. 2d 512 (S.D.N.Y. 2003), aff ’d,396 F.3d 508 (2d Cir. 2005), and the specter of growing industry regulation, healthier choices,such as salads and fresh fruit, were introduced to fast food menus. For example, a news article,Tami Abdollah, L.A. Eyes Limits on Fast-food Eateries: Officials Mull Moratorium, BOSTON SUNDAY

GLOBE, Sept. 16, 2007, at A22, commented on industry efforts to head off further regulation:‘‘Diners can choose salads over burgers, yogurts over shakes, and grilled over fried these days.And many food manufacturers have reconfigured their recipes to eliminate trans fats, themost unhealthful saturated fats . . . .’’ At the same time, the industry has discreetly endeavoredto raise concern in the public mind about how much government intrusion into personaleating choices they are willing to tolerate. Donuts may not be good for us, but few people areready to accept a government ban.


II. DEVELOPING A RULE-OF-LAW METRIC

The preceding discussion illustrates that rule of law can be compatible with

legal change if legal change does not occur randomly but rather occurs in

response to well-understood social forces and by means of transparent

procedures. Thus, predictability of outcomes and transparency in the rules

and processes by which legal change is accommodated are directly asso-

ciated with rule of law and must be accounted for in developing a rule-of-

law metric. Based on the principles of legal change as discussed above, this

article now turns to developing a rule-of-law metric for use in comparing

legal environments in different countries and at different times.

A. Problems in Characterizing and Quantifying Rule of Law

For more than half a century, a prevailing view motivating Western foreign

aid approaches was that rule of law correlated in some positive and sig-

nificant way with economic development and an attractive business climate

for foreign investment.94 For example, one author observed,

The conventional wisdom within the international development community isthat foreign direct investment (FDI) is an important component of economicgrowth and prosperity in transitional and developing countries and that acrucial, if not decisive, factor in enticing such investment is a stable, consistent,fair, and transparent legal and judicial system.95

94See supra notes 7–8. For more detailed discussions of theoretical and/or empirical correlationsbetween rule of law and economic success, see, for example, Stephan Haggard et al., The Rule ofLaw and Economic Development, 11 ANN. REV. POL. SCI. 205 (2008); Susan D. Franck, Judicial Inde-pendence and Legal Infrastructure: Essential Partners for Economic Development: Foreign Investment, In-vestment Treaty Arbitration, and Rule of Law, 19 PAC.MCGEORGE GLOBAL BUS. & DEV. L.J. 337, 342–343

(2007); James R. Jones, Open Markets, Competitive Democracy, and Transparent and Reliable Legal Systems:The Three Legs of Development, 83 CHI.-KENT L. REV. 25 (2008); Randall Peerenboom, Social Networks,Rule of Law and Economic Growth in China: The Elusive Pursuit of the Right Combination of Private andPublic Ordering, 31(2) GLOBAL ECON. REV. 3 (2002); Perry, supra note 9, at 1630–31; John Hewko,

Foreign Direct Investment: Does the Rule of Law Matter? (Carnegie Endowment for Int’l Peace,

Democracy and Rule of Law Project, Carnegie Papers No. 26, 2002).

95Hewko, supra note 94, at 3. In ROBERT J. BARRO, DETERMINANTS OF ECONOMIC GROWTH 26–28(1997), economist Robert Barro developed a rule-of-law index based on survey data from theInternational Country Risk Guide (ICRG). The ICRG survey data were compiled from re-sponses by business leaders to questions about their impressions of law in a subject country,including assessing the strength and impartiality of the legal system, as well as observance of thelaw. The Barro model was based on a rule-of-law scale ranging from 0 to 6, where highernumbers were associated with stronger court systems and political institutions, while lowernumbers were associated with a history of settling disputes by physical force or other extralegal


More recent literature in this field, however, has led to growing skepticism

about the validity and general application of the assumptions that served as

the touchstones for Western development initiatives.96 Debate continues,

for example, over whether a causal relationship between rule of law and a

successful market economy exists and, if so, in which direction that cau-

sation runs, whether these variables may be mutually reinforcing, what key

elements characterize a rule- of-law system, and how does one explain

away the many anomalies.97

In an insightful 2002 Working Paper on FDI provocatively entitled

‘‘Does the Rule of Law Matter?’’ in the Rule of Law Series published by the

Carnegie Endowment for International Peace,98 John Hewko noted that

during the preceding decade promoting the rule of law in developing and

post-communist countries had become a crucial new priority of the inter-

national aid community.99 The Working Paper observed that a variety of

international organizations had fervently embraced legal and judicial

reform in emerging economies ‘‘in the belief that legal reform and the

establishment of the rule of law could be accomplished in relatively short

order and in the hope that, once the reform process was completed, FDI

would finally begin to flow.’’100 The Working Paper cautioned, however,

that little is understood about how external actors actually influence ‘‘the

process of legislative and institutional reform in transitional countries.’’101

means. Using regression analysis, Professor Barro determined that a full point increase in hisrule-of-law index was correlated with a 0.5% increase in the country’s growth rate, id. at 28.

96See supra note 94 and infra notes 104–25 and accompanying text; see also MICHAEL SCHUMAN,THE MIRACLE: THE EPIC STORY OF ASIA’S QUEST FOR WEALTH xxxii–xli (2009) (discussing howsuccessful modern Asian countries have mostly followed the Japanese model of government–business partnership and interventionist economics in preference to Western laissez-faireeconomics); John K.M. Ohnesorge, Developing Development Theory: Law and Development Or-thodoxies and the Northeast Asian Experience, 28 U. PA. J. INT’L. ECON. L. 219, 233 (2007) (describinghow the modern Asian experience has differed from what conventional development wisdom

would have predicted).

97Id.; see also Margaret J. Radin, Reconsidering the Rule of Law, 69 B.U. L. REV. 781, 784–92 (1989)(asking whether a ‘‘social practice conception of rules’’ renders the traditional concept of ‘‘the

Rule of Law impossible’’).

98Hewko, supra note 94.

99Id. at 3–6.

100Id. at 3–4.

101Id. at 5.


Some of the principal conclusions reached in this Working Paper

were that ‘‘legislative and institutional reform is an organic process not

conducive to easy or quick solutions’’102 and that, regardless of whether

one holds a top-down or bottom-up view of legal change, ‘‘the process of

legislative and institutional reform is long and tortuous . . . and [g]enuine

reform requires that a new legal culture be developed and ingrained in a

society; this takes considerable time, effort, and several generations.’’103

But, without a clear understanding about what the key characteristics of

rule of law are, and how one establishes a metric for quantifying these

characteristics, it is not clear how one could begin to assess whether legal

reform efforts are working. In the absence of quantification, and without

longitudinal studies tracking these metrics over time, there is no way to

measure whether a society is even moving in the right direction.

A particularly interesting scholarly work addressing these issues was a

2000 law journal article by Amanda Perry, ‘‘An Ideal Legal System for At-

tracting Foreign Direct Investment? Theory and Reality.’’104 Drawing on

data and reports from the World Bank, and using Sri Lanka as a testing

laboratory, Perry endeavored to test many of the prevailing assumptions

about the importance of a Western-style legal system as a prerequisite for

attracting the FDI that developing countries depend upon as a source of

capital and stimulant for economic growth. A detailed overview of the

careful steps followed by Perry to design and implement her study, and the

seemingly inconsistent and unexplainable results of that study, are illus-

trative of the disappointments and frustrations other scholars have expe-

rienced in trying to define the elusive concept of rule of law.

Articulating the prevailing orthodoxy that, in order to attract FDI, a

host country legal system must serve the needs of prospective foreign in-

vestors and that what foreign investors most want ‘‘can be boiled down to

two essential items: efficiency and certainty,’’105 Perry labeled this ‘‘dominant

theory’’ as the ‘‘Ideal Paradigm.’’106 The World Bank’s 1997 World Devel-

opment Report, based on a survey of domestic and foreign investors, seemed

102Id. at 4.

103Id.

104Perry, supra note 9.

105Id. at 1629.

106Thus, Perry observed:


to demonstrate correlations between ‘‘political credibility’’ as perceived by

investors and investment levels, that is, ‘‘countries with high perceived po-

litical credibility had high investment rates, and vice versa.’’107 The author

sought to test that dominant view using Sri Lanka as a case study to see how

investors in fact reacted to a legal system that did not fit the Ideal Para-

digm.108 The author developed a questionnaire employing two approaches

to determine ‘‘how investors react to a legal system that is not of the Ideal

Paradigm, and is therefore theoretically unattractive for FDI.’’109 On the

basis of the responses to the questionnaires, the author compiled the data

and constructed tables illustrating investor perceptions about Sri Lankan

laws, courts, bureaucrats, and the credibility of the government.

The results of this effort, however, appeared to be somewhat incon-

sistent and difficult to interpret. For example, Table 1 of the Perry study

indicated that, while

most respondents perceived the laws of Sri Lanka to broadly conform withthe Ideal Paradigm [in certain respects], most perceived a deviation from theIdeal Paradigm with regard to the predictability of legal change. Indeed,sixty-four percent of respondents indicated that changes in laws and policiesare completely, mostly, or frequently unpredictable.110

On the other hand, respondents’ perceptions were that ‘‘once a change has

been implemented, it is not difficult to discover what the written law is.’’111

Whether the written law would actually be implemented, however,

proved to be another thorny question. Table 2 of this study indicated

that ‘‘most respondents perceived the decisions of Sri Lankan courts to be

According to the dominant theory, a legal system is most likely to be predictable wherethe laws are stable, accessible, and clear; the discretionary powers of the state (includingits bureaucrats) are limited; corruption is low; and powers are separated among branchesof government, particularly through the creation of an independent judiciary. This typeof legal system can be described as the Ideal Paradigm.

Id. at 1631–32. See also Norman L. Greene, Perspectives from the Rule of Law and International Eco-nomic Development: Are there Lessons for the Reform of Judicial Selection in the United States?, 86 DENV. U.L. REV. 53, 72 (2008) (also noting that the presumed ‘‘linkage between the rule of law and economic

development, including foreign investment’’ is commonly known as the ‘‘dominant theory’’).

