Polycentric Law in the New Millennium

An Essay Submitted to The Mont Pelerin Society

On the Occasion of its 1998 Golden Anniversary Meeting

In Accord with the Requirements for the Friedrich A. Hayek Fellowship

By

Tom W. Bell

Alexandria, Virginia

May, 1998

Polycentric Law In The New Millennium

Tom W. Bell[*]

Essay Question:

Entering the Twenty-first century, what modern choices in legal relations are becoming available consistent with the dynamic market process?

Introduction

For millennium upon millennium, customary and private legal systems alone ordered human affairs.[1] It could hardly have been otherwise, given that humans cannot live together without some sort of law. As Friedrich A. Hayek noted, society can exist "only if by a process of selection rules have evolved which lead individuals to behave in a manner [p. 1/p. 2] which makes social life possible."[2] Law's practical effect thus predates not only States but even the idea of law itself.[3]

States accumulated sufficient power to claim a monopoly in law[4] only relatively recently--and only after a long struggle to crush competing legal systems.[5] Polycentric law[6] [p. 2/p. 3] survived that onslaught, however, and has now taken root in the interstices of State power.[7] This essay will describe why, as we enter a new millennium, conditions favor the growth and flourishing of polycentric law.[8]

Three areas in particular stand out as promising fields for the development of polycentric law: alternative dispute resolution, private communities, and the Internet. Each has [p. 3/p. 4] seen the failure of political legal systems, an exodus by dissatisfied consumers to private alternatives, and rapid growth in the magnitude, diversity, and sophistication of polycentric legal services.

Alternative Dispute Resolution

That ADR typically serves the needs of shop-keepers by no means indicates that it requires the steady and secure environment of a well-regulated State. To the contrary, ADR has thrived under conditions that render soldiers and bureaucrats powerless. Consider the Mediterranean in the eleventh century: Muslim and Christian worlds stood on opposite shores, divided not only by sea but by religion, kinship, kingdom, and culture. Merchants struggled with agency relations under asymmetric information, an inability to specify comprehensive agreements, and sharply limited means of enforcing contracts. Yet free, private, and [p. 4/p. 5] competitive trade thrived thanks to the Maghribi traders, a coalition of merchants who set up and ran a private legal system.[9]

The Law Merchant (Lex Mercatoria) represents a more sophisticated and well-known example of how the demands of commerce can create and sustain a polycentric legal system under circumstances that frustrate statist law.[10] Like the Maghribi traders' coalition, the Law Merchant's effectiveness relied not on State coercion but on the threat of ostracism. Merchants who defected from the Law Merchant's standards found themselves cast out of its community of reciprocal commercial relationships.[11] The Law Merchant survived the political turmoil of the Middle Ages and influences international law and customary business practices to this day.[12] [p. 5/p. 6]

Just as impotent States left room for the development of the Maghribi traders' coalition and the Law Merchant, so today the long delays and high costs of State legal systems encourage the growth of commercial alternatives. The largest private provider of ADR services in the U.S., the American Arbitration Association, administered 62,423 cases in 1995, nearly twice as many as the 35,156 it handled in 1975.[13] More than 1,000 ADR brokerages compete with the AAA, led by Judicial Arbitration and Mediation Services/Endispute, a private California company founded in 1979.[14] JAMS/Endispute handled about 15,000 arbitrations and mediations in 1997, generating $45 million in revenue. By March of 1998, its monthly average caseload had already risen 13 percent over 1997 figures, to 1,500 a month.[15]

Private ADR has done so well that even State courts increasingly rely on its services. In 1980, only ten state courts and one federal district court had ADR programs.[16] By 1996, nearly half of all federal district courts had them, while all but two of the federal appeals courts did.[17] Nearly [p. 6/p. 7] half of the states now have statewide ADR programs at the trial level and nearly all of them have at least one court with a mediation program.[18]

The growth of ADR demonstrates that polycentric law naturally pervades the gaps that open where State power fails. As discussed below, private communities and the Internet provide similar examples of this diffusion of freedom. ADR proves especially interesting, however, because it demonstrates the distinction that F. A. Hayek and Bruno Leoni drew between law and legislation. Law arises as a spontaneous order, an aggregate effect of courts settling various individual disputes. "[T]he law is something to be discovered more than enacted," as Leoni put it.[19] In contrast, "legislation is conceived as an assured means of introducing homogeneity where there was none and rules where there were none."[20]

The State's courts have less and less time to find the law for civil litigants because their dockets overflow with [p. 7/p. 8] criminal prosecutions enforcing legislation.[21] That the Drug War generates most of these prosecutions merely illustrates the manifold hazards of unjust legislation. By effectively abandoning civil litigants, therefore, State courts have not only encouraged the rise of competing, polycentric legal processes; they have also vividly demonstrated the perils of confusing law with legislation.

