This is part 3 of a multi-part series presenting a praxeological theory of the origin and character of law. Part 2 here.

After two people verbally argue out their differences – perhaps with the assistance of a neutral arbitrator – the dispute can either go back to a state of open conflict (perhaps a standoff), or it is resolved through some kind of mutually agreed (stipulated) settlement. If the parties settle, then – as time goes by – they will either abide by the terms of the settlement because they believe sticking to the settlement is the best choice among the alternatives or they will end up in a dispute again over this or something else (feud). Good settlements are proven by their ability to prevent a return to open conflict or standoff. Poor settlements are proven by the opposite. As many disputes are settled, people learn that certain kinds of settlement are likely to fail and other kinds are likely to succeed in preventing a return to conflict or standoff. Those terms of settlement that tend to work in preventing future conflict can be termed law. The profession of assisting people who are trying to bargain for terms of settlement of a dispute in choosing good terms of settlement (and avoiding poor terms of settlement) can be called arbitration.

“The long-run consequences of even minor rules are very difficult to correctly assess, a lesson proved by the long history of perverse incentives and unintended consequences of statutory laws.”

But the story does not end here. Law itself feeds back and informs the ends that people value and the means they choose to attain those ends. Knowing that a certain course of action is likely to result in either direct conflict or unfavorable terms of settlement in arbitration makes that course of action – ceteris paribus – less attractive than it otherwise would have been. Such courses of action come to be perceived as unlawful. As a result of the settlement of disputes through mutual agreement to terms of settlement, society self-organizes and becomes lawful and orderly. A wise overlord is not needed. In fact, the Leviathan of Hobbes is a pox – it is the universal bully that – by virtue of its overwhelming power – may impose its ends upon all others. Such an organization is cancerous to lawful and orderly society.

Ludwig von Mises argued that socialism is impossible because governments are not subject to the market discipline of profit and loss and, therefore, they are unable to engage in economic calculation. That is, government simply cannot tell if it is making things better or worse, economically, even if it has perfectly altruistic intentions.

The paradox of “planning” is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.

Ludwig von Mises – Human Action, chapter 26, section 1

A similar problem exists with planned law, or statutory law. Law that emerges from the mutual, voluntary settlement of disputes is informed by a process of discovery through trial and error. Settlements which worked in past disputes are likely to work in new disputes because human nature is largely shared. Courses of action which are likely to result in unfavorable terms of settlement inform the choices that people make, thus reducing the incidence of disputes to begin with and making society more harmonious. The choice to arbitrate disputes in an orderly manner and accept the (sometimes painful) outcomes of orderly dispute-resolution is not only motivated by self-regard but also reinforced by the orderliness of lawful society itself. That is, whereas disputants in earliest human history bargained with one another solely out of a desperate attempt to avoid the risks and dangers of open conflict, we have a long experience with the benefits to the individual of participating in orderly dispute resolution. This process of feedback on the choices people make continually drives the gangly process of cooperative, arbitrated exchange in dispute resolution closer to a process of pure, catallactic exchange – the act of taking a legal risk becomes, more and more, an entirely conscious trade-off based on calculation of costs and benefits.

Statutory law, on the other hand, short-circuits this process via judicial, legislative or dictatorial fiat. The long-run consequences of even minor rules are very difficult to correctly assess, ex ante – a lesson proved a million different ways by the long history of perverse incentives and unintended consequences[1] of statutory laws. And these unintended consequences will plague even the “night watchman” State, ruling over a libertarian society. The author of statutory law cannot know – even if he has the most altruistic intentions – whether his law is going to reduce or increase the incidence of conflicts and he cannot know whether it will work in preventing future conflicts from buried dissatisfaction with the imposed terms of settlement.

As Mises calls central, economic planning, any system of statutory law – however created and administered – is a “system of groping about in the dark.” The costs of statutory law to the individual arise from the discoordination of what I will call general calculation. that is, the individual’s judgment regarding his best course of action not only in light of his opportunities for profit and loss in the market, but also in light of his legal risks, rights and responsibilities.

This discoordination is, in part, the result of legal uncertainty created by the complexity of statutes[2], as well as uncertainty regarding the future changes which will be made to statutes. Private citizens are no more privy to the long-run consequences of statutory law than the lawmakers, so uncertainty regarding the long-run consequences of existing statutes afflicts all alike.

Clayton –