107Perry, supra note 9, at 1631.

108Id. at 1632–33.

109Id. at 1633.

110Id. at 1635.

111Id.


objective and consistent enough to broadly conform with the Ideal Para-

digm,’’ but excessive delays made reliance on this system problematic.112

Reminiscent of Charles Dickens’ wry depiction of court delays and liti-

giousness in nineteenth-century England,113 the author quoted one re-

spondent as observing: ‘‘Litigation in Sri Lanka is a 100 percent successful

operation, but the patient is dead.’’114

Seemingly in contradiction to Table 2, however, Table 3 of the Perry

study indicated the perception that Sri Lankan courts ‘‘deviate from the Ideal

Paradigm in terms of independence and corruption’’ with sixty-two percent of

respondents feeling that ‘‘politicians could always, mostly or frequently influ-

ence the decisions of government officials.’’115 The author surmised that the

perception of a high level of consistency in bureaucratic decision making

might be accounted for by an equally high level of consistency ‘‘in the inci-

dence and effect of corruption and political interference. . . .’’116

The author also endeavored to measure the Sri Lankan legal system

against the so-called Ideal Paradigm by converting the survey responses for

each aspect of the legal system into a score based on a zero to five scale, with

five indicating maximum conformity with the Ideal Paradigm.117 The author

concluded that ‘‘[n]o institution in the Sri Lankan legal system would be

rated as attractive overall, according to the criteria of the Ideal Paradigm . . .

all specific features of each institution would be considered to be of border-

line attractiveness at best.’’118 If the dominant theory about the importance

of the proper legal system were correct, the results of this case study should

have indicated that foreign investors ‘‘should perceive the Sri Lankan legal

system to be unattractive, and therefore in need of reform.’’119

But the reality turned out to be quite different. As the author noted,

‘‘[t]he very fact that respondents to the questionnaire had invested in Sri

Lanka is evidence that their opinions of Sri Lanka’s legal system are not

112Id. at 1636–37.

113CHARLES DICKENS, BLEAK HOUSE ch. 1 (Penguin Classics 1996) (1853).

114Perry, supra note 9, at 1636–37.

115Id. at 1638.

116Id. at 1638–39.

117Id. at 1640.

118Id. at 1640–41.

119Id. at 1642.


overwhelmingly negative.’’120 The author explored but ultimately dis-

counted the possible explanation that the original investments were made

in ignorance of the deficiencies of the Sri Lankan legal system.121

An alternative explanation offered for the incongruous results was

that investors were neither aware of, nor did they care about, the potential

adverse effects an inefficient and unpredictable legal system could have on

their investments.122 Another possible explanation for the incongruous

results was that, despite substantial deviations in the Sri Lankan legal

system from the Ideal Paradigm, that system nonetheless afforded inves-

tors adequate levels of efficiency and predictability.123 In either case, the

author concluded, ‘‘it would seem that a legal system which does not con-

form with the Ideal Paradigm is not necessarily unattractive to all inves-

tors.’’124 Thus, the dominant theory being tested was severely undercut by

these results.

Accordingly, a different, more fundamental approach to characteriz-

ing the legal system is required, one less tied to specific institutional fea-

tures and one that better lends itself to quantification. The pioneering

early-twentieth-century scholarly work of Max Weber provides a useful

point of departure for developing such an alternative model for charac-

terizing a legal system.125

B. Weber’s Postulated Linkage Between Rule of Law and Entrepreneurial Activity

In addition to his work laying the foundations for the discipline of sociology,126

Max Weber is also known for his somewhat controversial theories

about the connection between religion and the rise of capitalism.127 In

his groundbreaking work, ‘‘The Protestant Ethic and the Spirit of

120Id.

121‘‘Remarkably, seventy-six percent . . . of respondents said the foreign investors in theircompany would still have invested in Sri Lanka in hindsight of the legal system.’’ Id.

122Id.

123Id.

124Id.

125See generally David M. Trubek, Max Weber on Law and the Rise of Capitalism, 1972 WIS. L. REV.720, 721–25.

126Id.

127Id.


Capitalism,’’128 and in a related work by R.H. Tawney,129 Weber and Tawney

linked the rise of capitalism in the Western world to certain tenets of

Calvinism.

Weber and Tawney identified certain fundamental principles of

CalvinismFfor example, worldly asceticism (i.e., thrift and savings), a

‘‘calling’’ (i.e., that every human being has a moral obligation to devote

himself/herself to a divinely ordained role in life), and predestination (i.e.,

the conviction that each of us is born predestined either as one of the

‘‘elect’’ or one of the ‘‘damned,’’ but that the only manifestation of God’s

will is one’s success or failure in worldly affairs)Fas playing a role in the

development and institutionalization of capitalism in the West.130

According to the Weber/Tawney hypothesis, this constellation of Calvinist

beliefs was mutually reinforcing: by exercising thrift and devoting yourself to

your chosen profession, one could indeed do very well in worldly affairs and

thereby prove to yourself, your family, and your community that you were

among the ‘‘elect.’’131 The result of this Calvinist belief system was the accu-

mulation of a substantial reserve of wealth, savings which were available at the

outset of the Industrial Revolution to finance business growth.132 The Weber/

Tawney thesis regarding an adequate capital reserve as a precursor to suc-

cessful capitalist economic development has been and continues to be incor-

porated into the economic and political development work of more recent

scholars in this field, including the Rostow economic development model133

and the Mendelson stages of growth model,134 as previously discussed.

128MAX WEBER, THE PROTESTANT ETHIC AND THE SPIRIT OF CAPITALISM (1958) (this version ofWeber’s work was translated by Talcott Parsons and includes a foreword by R.H. Tawney).

129R.H. TAWNEY, RELIGION AND THE RISE OF CAPITALISM (1926).

130See WEBER, supra note 128, at 95–154; see also BENJAMIN HIGGINS, ECONOMIC DEVELOPMENT:PRINCIPLES, PROBLEMS AND POLICIES 217, 219–23 (1968).

131See supra note 130.

132Id.

133See supra notes 43–45 and accompanying text; see also Daniel J. Benjamin et al., ReligiousIdentity and Economic Behavior (NBER Working Paper No. w15925, April 2010), available athttp://www.nber.org/papers/w15925 (Cornell and Yale University economists engaging in oneof the most recent efforts to test key aspects of the Weber/Tawney thesis based on studentreactions instead of the more typical analysis of international economic patterns).

134See supra notes 46–58 and accompanying text. In Gordon Redding, The Thick Description andComparison of Societal Systems of Capitalism, 36 J. INT’L BUS. STUD. 123, 127 (2005), the author

commented on the ‘‘continuing salience of Weber’s ideas [in new] formulations of his explanations


http://www.nber.org/papers/w15925



Weber’s work in this area, however, went beyond identifying Calvinist

doctrines as a source of the savings that financed the Industrial Revolution

in the West. Weber also devoted considerable energy to the puzzle of why

modern capitalism emerged and successfully entrenched itself in the West

but not in other societies around the globe that seemed, at least superfi-

cially, to possess the necessary prerequisites.135 In particular, Weber ap-

preciated that many non-Western societies, for example, China and India,

had accumulated pools of wealth but did not develop a capitalist economic

system.136 Why hadn’t Western-style capitalism emerged in these non-

Western societies?

The difference according to Weber was lawFnot just any system of

law, but a particular type of law. According to Weber, in order to encourage

voluntary, entrepreneurial risk taking, the legal system had to provide

capitalist investors with a minimum level of predictability in commercial

transactions.137 Calvinist investors, after all, were not merely risking their

hard-earned savings but their very souls because, under the doctrine of

predestination, a ruinous investment could indicate that they faced eternal

damnation.138 Without a legal system that provided an adequate level of

calculability in commercial transactions, particularly assurances that arbi-

trary governmental action would not result in confiscation of the gains of a

successful business investment, all of those Calvinist savings would lie

of societal economic [evolution and] Weber’s capacity to engage with both the cultural and the

economic character of Western civilization, and to drive towards an analytical socio-economic

synthesis.’’

135See generally Max Rheinstein, Introduction, in MAX WEBER ON LAW IN ECONOMY AND SOCIETY

(Max Rheinstein ed., 1954); Reinhard BENDIX, MAX WEBER, AN INTELLECTUAL PORTRAIT 385–457 (1962).

136See also MAX WEBER, THE RELIGION OF CHINA 100–04, 147–50 (1951).

137Id. Weber’s treatise Economy and Society includes detailed discussions about different types oflaw, his theories about the relationship between law and the rise of industrial capitalism, andcomparative sociological studies in support of his theories. Weber’s inquiries into the uniquefeatures of Western legal systems that were especially conducive to capitalist activity are setforth in the introduction to his work on sociology of religion, reprinted in WEBER, supra note128, at 13–31 (author’s introduction).