Private Communities

By managing their neighborhoods through clear-cut property rights and contractual agreements, residents of private communities win a variety of emotional, psychological, social, and financial advantages, including enhanced property values, security, aesthetics, and "community spirit."[24] On a less esoteric level, these associations provide the basic services--such as garbage, water works, and road care--that residents of political communities have found, to their distress, they can no longer take for granted.

Mere privatization alone cannot suffice to make any community a success. It does, however, create incentives that reward the development of successful communities. Those who own private communities, whether initial investors or later residents, directly benefit by prevailing in the competition for residents. Private communities thus tend to seek out and implement tools for making neighborhoods safe and pleasant. Politicians, who loosely run but do not own conventional communities, simply do not face the same incentives.

Does community privatization work? The numbers speak for themselves. In 1962 the U.S. had fewer than 500 [p. 9/p. 10] homeowners' associations.[25] Residential associations have exploded in growth since then. There were 10,000 in 1970; 55,000 in 1980; and 130,000 in 1990.[26] By 1992 there were 150,000 residential associations housing some twenty-eight million people.[27] Experts expect this number to double within a decade.[28] The number of residential associations in the U.S. has long exceeded the number of cities.[29] Gated communities, which press the extremes of privatization, have become the most rapidly growing type of housing in the U.S., claiming about 4 million residents at present.[30]

Residents of private communities experience polycentric law not as a theoretical abstraction, but as a working reality. These people have deliberately removed themselves from the inefficient political machinations of municipal governments, seeking instead to live under regulations of their own choice and making. Faced with the futility of exercising any real influence over the politicians and bureaucrats who would run their lives, residents of private [p. 10/p. 11] communities have rediscovered the pleasures--and undoubtedly the pains--of deliberating toward consensus with their neighbors.

Private communities are thus reintroducing a growing number of people to the principles of self-governance. These people have already rejected political control of their neighborhoods. They are rapidly acquiring a taste for home-cooked governance. Residents of private communities thus stand ready to embrace an expansion of polycentric law in the new millennium.

The Internet

For the most part, informal customary norms suffice to regulate Internet behavior. Principles of "netiquette," enforced through praise and criticism, set the basic rules for newsgroups, listservs, chatrooms, MUDs, MOOs, and other virtual communities.[32] In some cases, "netizens" of these communities establish more formal means of regulation, such as by relying on a moderator to screen messages or by adopting written rules. Dibbell offers a fascinating account of how one of these virtual communities responded to anti-social behavior by, in essence, creating a civil government.[33] These examples demonstrate that on the Internet, as in the Old West and elsewhere, "people frequently resolve their disputes in cooperative fashion without paying attention to the [State] laws that apply to those disputes."[34]

Although the Internet began as an academic and recreational network, in recent years it has become an [p. 12/p. 13] important new marketplace. With the advent of commerce have come new types of disputes--and new types of polycentric law. Consider the well-publicized problem of assigning rights to domain names, the Internet's addresses. Companies holding trademarks, such as "Panavision," have frequently sued parties holding rights to allegedly infringing domain names, such as "panavision.com." While government bureaucrats endlessly deliberated about how to fix the quasi-public domain name registration system, entrepreneurs set up a private, for-profit alternative, the Real Name System. In addition to technically bypassing the traditional domain name registration process, the Real Name System legally bypasses State courts by relying on adjudication to solve conflicts over trademark rights.[35]

The Internet has just begun to develop generic adjudication and alternative dispute resolution services to which, in contrast to the Real Name System, any mutually consenting parties can turn for help. These online [p. 13/p. 14] experiments promise to open up exciting new frontiers in polycentric law. A quick review of three such services, the Virtual Magistrate, Internet Neutral, and the Online Ombuds Office, illustrates this burgeoning trend.