138See supra note 137. For example, Trubek, supra note 125, at 735, observed: ‘‘Thus, underEuropean law, the rules governing economic life are easily determined; this type of legal orderreduces one element of economic uncertainty. This calculability of European law was its majorcontribution to capitalist economic activity.’’ See generally PETER J. THUESEN, Predestination:The American Career of a Contentious Doctrine (2009).


fallow, rotting away in a bank vault perhaps, instead of being put to pro-

ductive economic use.139

C. Four Types of Legal Systems Under Weber’s Typology

Weber’s work identified certain fundamental characteristics that a

legal system must possess to provide the level of calculability needed

to support market capitalism, which characteristics can be distilled

as autonomy, generality, and universality.140 Autonomy in a legal system

refers to the extent to which the rules used to decide disputes come from

within the legal system and are applied relatively free from external in-

fluences such as religion, politics, and ideology.141 Generality refers

139A good example of this philosophy is the Puritans of colonial Massachusetts who ferventlyembraced Calvinist ideology. A revealing insight into Puritan mistrust of government and thefear of arbitrary intervention in their business dealings was the fateful colonial ordinance of1641–47 by which ‘‘the colonial authorities took the extraordinary step of extending private[property rights] to encompass land as far as mean low water line or 100 rods from the meanhigh water line, whichever was the lesser measure,’’ Opinion of the Justices to the House ofRepresentatives, 365 Mass. 681, 684–85, 313 N.E.2d 561, 565 (1974) (an advisory opinion bythe Massachusetts Supreme Judicial Court to the Massachusetts legislature that proposedlegislation to establish a public on-foot right of passage along privately owned beachfrontwould amount to an unconstitutional ‘‘taking’’). The Massachusetts Supreme Judicial Courtnoted that the colonial legislation dramatically altered the common law rule that ‘‘privateownership in coastal land extended only as far as mean high water line . . . [b]eyond that,ownership was in the Crown.’’ Id. The court also clearly articulated the motivation behind thisunusual colonial legislation, namely, ‘‘to encourage littoral owners to build wharves,’’ to ac-commodate the colony’s burgeoning shipping industry. Id. Wily and distrustful Puritan busi-nessmen were not so foolish as to build on publicly owned land; they insisted first onownership rights. For a comprehensive perspective on the historical importance of legal pro-tection of private property rights, especially in land, see O. Lee Reed & E. Clayton Hipp,A ‘‘Commonest’’ Manifesto: Property and the General Welfare, 46 AM. BUS. L.J. 103 (2009). That

short-sighted colonial legislation has come back to haunt Massachusetts (and Maine, which in the

1640s was part of Massachusetts Bay Colony) in recent times, spawning contentious litigation

over public access to scarce beaches. See, e.g., Moody Beach Access to be Sought Again, BOSTON

GLOBE, Aug. 27, 1989, at 42 (describing renewed efforts by the town of Wells, Maine to negotiate

with beachfront owners after losing a bitter and drawn-out legal battle in the Maine Supreme

Judicial Court).

140Weber used different, more opaque terminology, discussing legal institutions in terms oftheir formal and structural characteristics and what he called their ‘‘degree of rationality’’ and‘‘formality.’’ WEBER, supra note 128, at 19. As explained by Trubek, supra note 125, at 724,‘‘Weber believed that European law was more ‘rational’ than the legal systems of other civ-ilizations, that is, it was more highly differentiated (or autonomous), consciously constructed,general, and universal.’’

141Trubek, supra note 125, at 736–45.


to the principle that similar fact patterns should ordinarily lead to

similar legal outcomes.142 Universality refers to the principle that the

same legal rules should ordinarily apply equally to everyone in the

society.143 Universality can be seen as a corollary to generality in that, if

the legal system provides similar legal outcomes for similar fact patterns, it

should not matter who are the parties to a particular dispute.

Weber’s model of an ‘‘ideal’’ legal system seemed to be heavily influ-

enced by the German Civil Code that had recently been enacted.144 The

German Civil Code, perhaps to even a greater degree than other Code

systems, could be considered highly autonomous in that the rules for de-

ciding cases were established by formal legislative processes.145 The Ger-

man Civil Code could also be seen as being high in generality and

universality (i.e., highly predictable) because every time a particular fact

pattern arose the judge would presumably turn to the same section of the

Code where, not surprisingly, the judge would find the same answer as the

last time this question arose.146

142Id. at 724, 736–45.

143Id.

144Id. at 730–31.

145Civil codes are intended to be authoritative, systematic, and comprehensive statements ofthe law that cover every conceivable fact situation to eliminate any room for ambiguity. See,e.g., Francis Deak & Max Rheinstein, The Development of French and German Law, 24 GEO. L.J.551, 570–71 (1936). The authors noted that the ‘‘most important step in the process of [political]

unification [in Germany] was the enactment, on August 1, 1896, of the [modern German] Civil

Code . . . covering almost the entire field of private law, [it] abolished all of the various local laws

and replaced them with a uniform legal system.’’ Id.

146Id. In RUDOLF B. SCHLESINGER, COMPARATIVE LAW 233 (1970), the author observed that ‘‘evenwhen faced with a novel and unforeseen case, and fashioning what in effect may be a newsolution, a civil law court as a rule purports merely to ‘interpret’ and ‘apply’ a provisionFthough perhaps a broadly worded oneFof the Code.’’ Complete codification of the law incivil law systems has been seen as an important bulwark against arbitrariness in the applicationof legal rules. See, e.g., ARTHUR T. VON MEHREN, THE CIVIL LAW SYSTEM 31–35, 838–42 (1957);Rudolf B. Schlesinger, The Uniform Commercial Code in the Light of Comparative Law, 1 INTER-AM.L. REV. 11, 19–21 (1959). Scholars have long noted, however, that under the facade of stability

established by a fully articulated civil code system lies a reality of uncertainty. For example, in

Julliot de la Morandiere, The Reform of the French Civil Code, 97 U. PA. L. REV. 1, 7 (1948), the

author complained,

Today, our texts do not relate our true civil law; to learn the truth, one must study also thecourt decisions . . . Onto our written law has been grafted customary law, with the deficienciesinherent in itFcomplexity, lack of precision, obscurity for the uninitiated. The individual


In a 1972 law review article, David Trubek endeavored to organize

Weber’s ideas about the relationship between law and economic develop-

ment so as to make these concepts ‘‘more generally accessible to legal

scholars and social scientists’’ and in a way that more readily facilitated

comparing and contrasting different world systems.147 Following this or-

ganizational model, a legal system can be regarded as being either rela-

tively high or low in the characteristics of autonomy and generality/

universality. On this basis, a four-cell graph can be constructed, as shown

in Figure 4 above, to identify four prototypical legal systems.148

1. The Type 1 Legal System

The type 1 legal system in Figure 4 is a system that is relatively high in

autonomy but relatively low in generality/universality. An example might

be a legal system where disputes are decided based on the flip of a coin

(e.g., heads wins, tails loses) or a roll of dice (e.g., even wins, odd loses).

Such a system would be high in autonomy because the rules of decision

would be completely insulated from influences, such as religion or politics,

which are external to the legal system. On the other hand, such a system

would be low in generality/universality because there would be no way to

LOW HIGH

HIGH Type 1 Type 4

LOW Type 2 Type 3

Autonomy

Generality /Universality

Figure 4. Trubek’s Model of Weber’s Legal System Characteristics.

who in his actions relies upon the Code risks bringing himself into conflict with the law that isin fact applied. To keep informed, he must familiarize himself with court decisions. Still, hecannot be certain that the courts will decide tomorrow as they did yesterday . . . .

147Trubek, supra note 125, at 721.

148Cf. id. at 729. In his Table 1, Trubek identified the four cells of his graph as ‘‘FormalIrrationality’’ (corresponding to the Type 1 legal system of Figure 4 above), ‘‘SubstantiveIrrationality’’ (corresponding to the Type 2 legal system), ‘‘Substantive Rationality’’ (corre-sponding to the Type 3 legal system), and ‘‘Logically Formal Rationality’’ (corresponding tothe Type 4 legal system).


predict the outcome of future decisions. A subsequent case based on a

substantially identical fact pattern could lead to an opposite outcome based

on the flip of the coin or the roll of the dice.149

There are, of course, no actual examples where legal disputes are

decided in such an obviously arbitrary and capricious manner, but this

variety of legal system has a number of real-world counterparts. Anthro-

pologists, for example, have described tribal societies where a spiritual

leader or shaman decides disputes among tribal members by drawing on

some amorphous, unwritten body of magic or spiritual law.150 Assuming

such a body of spiritual law existed and was applied impartially, such a

system could be considered relatively high in autonomy. But because such

149Trubek described what this article refers to as the type 1 legal system as follows:

Formally irrational legal decisionmaking is associated with prophetic decisions or rev-elations. Decisions are announced without any reference to some general standard oreven to the concerns of the parties to the dispute. The criteria of decisionmaking is in-trinsic to the legal system [i.e., high in ‘autonomy’] but unknowable; there is no way theobserver can predict the decision or understand why it was reached [i.e., low in gener-ality/universality].

Id. at 720.

150See, e.g., MAX GLUCKMAN, THE JUDICIAL PROCESS AMONG THE BAROTSE (1955) (describing dis-pute resolution practices among an isolated tribal group); BRONISLAW MALINOWSKI, CRIME AND

CUSTOM IN SAVAGE SOCIETY 190–94 (1959) (discussing an example of the importance of magicand the tribal magician in the daily lives of the Kiriwinians, natives of the Trobriand Islands).Malinowski observes, for example, that ‘‘[m]agic plays an enormous part in the tribal life of theKiriwinians (as it undoubtedly does with the majority of native peoples).’’ MALINOWSKI, supra,at 190. In WEBER, supra note 135, at 349–56, the author explained that Weber used the term‘‘khadi justice’’ to describe

a type of adjudication which is guided primarily by sacred traditions without findingtherein a clear basis for the decision of concrete cases. It thus decides cases either ascharismatic justice, i.e., by the concrete ‘‘revelations’’ of an oracle, or prophet’s doom oran ordeal . . . [Thus, in] khadi justice there are no ‘rational’ bases of ‘‘judgment’’ at all.

Id. Indeed, Weber considered the English common law legal system with an unpredictablejury system and without a comprehensive Civil Code, as in the German system, to be a ‘‘sub-stratum of the legal system which is in substance khadi justice to an extent which cannot beeasily visualized on the Continent.’’ Id. The fact that England, notwithstanding its legal system,was successful in attaining ‘‘a high level of capitalistic development’’ was largely attributed tothe predictability of a ‘‘court system and trial procedure [that] until well in the modern age[denied] justice to the economically weaker groups.’’ Id. By contrast, however, in History of theEnglish Speaking Peoples, Winston Churchill lauded the role that the common law legal systemplayed in welding England into a nation. Judicial arbitrariness in the common law system waslimited by the institution of a jury system and the emergence of stare decisis. See Andre Tunc,The General Outline of the Code Napoleon, 29 TULANE L. REV. 431, 431–32 (1955).


a body of spiritual law would be inaccessible to and indecipherable by the

typical tribal member, this system would be low in generality/universality as

one could not reasonably predict outcomes.151


The type 2 legal system in Figure 4 is a system that is relatively low in both

autonomy and generality/universality.152 An authoritarian dictatorship

where the ruler decides disputes based on whim, or outright partisanship,

without even the pretense of reliance on any established legal order would

be one example of a type 2 system.153 Unfortunately, too many parts of the

world, perhaps, for instance, Iraq under the control of Saddam Hussein,

have recently experienced or continue to live under such despotic regimes.