The Virtual Magistrate is an on-line arbitration and fact-finding system designed to settle disputes involving Internet users, parties who complain that on-line conduct has harmed them, or (to the extent that complaints implicate them) system operators.[36] Its organizers, for the most part academics, have given careful thought to why Internet disputes call for special legal procedures. On the Internet, they explain,



People all over the world interact in real time and take actions that affect the rights, interests, and feelings of others. When conflicts arise over similar activities in the "real" world, regular courts are available to resolve resulting formal complaints. But the court system is too slow, too expensive, and too inaccessible to address all problems that arise on the Net. Also, with people from many countries communicating on the Net, traditional nation-based legal remedies are especially difficult to apply.[37]

The Virtual Magistrate Project has adopted procedures uniquely suited to Internet law. Filings and other communications normally take place solely via email; neither the parties nor their virtual magistrate need ever meet face-to-face. Indeed, they need not even leave their computer terminals! Proceedings move at the accelerated pace of [p. 14/p. 15] "Internet time," with decisions issuing within 72 hours of the receipt of a complaint.[38] Far from merely interpreting and applying State law to disputes, virtual magistrates examine the standards of network etiquette and applicable contracts to determine the evolving shape of Internet law.[39]

Another ADR project, Internet Neutral, demonstrates the diversity of polycentric legal services that have already taken root on the Internet.[40] In contrast to the Virtual Magistrate, Internet Neutral offers solely mediation and uses on-line chat rather than email to conduct proceedings.[41] It also, again in contrast to the Virtual Magistrate, operates on a for-profit basis.[42]

Yet another project, the Online Ombuds Office, offers mediation via email, at no charge, as part of non-profit experiment in developing Internet ADR programs.[43] Its most interesting work has yet to come. The Online Ombuds Office aims to develop a sophisticated interactive multimedia virtual environment, called "LegalSpace," to facilitate [p. 15/p. 16] online ADR.[44] If successful, LegalSpace will make polycentric legal services easy to use and instantly accessible for the millions (and counting) of netizens worldwide.

Internet users sorely need polycentric law. Notwithstanding its somewhat ethereal nature, the Internet sees quite real conflicts. The Online Ombuds Office has observed a wide range of situations calling for mediation, including personal disputes between members of newsgroups or listservers, contests over domain names, disagreements between Internet service providers and their customers, and allegations of copyright infringement.[45] Even this partial listing shows that life on the Internet, like life off of it, gives rise to disputes that demand legal resolution.

As the Internet community grows in population and diversity, it will need polycentric law all the more. At the close of 1995, about nine million people used the Internet.[46] A year later, the figure had grown to 28 million.[47] Today, over 100 million people use the Internet.[48] By the year 2005, [p. 16/p. 17] according one estimate, one billion people will do so.[49] American netizens will soon find themselves in the minority. The international Internet community, like the community of itinerant traders that created the Law Merchant, flows too freely and quickly for State law. Only polycentric law can keep up with that most polycentric of networks, the Internet.

Conclusion

To judge from the account set forth above, polycentric law has a very bright future. The case studies on alternative dispute resolution, private communities, and the Internet reveal that all three provide excellent platforms for the growth and development of polycentric legal services. But reviewing facts, figures, and examples merely brings us up to date. Ultimately, the fate of polycentric law relies on what we choose to make it.

Bruno Leoni once said, "Individuals make the law insofar as they make successful claims."[50] By this he meant that legal norms arise out of the sorts of claims that have a good probability of being satisfied in a given society. But what Leoni said of the law's content holds equally true of [p. 17/p. 18] the law's structure: Individuals make the law more polycentric insofar as they struggle free of existing, statist legal structures and successfully lay claim to newer, freer ones.

Footnotes

[p. 1]

[*] Assistant Professor, University of Dayton School of Law (on leave in 1997-98 academic year); Director of Telecommunications and Technology Studies, Cato Institute (1997-98); Assistant Professor, Chapman University School of Law (forthcoming, 1998 academic year). Age: 34 (born 3/3/64). Email: <tomwbell@aol.com>; WWW: <http://members.aol.com/tomwbell/Homepage.html>; office phone: 202/789-5283.

[1] For a review of the historical role of customary and private legal systems, see Bruce L. Benson, The Enterprise of Law (1990).

[p. 1/p. 2]

[2] Friedrich A. Hayek, I Law, Legislation and Liberty 44 (1973).

[3] "At least in primitive human society, scarcely less than in animal societies, the structure of social life is determined by rules of conduct which manifest themselves only by being in fact observed." Id. at 43.

[4] Indeed, Weber's classic definition of the State relies crucially on reference to its monopoly in law. "A compulsory political organization with a continuous organization (politischer Anstaltsbetrieb) will be called a 'state' if and insofar as its administrative staff successfully upholds a claim to the monopoly of the legitimate use of physical force in the enforcement of its order." Max Weber, The Theory of Social and Economic Organization 154 (1964) (emphasis in the original).