151For example, Weber, supra note 135, at 353, observed: ‘‘A typical instance of nonrationaland yet ‘rationalistic’ and highly traditional empirical justice is to be found in the responses ofthe rabbis of the Talmud. Purely untraditional khadi justice is represented in every propheticdictum of the pattern: ‘It is writtenFbut I say unto you.’’’ In describing such ‘‘charismaticauthority,’’ Weber further observed that the term ‘‘charisma’’ can be

applied to a certain quality of an individual personality by virtue of which he is set apartfrom ordinary men and treated as endowed with supernatural, superhuman, or at leastspecifically exceptional powers or qualities. . . . In primitive circumstances this peculiarkind of deference is paid to prophets, to people with a reputation for therapeutic or legalwisdom [or] magical powers.

Id. In Haiti and the Voodoo Curse, WALL ST. J., Feb. 5, 2010, at A13, Lawrence Harrison, Directorof the Cultural Change Institute at the Fletcher School of Law and Diplomacy, Tufts Univer-sity, and a former head of the USAID mission to Haiti, attributed the disappointing results ofmore than fifty years of foreign aid largely to the fact that ‘‘Haiti’s culture [remains] powerfullyinfluenced by its religion, voodoo [where] followers believe that their destinies are controlledby hundreds of capricious spirits who must be propitiated through voodoo ceremonies.’’ As insome similarly affected African countries, this belief/value system is seen as ‘‘one of the prin-cipal obstacles to progress.’’ Id.

152Trubek described the type 2 legal system as follows:

Substantively irrational decisions apply observable criteria but these are always based onconcrete ethical and practical considerations of the specific cases. It is possible to un-derstand these decisions after the fact, but unless a system of precedent arises, it is diffi-cult to generalize from the concrete cases.

Trubek, supra note 125, at 729–30.

153Trubek’s description of the type 2 legal system seemingly considered only benevolent ver-sions of such a system and failed to consider abusive, despotic versions of such a systemFperhaps because of a personal reluctance to grace such systems with the label of being a ‘‘legalsystem.’’ Id.


Another manifestation of a type 2 legal system, however, is a society

where corruption among government officials is endemic and becomes

inculcated as a part of the social order. Favoritism or graft, as in the earlier-

discussed case of the Sri Lankan system, may temporarily win the favor of

the government then in power in such a type 2 society, creating at least

short-term calculability in commercial transactions.154 But experience

shows that the whims, or political interests, of a capricious government

can turn on a dime; a business in favor today may be destroyed tomorrow

by the same government that earlier had nurtured it or by a new govern-

ment that comes to power.155 Thus, there is no long-term predictability or

stability under a type 2 system.


The type 3 legal system in Figure 4 is a system that is relatively low in

autonomy, but, nevertheless, high in generality/universality. In this type of

system, which has a number of real-world examples, various social and

ideological influencesFfor example, status, wealth, religion, interpersonal

relationships, and politicsFbecome an integral part of the decision-

making process. As a result, such systems are relatively low in autonomy.

But, because the people in the society well appreciate the ways in which

these external influences affect legal outcomes, such a system can never-

theless be relatively predictable.156

154See supra notes 104–25 and accompanying text; see also Ana Isabel Eiras, Ethics, Corruption,and Economic Freedom (Oct. 14, 2003), in HERITAGE LECTURES NO. 813, Dec. 9, 2003, availableat http://www.heritage.org/Research/Lecture/Ethics-Corruption-and-Economic-Freedom.This study dramatically illustrates the high correlation between more corruption/weak ruleof law and a rapid drop-off in the level of economic freedom in a country. Eiras, supra, at 4–6.

155See supra note 154. Some commentators, for example, have linked the current economiccrisis in Greece to a deeply entrenched culture of political corruption and tax avoidance. See,e.g., Marcus Walker, Tragic Flaw: Graft Feeds Greek Crisis, WALL ST. J., Apr. 16, 2010, at A-1. Seealso Parts III.C.3 (Venezuela) and III.C.4 (Zimbabwe).

156Trubek described the type 3 legal system as follows:

Substantively rational decisionmaking employs a set of general policies or criteria, butthese are of some body of thought extrinsic to the legal systemFreligion and politicalideology are examples of such extrinsic systems. To the extent that the overarchingprinciples of the external thought system are understood, it is possible to apprehendrationally how the system will function [i.e., high in generality/universality]. But this isonly true to a limited degree, for the manner in which the precepts of the external systemwill be translated into legal decisions may vary.


http://www.heritage.org/Research/Lecture/Ethics-Corruption-and-Economic-Freedom



The legal system of the former Soviet Union can be considered a

particularly important and interesting example of a type 3 legal system.

Although Communist party ideology had a pervasive and conspicuous in-

fluence in Soviet judicial decisions, in general a high level of predictability

existed.157

Thus, one could have predicted with some reliability that drunks

charged with disorderly behavior would be treated mildly by the Soviet

legal system158 while picketing political dissidents, who might also be

charged with some type of disorderly behavior, would more likely be

harshly punished.159 Such predictably differential treatment of drunks

and dissidents was nowhere to be found in the Soviet law books.160 In-

stead, such predictability in differential criminal treatment derived from

well-recognized ideological and political forces that were external to the

formal Soviet legal system.161

One of my (the first author’s) former MBA students, at the time a

recent immigrant from the Soviet Union, lit up with recognition when

the subject of lack of autonomy in the Soviet legal system was addressed

in class, and he drew my attention to a wonderful illustration of a

Trubek, supra note 125, at 729–30. For detailed descriptions of ten very different varieties ofarguably type 3 legal systems, see THE DISPUTING PROCESS: LAW IN TEN SOCIETIES 1–40 (LauraNader & Harry F. Todd, Jr. eds., 1978).

157See generally LAW IN THE SOVIET SOCIETY 61–69 (Wayne R. LaFave ed., 1965). Soviet juristscategorically rejected the civil law tradition of distinguishing ‘‘private’’ legal relationships fromthe broader constitutive order of society. Id. Instead, Soviet law was seen as embodying Le-nin’s statement that all law is ‘‘public’’ and that governmental and party perspectives do andshould pervade any applications of law, 29 LENIN, SOCHENENIYA (Works) 419 (Moscow 1928–37).

158See, e.g., JOHN N. HAZARD, SETTLING DISPUTES IN SOVIET SOCIETY 109–23 (1960) (describingthe emergence of a two-level people’s court system in the early days of the Soviet Union, onelevel to handle cases, such as drunkenness, that garnered considerable public empathy andwhere the penalties were mild and a second level to handle more serious cases, such as thoseinvolving ‘‘political enemies who were really or presumably seeking to overthrow theregime’’).

159Id.; see also JOHN N. HAZARD ET AL., THE SOVIET LEGAL SYSTEM 81–106 (1977) (a collection ofexcerpts from writings, addresses, and legal documents illustrating the limited scope of in-dividual civil rights and harsh attitude toward political dissent under the Soviet legal system ofthe mid-twentieth century, including a Leonid Breshnev speech paraphrasing the Lenin phi-losophy that ‘‘what is moral is that which serves the interests of communist construction’’).


161Id.


type 3 legal system. He told the class about a practice in the Soviet courts

which had become widely known as ‘‘telephone justice.’’162 Especially in

politically sensitive trials, a telephone on the bench by the judge would

ring right in the middle of court proceedings: a Communist party official

would be calling to instruct the judge about how to decide the case being

tried.163


The type 4 legal system in Figure 4 is a system that is relatively high in both

autonomy and generality/universality. In the Weber model, this is the most

desirable form of legal system and the one that societies should strive to

achieve and maintain. According to the Weber model, none of the type 1,

2, or 3 legal systems provide a sufficiently high level of calculability in

commercial transactions over the long term to promote the voluntary

entrepreneurial risk-taking activities which are at the heart of market

162See, e.g., Alena Ledeneva, Behind the Facade: ‘‘Telephone Justice’’ in Putin’s Russia, in MARY

MCAULEY ET AL., DICTATORSHIP OF REFORM? THE RULE OF LAW IN RUSSIA 24 (2006) (in com-menting on an aspect of the contemporary Russian legal system that has become known as‘‘Basmanny justice’’Fthe rapid transformation of law enforcement agencies into zealous ex-ecutors of political orders often while ignoring the law with impunityFthe author observedthat ‘‘[s]uch dependence of the legal system on political orders is in fact a reinvented Sovietpractice known as telefonnoe pravo, or ‘telephone justice’.’’); Alena Ledeneva, Telephone Justicein Russia, 24 POST-SOVIET AFF. 324, 350 (2008) (exploring the pervasiveness and effectiveness of the

practice of ‘‘‘telephone justice’Finformal influence or pressure exerted on the judiciary’’ in mod-

ern Russia using data from a 2007 national survey); Richard Thornburgh, The Soviet Union and theRule of Law, FOREIGN AFF., Spring 1990, at 14–17 (tracing the history of law in Russia under

tsarist and later Soviet rule and noting the long Russian tradition of using law as an ‘‘instrument

of ruling elites’’ serving political or ideological ends rather than as a ‘‘replacement for arbitrary

political power or a check on despotism’’ as in modern Western legal systems).

163See supra note 162. In a 1992 New York Times article, Steven Erlanger reported:

In a speech last month, [Russian] President Yeltsin complained about the weak legal basisof Russian life. ‘‘For many years,’’ Yeltsin said ‘the laws in this country played a decorativerole. . . . They were openly violated or bypassed. . . . Legal and state nihilism are deeplyrooted in our minds. An example was provided by those in power, whose life was sub-ordinated to secret orders issued by telephone . . . .

Steven Erlanger, Discovering Justice: Russia and the LawFA Special Report; Two Novelties in Rus-sian Courts: Defense Lawyers and Jury Trials, N.Y. TIMES, May 11, 1992, at A8. Erlanger went onto explain: ‘‘What Mr. Yeltsin was describing is ‘telephone justice,’ when judges, who were allparty members, were called by party leaders and told how to rule.’’ Id. But, the Times articlefurther included the observations of a former Soviet counsel who had defended many dis-sidents that ‘‘telephone justice was much exaggerated’’ because ‘‘judges understood what wasrequired from them without the need for many calls.’’ Id.


capitalism.164 Only a type 4 legal system can, over the long term, support a

capitalist economic system.165

D. Using the Weber Typology to Develop a Rule-of-Law Metric

Within the type 4 cell, there is room for considerable variation in the degree

of autonomy and generality/universality, while still maintaining a viable mar-

ket capitalism economic system.166 For example, the type 4 cell can be sub-

divided into four subcellsF4a, 4b, 4c, and 4d, as illustrated in Figure 5 above

Feach representing a different combination of relatively high autonomy

and relatively high generality/universality characteristics.167

Although a legal system according to any of the four subcells 4a, 4b,

4c, and 4d would theoretically be capable of supporting some form of

market capitalism, a type 4a legal system would be expected to be the most

LOW4b 4a4d 4c

LOW Type 2 Type 3

HIGH Type 1Autonomy


HIGH

Figure 5. Refinement of Trubek’s Model.

164Trubek observed, ‘‘In comparison with this fourth type [of legal system], these [first] threetypes of legal systems, therefore, display a low degree of differentiation [i.e., ‘autonomy’], alow degree of generality of rules, or both. As a result it is difficult to predict the types ofdecisions they will reach.’’ Trubek, supra note 125, at 730.

165Id.

166For example, during each of Mendelson’s stages of development, see supra notes 46–58 andaccompanying text, the United States could have been regarded as having a type 4 legal sys-tem, but a very different kind of type 4 system during Mendelson’s ‘‘era of industrialization’’than during Mendelson’s ‘‘era of the welfare state.’’

167See discussion infra Part III.C.1. These four varieties of the type 4 legal system share certaincommonalities with the ‘‘Four Ideal Rule of Law Types’’ identified in Table 1 of RandallPeerenboom, Let One Hundred Flowers Bloom, One Hundred Schools Contend: Debating Rule of Lawin China, 23 MICH. J. INT’L L. 471, 538 (2002). Professor Peerenboom calls his four ideal types:

Liberal Democratic Rule of Law, Chinese Communitarian Rule of Law, Neo-Authoritarian Rule

of Law, and Statist Socialism Rule of Law. Id. at 483. His article also discusses the particular

Economic Regime, Political Regime, Rights, Purposes of Rule of Law, Institutions/Practices, and

Rules characteristics typically associated with each of his four ideal types. Id. at 483–505.


conducive to entrepreneurial risk taking168 and would presumably spur a

measurably higher level of business investment,169 for example, than the

marginally adequate type 4d system.170 Under the influence of legal change

mechanisms as discussed in Part I above, established market economies

would be expected to periodically transition among the different type 4

subcells as normal business cycles, economic maturation, and shifting polit-

ical winds alternately favoring greater or lesser government regulation of

business affected the degree of autonomy, generality/universality, or both.171

For example, following a forty-year cycle of growing government

regulation of business in the United States from the New Deal era extend-

ing into the early 1970s,172 the United States then experienced a period

of significant deregulation in such major industries as airlines, telecom-

munications, banking, and gas and electric power.173 Recent industry

168For example, in the Mendelson stages of growth model, see supra notes 41–58 and accom-panying text, the United States during the ‘‘era of industrialization’’ under a ‘‘laissez-faire’’legal system would likely have been a type 4a system.

169Id.

170For example, Figure 9 shows that South Korea and Israel are categorized as type 4dcountries.

171See supra Part II.C. Such periodic transitions in the legal environment of business in a type 4legal system might correspond to oscillations along Ackerman’s Zone of Discretion/TransitionZone as illustrated in Figure 2 (the ‘‘Stages of Development’’ scale), or as illustrated in Figure 3(the ‘‘Receptivity-to-Change’’ scale), or both.

172See, e.g., Bob Davis et al., Unraveling Reagan: Amid Turmoil, U.S. Turns Away From Decades ofDeregulation, WALL ST. J., July 25, 2008, at A1; Michel Ghertman, The Puzzle of Regulation,Deregulation and Reregulation, in REGULATION, DEREGULATION, REREGULATION: INSTITUTIONAL

PERSPECTIVES 351 (Claude Menard & Michel Ghertman eds., 2009) (discussing selected writ-ings of leading academics on historical regulatory cycles and commenting on emerging the-ories about the interplay of economics and politics in determining the timing of such cycles).In the lead chapter of this volume, Transaction Cost Economics: The Precursors, id. at 9, recentNobel laureate Oliver E. Williamson traced the ‘‘first stage’’ of the natural progression in thedevelopment of transaction cost economics as a tool for analyzing regulation to the period‘‘1920–70, especially the decade of the 1930s . . . .’’ Williamson also observed, ‘‘Contrary to thestandard assumption in economic theory circa 1970 that transaction costs were zero, trans-action cost economics makes express provision for positive transaction costs.’’ Id.

173See supra note 172. The growing awareness of transaction costs, in combination with the‘‘stagflation’’ phenomenon of the 1970s, ushered in a quarter century of U.S. regulatory re-form and a temporary retreat from the progressive regulation of the 1930–70 era. Beginningwith the partial deregulation of the airline industry in 1978 (by abolishing the Civil Aeronau-tics Board), see, e.g., John E. Robson, Airline Deregulation: Twenty Years of Success and Counting,REGULATION, Spring 1998, at 17, the deregulation movement picked up steam during the


scandals, such as Enron,174 and the near economic meltdown of

2008–2009,175 however, have fueled a new cycle of increasing government

regulation.176 It is possible to identify such cyclical shifts in the legal en-

vironment of business of a type 4 country on a graph comparable to Figure

5 and/or to chart such changes as in Table 3 infra.177

Another application where quantification of the legal environment of

business is useful is in making business decisions about FDI in emerging

economies by comparing rule of law in two or more countries according to

some mathematical standards rather than based on simple intuition. To

facilitate such quantification, Figure 5 can be converted to a graph, and the

horizontal and vertical axes of the graph can be scaled, for example, as

shown in Figure 6 below. An (x, y) coordinate pair can then be used to

characterize the legal environment of business in a given country at any

given point in time.

Thus, in Figure 6, the type 4 legal system is the region bounded by the

points (0, 0), (10, 0), (0, 10), and (10, 10), where both the x and y coordinates

are positive numbers. Any coordinate pair wherein one or both coordinates

are negative numbers would define a legal system that does not satisfy rule

of law criteria according to the methodology of this article.

Thus, for any given country at a particular time, a single (x, y) co-

ordinate pair would immediately characterize the country’s legal environ-

ment of business as type 1, 2, 3, or 4, and, if a type 4 system, whether that

legal environment is currently more or less conducive to business

Reagan presidency (including the breakup of telecommunications as a public utility andderegulation of the trucking and savings and loan industries), Bob Davis et al., UnravelingReagan: Amid Turmoil, U.S. Turns Away From Decades of Deregulation, WALL ST. J., July 25, 2008, atA1, A12, culminating with Congress’s 1999 dismantling of the 1932 Glass-Steagall Act (whichhad separated commercial banking from investment banking and insurance services), J.R.Barth et al., Policy Watch: The Repeal of Glass-Steagall and the Advent of Broad Banking, 14 J. ECON.PERSPECTIVES 191–204 (2000).

174See Davis et al., supra note 173; Marianne M. Jennings, A Primer on ENRON: Lessons from aPerfect Storm of Financial Reporting, Corporate Governance and Ethical Culture Failures, 39 CAL.WEST. L. REV. 163–262 (2003).

175See, e.g., Davis et al., supra note 173.

176For example, in Davis et al., the authors observe: ‘‘The housing and financial crisis con-vulsing the U.S. is powering a new wave of government regulation of business and the econ-omy.’’ Id.

177See infra Part III.D.


investment, that is, a 4a, 4b, 4c, or 4d system.178 The graph of Figure 6 also

can be utilized in conjunction with longitudinal studies of a given country

to plot the evolution over a period of time of the country’s legal environ-

ment of business.179 In addition, the graph of Figure 6 could be used to

easily compare the legal investment climates for business in two or more

countries of interest for possible foreign investment, for example, India

and China, as described above.180

Identifying a potential host country’s (x, y) legal environment coor-

dinate pair, in conjunction with projecting a locus for anticipated evolution

of that legal environment over the near term based on the legal change

principles discussed in Part I above, can be utilized by businesses in choos-

ing among alternative foreign investment locations and strategies,181 rang-

ing from whether to invest at all,182 to the choice of investing through a

x-axis(Generality/

Universality) –10

4

–8

y-axis (Autonomy)

–10

6 8 10–6 –4 2–2

–2

10

–4

–6

1

2

4

–8

2

4

3

6

8

Figure 6. Graphical Representation of Trubek’s Model.


179See infra Part III.D.


181See DAVID K. EITEMAN ET AL., MULTINATIONAL BUSINESS FINANCE, chs. 16–17 (11th ed. 2006).

182For what continues to be a classic and remarkably thorough treatment of alternative busi-ness strategies for entering and exploiting a foreign market, authored by a Wharton Schoollegend, see Franklin R. Root, Entering International Markets, in HANDBOOK OF INTERNATIONAL


joint venture, wholly or partly owned subsidiary, licensing, or another

mechanism as a preferred means of entry into the host country.183

In Part III, below, a methodology is proposed for calculating the

(x, y) coordinate pairs based on existing data sets, and examples are given

of utilizing those rule-of-law metrics in comparative and longitudinal

applications.