[5] For a magisterial account of the origins of State law in the West, see Harold J. Berman, Law and Revolution: The Formation of Western Legal Tradition (1983).

[6] This essay uses "polycentric law" as a generic label for non-statist law, including both customary and privately produced law. This follows Lon L. Fuller's definition of the term: "[L]aw is the enterprise of subjecting human conduct to the governance of rules." Lon L. Fuller, The Morality of Law 106 (1964). In defending his definition, Fuller admitted that it left ample room for non-statist legal systems. "A possible objection . . . is that it permits the existence of more than one legal system governing the same population. The answer, of course, is that such multiple systems do exist and have in the history been more common than unitary systems." Id. at 123. See also, Roscoe Pound, II Jurisprudence 299 (1959) ("In the sense in which many sociologists now use [p. 2/p. 3] 'law' there may be a legal order and so law without any political organization.")

It bears noting that legal positivists and analytical philosophers sometimes dispute that anything but the State can generate law. With regard to the former, see for example, John Austin, The Province of Jurisprudence Determined 202 (1954) ("For every positive law, or every law simply and strictly so called, is set directly or circuitously by a monarch or sovereign number to a person or persons in a state of subjection to its author.") With regard to the latter, see for example, Margaret MacDonald, The Language of Political Theory, 41 Proc. Aristotelian Soc'y 91, 110 (1940-41) ("To ask whether I should obey any laws is to ask whether there might be a political society without political obligations, which is absurd.") (emphasis in the original).

To fully refute the notion that law comes only from States would far exceed the bounds of this essay. For an attempt at that project, however, see, Tom W. Bell, The Jurisprudence of Polycentric Law (1992) (unpublished manuscript, on file with the author) (defending "polycentric law" as the best of many alternative labels, defining customary law and privately produced law as subsets of polycentric law, and setting forth a jurisprudential theory of polycentric law).

[7] A number of scholars have discussed polycentric law, albeit not always under that name. For a summary of scholarship on polycentric law see, Tom W. Bell, Polycentric Law, 7 Humane Studies Rev. 1 (1991/92).

[8] For a vivid projection of life in a polycentric legal order, see Randy E. Barnett, The Structure of Liberty 284-297 (1998).

[p. 3/p. 4]

[p. 4/p. 5]

[9] Avner Greif, Reputation and Coalitions in Medieval Trade: Evidence from the Geniza Documents, 49 J. Econ. Hist. 857 (1989).

[10] See generally, Leon E. Trakman, The Law Merchant: The Evolution of Commercial Law (1983); Berman, Law and Revolution at 333-56 (cited in note 5).

[11] "Reciprocity and the threat of business sanctions compelled performance. The ordinary undertakings of merchants were binding because they were 'intended' to be binding, not because any law compelled such performance." Trakman, The Law Merchant at 10 (cited in note 10).

[12] See Harold J. Berman & Felix J. Dasser, The 'New' Law Merchant and the 'Old': Sources, Content, and Legitimacy, in Thomas E. Carbonneau, ed., Lex Mercatoria and Arbitration 22 (Transnational Juris Publ, 1990): "The law merchant has been for centuries and continues to be today an international body of law, founded on the shared legal understandings of [p. 5/p. 6] an international community composed principally of commercial, shipping, insurance, and banking enterprises of all countries." See also, Benson, The Enterprise of Law at 224-27 (cited in note 1).

[13] Richard C. Reuben, Public Justice: Toward a State Action Theory of Alternative Dispute Resolution, 85 Calif. L. Rev. 577, 584 (1997).

[14] Id.

[15] Mike Fimea, Alternative Justice; Problem Solving Through Mediation and Arbitration is Growing, The Arizona Republic, March 3, 1998, at EV10.

[16] Reuben, 85 Calif. L. Rev. at 584.

[17] Id.

[p. 6/p. 7]

[18] See Richard C. Reuben, The Lawyer Turns Peacemaker, A.B.A. Journal, Aug. 1996, at 54, 56.

[19] Bruno Leoni, Freedom and the Law 10 (1961) (emphasis in the original). See also, Hayek, I Law, Legislation and Liberty at 72-73, 119-120 (cited in note 2).

[20] Id. at 16-17. See also, Hayek, I Law, Legislation and Liberty at 124-ff. (discussing proper role of legislation) (cited in note 2); Friedrich A. Hayek, The Road to Serfdom 72-87 (1944) (discussing proper scope of Rule of Law).

[p. 7/p. 8]

[21] "Indeed, since criminal cases have priority, many courts are unable to reach their civil dockets at all." Steven B. Duke, America's Longest War: Rethinking Our Tragic Crusade Against Drugs 177 (1993).