III. COMPARATIVE AND LONGITUDINALAPPLICATIONS OF THE RULE-OF-LAW METRIC

A first step in generating the (x, y) coordinate pairs for characterizing rule

of law according to the Weber typology discussed above is to establish a

suitable information database. Second, a methodology has to be developed

for correlating data from the database with the characteristics of autonomy

and generality/universality.

Fortunately, for a number of years several governmental, academic,

and private organizations have compiled extensive annual economic and

political data on countries around the world.184 Such information is used

to assess and monitor ‘‘freedom,’’ ‘‘human rights,’’ and other social/busi-

ness conditions in the countries being followed. Several of those existing

databases numerically rank the countries surveyed on various economic

BUSINESS 31–3 to 31–22 (Ingo Walter ed., 1982). As observed by the author, ‘‘[p]lanning for-eign market entry is actually a process of deciding on the direction of a company’s interna-tional business by combining reason with empirical knowledge.’’ Id. at 31–3. The Rule-of-LawMetric according to this article provides managers with an important piece of empiricalknowledge to aid in the strategic planning of foreign market entry.

183Id. Professor Root concluded by offering managers three ‘‘decision rules’’ for selecting the‘‘right entry mode’’Fthe naıve rule (using the same entry mode for all target countries), thepragmatic rule (finding an entry mode that ‘‘works’’), and the strategy rule (customizing the entrystrategy based on systematic comparisons of country operating environments). Id. at 31–20 to31–21. The payoff, he observed, of using the more sophisticated strategy rule ‘‘is better entrydecisions.’’ Id. at 31–21. Clearly the Rule-of-Law Metric of this article can facilitate and enrichthe use of Professor Root’s preferred strategy rule.

184Investment banks and business consulting firms have been engaged in political risk as-sessment for many years. Their proprietary databases and methodologies have become in-creasingly sophisticated. In 2001, the brokerage firm Lehman Brothers and Eurasia Group,an emerging markets consulting firm, launched a new index that ranked emerging marketsaccording to their political stability. Craig Karmin, Index to Assess Political Stability of EmergingNations to Launch, WALL ST. J., Oct. 17, 2001, at C10.


and political characteristics which could, perhaps, be correlated with

‘‘autonomy’’ and ‘‘generality/universality.’’

For example, the annual Freedom House ‘‘Freedom in the World’’

survey comprises two elements: a ‘‘Political Rights Checklist,’’ which includes

questions about free and fair elections and the autonomy of different social

groups in the country, and a ‘‘Civil Liberties Checklist,’’ which includes ‘‘Rule

of Law and Human Rights’’ and ‘‘Personal Autonomy and Economic Rights’’

subcategories.185 Ratings are done for each survey item using a seven-cat-

egory scale, where one represents the most free and seven the least free, and

by assigning from zero to four raw points per checklist item.186

The World Bank also compiles an annual index that includes ‘‘Rule of

Law’’ as one of six ‘‘dimensions’’ of governance along with ‘‘Voice and Ac-

countability,’’ ‘‘Political Stability and Absence of Violence/Terrorism,’’ ‘‘Gov-

ernment Effectiveness,’’ ‘‘Regulatory Quality,’’ and ‘‘Control of Corruption.’’

Ratings are done for 212 countries and are based on several hundred indi-

vidual variables drawn from thirty-five separate data sources constructed by

thirty-three different organizations from around the world. Rule of law in the

World Bank Index is defined as ‘‘capturing perceptions of the extent to

which agents have confidence in and abide by the rules of society, and in

particular the quality of contract enforcement, property rights, the police,

and the courts, as well as the likelihood of crime and violence.’’187

The Heritage Foundation’s ‘‘Index of Economic Freedom’’ report,

compiled annually since 1995, also gives explicit treatment to rule of law/

legal environment issues.188 Among the important institutional factors

used by the Heritage Foundation to determine economic freedom in

different countries are the rule of law, independence of the judiciary,

185Freedom House, Freedom In the World 2009 (2009), available at http://www.freedomhouse.org/template.cfm?page=351&ana_page=354&year=2009.

186Id.

187See DANIEL KAUFMANN ET AL., GOVERNANCE MATTERS VIII: AGGREGATE AND INDIVIDUAL GOVER-

NANCE INDICATORS 1996–2008, 6 (2009) (describing the World Bank’s approach to character-izing ‘‘Rule of Law’’).

188See TERRY MILLER & KIM R. HOLMES, 2009 INDEX OF ECONOMIC FREEDOM (2009) (describingthe Heritage Foundation’s approach to assessing ‘‘Economic Freedom’’ and the results of the2009 data collection) [hereinafter 2009 Index of Economic Freedom]; see also Eiras, supranote 154 (addressing how the level of corruption affects economic freedom and rule of law inthe Index of Economic Freedom).


http://www.freedomhouse.org/template.cfm?page=351&ana_page=354&year=2009

http://www.freedomhouse.org/template.cfm?page=351&ana_page=354&year=2009

the ability of businesses to enforce contracts, and regulatory burdens on

business.189

More specifically, the Index of Economic Freedom studies fifty inde-

pendent economic variables organized into ten broad categories or factors

of economic freedom in the countries included in the survey.190 Each fac-

tor is weighted equally.191 Each factor is scored according to a grading

scale adapted for that factor on a scale running from 0 to 100, where

a score of 100 signifies an institutional feature or a consistent set of

policies most conducive to economic freedom, while a score of 0 signifies

institutional features or policies that are least conducive to economic

freedom.192

It should certainly be possible to adapt the databases of these estab-

lished economic surveys to generate the (x, y) coordinate pairs for use with

the graph of Figure 6.

A. A Methodology for Generating (x, y) Coordinate Pairs

For purposes of this article, we selected the Heritage Foundation’s ‘‘2009 Index

of Economic Freedom’’193 and previous-year Indexes in this series as readily

accessible databases that lend themselves to generating the (x, y) coordinate

pairs for the rule-of-law metric computations. The Index identifies the ‘‘10

Economic Freedoms’’ as: (1) Business freedom,194 (2) Trade freedom,195

189MILLER & HOLMES, supra note 188, at 15.

190Id.

191Id. at 15.

192Id. at 15–16.

193Id. The 2010 Index of Economic Freedom was recently released, but too late to be incor-porated into this article. A summary of the 2010 Index, however, appears in Terry Miller, TheU.S. Isn’t as Free as it Used to Be, WALL ST. J., Jan. 20, 2010, at A17.

194‘‘Business Freedom’’ comprises an ‘‘individual’s right to create, operate, and close an en-terprise without interference from the state.’’ See MILLER & HOLMES, supra note 188, at 12.According to Miller and Holmes, the most common forms of ‘‘barriers’’ are regulatoryschemes of the state. Licensing and taxation are also examples of inhibitors of business free-dom. Id. at 12–13.

195‘‘Trade Freedom’’ is ‘‘the openness of an economy to imports of goods and services fromaround the world and the ability of citizens to interact freely with buyers and sellers in theinternational marketplace.’’ Id. at 13. Taxes, tariffs, quotas, and embargos are examples offactors that affect trade freedom. Id.


(3) Fiscal freedom,196 (4) Government size,197 (5) Monetary freedom,198

(6) Investment freedom,199 (7) Financial freedom,200 (8) Property

rights,201 (9) Freedom from corruption,202 and (10) Labor freedom.203

Each of these freedoms is scored by the Index on a scale of 0 to 100.204

After carefully considering the elements that comprise each

of these ‘‘10 Economic Freedoms,’’ it was decided that freedoms (3), (5),

(7), and (9) were most closely associated with the characteristic of

‘‘autonomy.’’ Similarly, it was decided that freedoms (1), (2), (6), (8),

and (10) were most closely associated with the characteristic of ‘‘general-

ity/universality.’’205 Index factor (4) (Government size) was omitted

from the calculations because it cannot be considered a freedom and

196‘‘Fiscal Freedom,’’ as that term is used by Miller and Holmes, is defined as ‘‘the freedom ofindividuals and businesses to keep and control their income and wealth for their own benefitand use.’’ Id. at 13. Taxation is the primary example of a factor influencing fiscal freedom. Id.

197‘‘Government Size’’ refers to ‘‘the burden of excessive government, both in terms of gen-erating revenue . . . and in terms of expenditure.’’ Id. at 13. According to Miller and Holmes,the efficiencies (or lack thereof) of a government combined with its potential to impact theprivate sector makes this a significant factor. Id.

198‘‘Monetary Freedom’’ pertains to a stable currency and monetary system. Id. at 14. Withouta stable currency, ‘‘it is difficult to create long term value.’’ Id.

199‘‘Investment Freedom’’ is a measure of restrictions on foreign investment. According toMiller and Holmes, ‘‘the more restrictions a country imposes on investment, the lower its levelof entrepreneurial activity and economic growth.’’ Id. at 14.

200‘‘Financial Freedom’’ is the degree of financial and banking regulation in a particularcountry. Miller and Holmes correctly point out that most, if not all, countries regulate theirfinancial and banking institutions. Accordingly, this factor measures the relative amount ofregulation. Id.

201‘‘Property Rights’’ refers to ‘‘[t]he ability to accumulate private property.’’ Id. at 14–15. Asprotection of private property rights increases, this factor increases.

202‘‘Freedom from Corruption’’ refers to the degree of transparency and honesty of acountry’s systemic institutions. Id.

203‘‘Labor Freedom’’ is defined as ‘‘[t]he ability of individuals to work as much as they wantand wherever they want.’’ Id. Notably, data only exist on this factor from 2005 through thepresent.

204See id. at 15–16.

205For simplicity, we assigned the various Index Freedoms as a whole either to ‘‘generality/universality’’ or to ‘‘autonomy.’’ But, this approach could be fine-tuned by weighting each ofthe Index FreedomsFfor example, 40% of a Freedom value could be assigned to ‘‘generality/universality’’ and 60% of that value could be assigned to ‘‘autonomy.’’


does not clearly correlate with either autonomy or generality/

universality. For scaling purposes, the following mathematical formulas

were used to convert the Index Freedom scores into (x, y) coordinates for

Figure 6206:

XðgeneralityÞCoordinate ¼ ð1Þ þ ð2Þ þ ð6Þ þ ð8Þ þ ð10Þ25

� 10

YðautonomyÞCoordinate ¼ ð3Þ þ ð5Þ þ ð7Þ þ ð9Þ20

� 10

For example, using the above formulas, if the Index scored a partic-

ular country as approximately 90 in each of the 9 freedoms being used in

these calculations, the corresponding (x, y) coordinate pair would be (8, 8),

which clearly falls into the type 4 region of Figure 6, more particularly, in

the type 4a region of Figure 5, indicating the highest levels of autonomy

and generality/universality. Similarly, based on the earlier discussion, a

country with a Sri Lankan–type legal system might be expected to have

Index scores of approximately 30 each, resulting in an (x, y) coordinate

pair of (� 4, � 4), which clearly falls in the type 2 region of Figure 6. More

specific applications of the rule-of-law metric proposed in this article are

presented in the following sections.

B. Rupert MurdochFThe India/China Comparison

In the Introduction, this article quoted News Corp. chairman and chief

executive Rupert Murdoch in his recent observation that India has a more

attractive current investment climate than China because of a better de-

veloped rule of law. The rule-of-law metric of this article permits us to test

that observation. Table 1 below presents 2009 ‘‘Index of Economic Free-

dom’’ data for India and China and illustrates how the mathematical for-

mulas presented above are used to calculate (x, y) coordinate pairs for each

country.

The (x, y) coordinate pairs calculated above can then be plotted on a

graph comparable to Figure 6, as shown in Figure 7 below.

206Prior to 2005, the Index of Economic Freedom database did not provide data for Freedom(10)FLabor Freedom. Accordingly, in calculating (x, y) coordinates for years prior to 2005,the formula for calculating the x axis coordinate was modified by eliminating item (10) anddividing by 20 instead of 25.


Figure 7 below clearly illustrates that Mr. Murdoch’s intuitive obser-

vations about rule of law in India and China were, in fact, correct, but only

barely. Figure 7, and the rule-of-law metrics on which it is based,show that

India has a marginally higher level of both autonomy and generality/uni-

versality than China.208

Both countries border on, but do not quite make it into, the type 4

legal system region that is required to fully support capitalism-based eco-

nomic development and the encouragement of entrepreneurial risk tak-

ing. In other words, savvy investors considering business investment in

either of these countries should, for now, remain cautious and risk averse.

Another interesting question that lends itself to the methodology of

this article is whether Mr. Murdoch’s observations about rule of law in

China might be outdated and based on anecdotal information from earlier

years. To test this possibility, (x, y) coordinate pairs for China were calcu-

lated for two earlier yearsF1995 and 2003Fagain based on the Index

data. Those calculations are shown in Table 2 below.

Table 1: Computation of Rule-of-Law Metrics for India and China (2009)

India (2009) China (2009)

X Y X Y

1 54.4 51.62 51.0 71.43 73.8 70.64 N/A N/A5 69.3 72.96 30.0 30.07 40.0 30.08 50.0 20.09 35.0 3510 62.3 61.8 F

247.7 218.1 234.8 208.5� 25 5 � 20 5 � 25 5 � 20 5

9.908 10.905 9.392 10.425� 10 5 � 10 5 � 10 5 � 10 5

�0.0904207 10.9042 � 0.6117 10.4232

207There are slight rounding differences.

208See Upendra Baxi, Rule of Law in India: Theory and Practice, in ASIAN DISCOURSES OF RULE OF

LAW: THEORIES AND IMPLEMENTATION OF RULE OF LAW IN TWELVE ASIAN COUNTRIES, FRANCE AND

THE U.S. 324 (Randall P. Peerenboom ed., 2004).


The (x, y) coordinate pairs for China for 1995, 2003, and 2009 as

calculated above were then plotted on a graph as shown in Figure 8 below.

Figure 8 illustrates that, in fact, the rule-of-law conditions in China

have shown improvement over the period 1995–2009, but that improve-

ment has been agonizingly slow and uneven. Figure 8 shows that China has

certainly made progress in improving generality and universality, but

there has been a slight decline in the characteristic of autonomy.

C. Exemplary Country ComparisonsF2009 Data

To further illustrate applications of the rule-of-law metric, this section pre-

sents some exemplary country comparisons based on the 2009 Index data.

1. United States/Other Selected Developed Countries

Using the methodology and mathematical formulas discussed above and

based on 2009 data, (x, y) coordinate pairs were calculated for the United

0.0

2.0

4.0

–2.0 0.0 2.0 4.0

Au

ton

om

y


India

China

Figure 7. Graph of Rule-of-Law Metrics for India and China (2009).

Table 2: Rule-of-Law Metrics for China (1995, 2003, 2009)

Year Generality/Universality (x) Autonomy (y)

1995 �2.2500 0.95142003 �1.7200 0.88422009 �0.6117 0.4232


States and eleven other developed countries. The results were then plotted

as shown in Figure 9 below.

Figure 9 illustrates that, as one might expect, all twelve of the developed

countries studied exhibit characteristics consistent with type 4 rule of law legal

systems. Most of those countries (Hong Kong, Singapore, Switzerland, the

United States, United Kingdom, Ireland, and Australia) enviably exhibit the

characteristics of a type 4a system, the type most conducive to entrepreneurial

investment activities. Other developed countries fall into one of the other three

varieties of the type 4 legal system (i.e., a type 4b, 4c, or 4d system) that, to a

greater or lesser degree, tend to constrain entrepreneurial incentive. Figure 9

illustrates that a commonly seen variety of the type 4 legal system, other than

type 4a, is type 4c, where there is some impairment in the degree of autonomy

while the highest levels of generality/universality are maintained.

2. United States/Selected Emerging Economies



States and six emerging economies. The results were then plotted as shown

in Figure 10 below.

Figure 10 illustrates how six countries that have attracted consider-

able FDI attention in recent years as high-profile emerging economies

generally trend from a borderline type 1 into a type 4 legal environment.

Figure 10 shows, for example, that Vietnam, which has been transitioning

–5.0

–3.0

–1.0

1.0

3.0

5.0

–5.0 –3.0 –1.0 1.0 3.0 5.0

Au

ton

om

y


2009

1995 2003

Figure 8. Graph of Rule-of-Law Metrics for China (1995 to 2009).


away from a hard-line Communist economic system, provides less of a

rule-of-law system than more established emerging economies like India

and Brazil that were never saddled with Communist domination.

Also interesting and worthy of further study is the significant rule of

law disparity between Indonesia and Malaysia, two countries that share

many important commonalities from geography to religion.

3. United States/Selected Authoritarian States



States and ten states that might be regarded politically as largely autocratic.

The results were then plotted as shown in Figure 11 below.

Figure 11 illustrates patterns of legal environments (i.e., type 2)

consistent with autocratic systems of government. Specifically these states

are highly regulated, or even repressed, societies. At the extreme, North

–1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

–1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0

Au

ton

om

y


South Korea

IrelandSingapore

Hong Kong

UK

Australia

BelgiumGermany

SwedenJapan

Israel

Switzerland

US

SELECTED DEVELOPED COUNTRIES

4(b) 4(a)

4(d) 4(c)

Figure 9. Graph of Rule-of-Law Metrics for Selected Developed Countries(2009).


Korean citizens enjoy virtually no freedom at all. Their law is sporadic and

whimsically applied by the controlling regime and its dictator, Kim Jong-il.

It is characterized as a closed society. Accordingly, its scores reflect an ex-

treme type 2 legal environment. As discussed further in Part III.D.4 below,

Figure 11 also illustrates the extent of the progressive deterioration of the

legal environment of Zimbabwe in recent years.

D. Exemplary Longitudinal ComparisonsF1995 to 2009 Data

To further illustrate applications of the rule-of-law metric, this section

presents some exemplary longitudinal comparisons based on Index data

over the period 1995 to 2009 to show the evolution of a country’s legal

environment over time.

1. Selected Country Longitudinal Comparisons

There are examples of countries moving from a type 1, type 2, or type 3

legal system in 1995 to a type 4 system in 2009, as shown in Table 3 below.

Table 3 illustrates how much improvement has occurred in the legal

environments of certain countries between 1995 and 2009. Thus, Bulgaria,

a type 3 country in 1995 (still reflecting the impact of a half century of

Soviet/Communist domination), had by 2009 decisively transitioned into a

type 4 legal environment. Similarly, the Dominican Republic, a type 1

–2.0

0.0

2.0

4.0

6.0

–2.0 0.0 2.0 4.0 6.0 8.0 10.0

Au

ton

om

y


IndiaIndonesia

US

Brazil

Vietnam

Malaysia

Phillipines

Selected Emerging Economies

Figure 10. Graph of Rule-of-Law Metrics for Selected EmergingEconomies (2009).


country in 1995, by 2009 had transitioned to a type 4 legal environment;

and, Moldova, a type 2 country in 1995, by 2009 had also transitioned into

a type 4 legal environment.

2. Bulgaria

Using the methodology and mathematical formulas discussed above, (x, y)

coordinate pairs were calculated for Bulgaria over the period 1995 to

–10.0

–8.0

–6.0

–4.0

–2.0

0.0

2.0

4.0

6.0

–10.0 –8.0 –6.0 –4.0 –2.0 0.0 2.0 4.0 6.0 8.0 10.0

Au

ton

om

y


Selected Autocratic States

Congo

Zimbabwe

US

Iran

PakistanAngola

Laos

Yemen

NorthKorea

Syria

Figure 11. Graph of Rule-of-Law Metrics for Selected Autocratic States(2009).