[22] Private communities have existed in the U.S. since at least 1831, when Gramercy Park was formed in New York City. Robert G. Natelson, Law of Property Owners Associations 17 (1989).

[23] For a prescient analysis of how private communities develop and function, see, Spencer Heath MacCallum, The Art of Community (1970).

[p. 8/p. 9]

[24] See A. Dan Tarlock, Residential Community Associations and Land Use Controls, in Residential Community Associations: Private Governments in the Intergovernmental System? 75 (1989).

[p. 9/p. 10]

[25] Evan McKenzie, Privatopia: Homeowner Associations and the Rise of Residential Private Governments 10 (1994).

[26] Id. at 10-11.

[27] Id. at 10; Timothy Egan, Many Seek Security in Private Communities: The Serene Fortress, N.Y. Times, Sept. 3, 1995, at A1, A22.

[28] Id. at A1.

[29] Robert C. Ellickson, Cities and Homeowners Associations, 130 U. Pa. L. Rev. 1519, 1520 (1982).

[30] Egan, Many Seek Security in Private Communities: The Serene Fortress, at A22.

[p. 10/p. 11]

[31] Terry L. Anderson & P.J. Hill, An American Experiment in Anarcho-Capitalism: The Not So Wild, Wild West, 3 J. Libertarian Stud. 9 (1979) (describing private legal procedures on frontier of American West).

[p. 11/p. 12]

[32] A listserv (or email list) forwards each message to the listserv to all its subscriber members. A newsgroup is a Usenet discussion group that functions much like a public bulletin board devoted to a specific topic. A chatroom provides the equivalent of a text-based conference call. A MUD (Multiple User Dungeon/Dimension) or MOO (MUD, Object Oriented) is a text-based virtual environment that uses a real-time chat interface.

[33] Julian Dibbell, A Rape in Cyberspace or How an Evil Clown, a Haitian Trickster Spirit, Two Wizards, and a Cast of Dozens Turned a Database into a Society, The Village Voice, Dec. 23, 1993, at 36.

[34] Robert C. Ellickson, Order Without Law: How Neighbors Settle Disputes vii (1991). In this quote, as in the title of his book, Ellickson regrettably reserves "law" for statist law.

[p. 12/p. 13]

[35] See, James Glave, Finding Brand Names Fast, Wired News, 5/8/98, available at <http://www.wired.com/news/news/technology/story/12171.html>. The story describes how the Real Name System allows companies to ensure that links to their sites will follow searches for their brand names on search engines and elsewhere on the web. "If Real Name takes off, the tangled legal mess of domain name trademark battles may be resigned to an interesting chapter in Internet history. [The Real Name System] dispute policy is clear--[it] only accepts payment from the registered trademark holder of a name or slogan, and disputes are judged by Bill Washburn. . . . one of the Net's commercial pioneers." Id.

[p. 13/p. 14]

[36] See, Virtual Magistrate Homepage at <http://vmag.cilp.org>.

[37] Frequently Asked Questions at <http://vcilp.org/docs/vmagfaq.html>.

[p. 14/p. 15]

[38] See, How Will Decisions be Reached? at <http://vmag.cilp.org/docs/vmpaper.html>

[39] See, Standard for Decisions at <http://vmag.cilp.org/docs/vmpaper.html>.

[40] See, Internet Neutral Homepage at <http://www.internetneutral.com/>.

[41] See, Mediation in a Nutshell at <http://www.internetneutral.com/nutshell.htm>.

[42] See, The Fees at <http://www.internetneutral.com/fees.htm>.

[43] See, Online Ombuds Project Homepage at <http://128.119.199.27/center/ombuds/>.

[p. 15/p. 16]

[44] See, LegalSpace: Moving Beyond Email at <http://128.119.199.27/process>.

[45] Table of Disputes at <http://128.119.199.27/center/ombuds/database.html>.

[46] Mary Meeker & Sharon Pearson, Morgan Stanley U.S. Investment Research: Internet Retail 2-3 (1997).

[47] Id.

[48] Louise Kehoe, High Streets in Hyperspace, Financial Times (London), April 18, 1998, at 10.

[p. 16/p. 17]

[49] Nicholas Negroponte, The Third Shall Be First: The Net leverages latecomers in the developing world, Wired, January, 1998, at 96.

[50] Bruno Leoni, The Law as the Claim of the Individual, Archives for Philosophy of Law and Social Philosophy 40, 58 (1964).

[p. 17/p. 18]

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