Table 3: Rule-of-Law Metrics for Bulgaria, Dominican Republic and

Moldova (1995, 2009)

Country

1995 2009

Autonomy Generality Type Autonomy Generality Type

Bulgaria � 2.3855 2.3700 3 2.9976 3.1058 4Dominican Republic 2.0275 � 1.7000 1 1.4688 0.8725 4Moldova � 7.1372 � 1.6200 2 1.5456 0.6709 4


2009. This was a period when Bulgaria, emancipated in 1990 from half a

century of Soviet domination, was actively reforming its economic, political,

and legal institutions as part of its transformation from a communist society

to a European-type capitalist economy.209 The results of the rule-of-law

metric coordinate calculations were plotted as shown in Figure 12 above.

This figure demonstrates the transitional turmoil of the late 1990s.

Then, in 2001, there is a meteoric rise in autonomous growth until 2004

when Bulgaria entered the North Atlantic Treaty Organization.210 This

was followed by an impressive strengthening of the generality/universality

scores leading up to 2007 when it entered the European Union.211 It ap-

pears that Bulgaria has taken deliberate steps to transform itself from a

type 4d economy toward a type 4c economy.

–4

–3

–2

–1

0

1

2

3

4

5

6

–1 0 1 2 3 4

Au

ton

om

y


Bulgaria

2009

1995

Figure 12. Graph of Rule-of-Law Metrics for Bulgaria (1995 to 2009).

209See generally DIMITRIS KERIDIS ET AL., BULGARIA IN EUROPE: CHARTING A PATH TOWARD REFORM

AND INTEGRATION (2006).

210Id.; see also Baltic States Rejoice as They Join NATO, MALAYSIAN STAR, Mar. 29, 2004, available athttp://thestar.com.my/news/story.asp?file=/2004/3/29/latest/16653Balticsta&sec=latest.

211Id.; see also Dan Bilefsky, Romania and Bulgaria Join EU, N.Y. TIMES, Jan. 1, 2007, available athttp://www.nytimes.com/2007/01/01/world/europe/01iht-EU.4070609.html?_r=1.


http://thestar.com.my/news/story.asp?file=/2004/3/29/latest/16653Balticsta&sec=latest

http://www.nytimes.com/2007/01/01/world/europe/01iht-EU.4070609.html?_r=1

3. Venezuela

Using the methodology and mathematical formulas discussed above, (x, y) co-

ordinate pairs were calculated for Venezuela over the period 1995 to 2009. This

was a period when Venezuela’s once thriving economy and generally plu-

ralistic political system was being dramatically transformed under the repressive

and openly socialistic policies of President Hugo Chavez. The results of the rule-

of-law metric coordinate calculations were plotted as shown in Figure 13 above.

Figure 13 dramatically illustrates how a nation can evolve backwards

from a type 4 to a type 2 legal environment over a relatively short period of

time. The graph reveals how the legal environment in Venezuela deteri-

orated rapidly into a type 2 system after 1999 when Hugo Chavez came

into power and implemented his version of ‘‘21st Century Socialism,’’ re-

tarding growth and private economic investment.212 Venezuelan media

–1.50

–1.00

–0.50

0.00

0.50

1.00

–4.00 –3.00 –2.00 –1.00 0.00 1.00 2.00 3.00

Au

ton

om

y


Venezuela

1995

2009

Figure 13. Graph of Rule-of-Law Metrics for Venezuela (1995 to 2009).

212Central Intelligence Agency, The World Factbook, https://www.cia.gov/library/publications/the-world-factbook/geos/ve.html (last visited June 24, 2010); see also The weakening of the ‘‘strongbolıvar’’; Venezuela’s devaluation, ECONOMIST ( Jan. 16, 2010). Critics of the Chavez policies havenoted, for example, that ‘‘Chavez’s price controls, government expropriations and otherforms of economic distortion have caused Venezuelans shortages of milk and meat, inflationrates as high as 21 percent, and a sharp decline in foreign investment.’’ Robert Vela, AlternativeApproaches for Venezuela’s Integration into the World Economy: Lessons from Asia, AMERICAS, Spring2009, at 11. In Thomas Carothers, Rule of Law Temptations, FLETCHER FORUM OF WORLD AFF.,Winter/Spring 2009, at 52, Mr. Carothers, Vice President for Studies, the Carnegie


https://www.cia.gov/library/publications/the-world-factbook/geos/ve.html









critics of the Chavez policies, such as the once popular television com-

mentator Napoleon Bravo, have been removed from their jobs. In 2007,

President Chavez confiscated control from private-sector oil companies

and nationalized the largest electricity and telephone companies.213 As

Chavez’s grip has strengthened, Venezuela has progressively transformed

into a society with no meaningful rule of law.214

4. Zimbabwe

Using the methodology and mathematical formulas discussed above, (x, y)

coordinate pairs were calculated for Zimbabwe over the period 1995 to

2009. This was a period when Zimbabwe, a historically poor African coun-

try that seemed on the verge of a successful economic take-off after throw-

ing off the shackles of colonialism, began a persistent and ultimately

disastrous economic decline under the increasingly despotic control of

President Robert Mugabe. The results of the rule-of-law metric coordinate

calculations were plotted as shown in Figure 14 below.

Figure 14 illustrates the shocking deterioration of Zimbabwe’s legal

environment between 1995 and 2009. In 1995, Zimbabwe was a type 2

legal system, but well within reach of achieving type 4 status. By 2009,

however, Zimbabwe was deep into the type 2 system. This deterioration in

the legal environment of Zimbabwe coincided with the country’s political

and economic deterioration under President Mugabe’s increasingly

repressive leadership.215

Endowment for International Peace, commented on the unfortunate tendency that ‘‘newleaders end up reproducing the old forms of corruption, or inventing their own . . . HugoChavez came to power decrying Venezuela’s endemic corruption, yet his rule has come to bemarked by as much or even greater corruption.’’

213See supra note 212. For comparison and a good discussion of the deleterious effects ondomestic business and foreign investment resulting from Argentina’s recent erosion of rule oflaw, see Andres A. Gallo & Lee J. Alston, Argentina’s Abandonment of the Rule of Law and itsAftermath, 26 WASH. U. J. L. & POL’Y 153, 156–59 (2008). It remains to be seen whether Argentina

will track the path of Venezuela. For a different perspective on Venezuela, see Leonardo Vivas &

Juan Pablo Lupi, (Mis)Understanding Chavez and Venezuela in Times of Revolution, FLETCHER

FORUM OF WORLD AFF., Winter 2005, at 81.


215In Todd Moss, Zimbabwe’s Meltdown: Anatomy of a Peacetime Economic Collapse, FLETCHER

FORUM OF WORLD AFF., Summer 2007, at 134–36, the author observed: ‘‘Zimbabwe is an un-usual case of a country driven into the advanced stages of collapse, not by war or naturaldisaster, but by the deliberate acts of its own leaders.’’ See also ANNA KAJUMULO TIBAIJUKA,






According to the U.S. Central Intelligence Agency, Zimbabwe’s dic-

tator, President Mugabe, began a ‘‘chaotic land redistribution campaign . . .

in 2000, caus[ing] an exodus of white farmers, [which] crippled the econ-

omy, and ushered in widespread shortages of basic commodities.’’216 Price

controls and rampant inflation have devastated this economy.217 It is no

surprise that Zimbabwe today is a nation that is second only to North

Korea in its negative rule-of-law metric score.

–7

–6

–5

–4

–3

–2

–1

0

1

2

–5 –4 –3 –2 –1 0

Au

ton

om

y


Zimbabwe

2009

1995

Figure 14. Graph of Rule-of-Law Metrics for Zimbabwe (1995 to 2009).

REPORT OF THE FACT-FINDING MISSION TO ZIMBABWE TO ASSESS THE SCOPE AND IMPACT OF OPERATION

MURAMBATSVINABY THE UN SPECIAL ENVOY ON HUMAN SETTLEMENTS ISSUES IN ZIMBABWE (2005)(detailing the effect of Zimbabwe Government real property reclamation actions). See generallyMARTIN MEREDITH, MUGABE: Power, Plunder and the Struggle for Zimbabwe (2002).

216Central Intelligence Agency, supra note 212, https://www.cia.gov/library/publications/the-world-factbook/geos/zi.html. See generally Blair Rutherford, The Rough Contours of Landin Zimbabwe, FLETCHER FORUM OF WORLD AFF., Summer 2005, at 103–04.

217See, e.g., Sharmini Coorey et al., Lessons from High Inflation Episodes for Stabilizing the Economyin Zimbabwe 1–3 (IMF Working Paper WP/07/09, April 2007) (describing the disruptionscaused by skyrocketing inflation rates and currency devaluations); see also A Worthless Currency;Zimbabwe, ECONOMIST, July 19, 2008, at 56. See generally DOUGLAS ROGERS, The Last Resort(2009).


https://www.cia.gov/library/publications/the-world-factbook/geos/zi.html



CONCLUSION

This article proposed a new approach to developing a metric for quanti-

fying ‘‘rule of law’’ as a way to track a country’s legal environment of

business over time, to evaluate and compare the business climates in

different countries in making FDI decisions, and to guide managers in

adapting their firms’ FDI decisions and strategies to differing and evolving

national legal environments.

The rule-of-law metric developed in this article was based on char-

acterizing a country’s legal system by an (x, y) coordinate pair on a two-axis

graph representing the characteristics of generality/universality (x axis)

and autonomy (y axis). Based on this model, four types of legal systems

were identified, only one of which is compatible long term with market

capitalism; and, within the preferred legal model, variations can be corre-

lated with cyclical changes in a country’s balance between regulated and

free markets.

Using one of several available data sets compiled annually for eval-

uating economic freedom around the world, this article also proposed a

methodology for generating the (x, y) coordinate pairs for different coun-

tries and over different times. Employing the proposed methodology,

illustrative comparative and longitudinal examples were provided to dem-

onstrate the utility of this approach.

Although there is certainly considerable room for refining and fur-

ther developing the methodology of this article, it is believed that the

proposed rule-of-law metric will prove immediately useful to business ex-

ecutives and academics.


a rule-of-law metric for quantifying and assessing the changing legal environment of business

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