On a 'flat' world, we need lawyers to level the playing fields
Gillian Hadfield
This article is adapted from Rules for a Flat World: Why Humans Invented Law and How to Reinvent It for a Complex Global Economy
Cheap communications and transportation have given us the global supply chain or a more level economic playing field, captured by Thomas Friedman in his 2005 best-seller, The World is Flat. The most glaring hole in Friedman’s flat-world story, however, is the absence of any mention of legal infrastructure.
Flattening production processes with global supply chains requires more than technology and container ships. It requires a resolution of that basic problem of how to coordinate and support collaboration and exchange. It requires a way of resolving the externalities and conflicts that upheaval in economic life creates.
It requires a means of responding to the very unevenness—the nonflatness—that has persisted, even been exacerbated, in the wake of the ways in which the global platform has rearranged work and resources.
These are the types of problems that culture solved in simple human societies, and that the many rule-making groups of medieval Europe—the guilds, town councils, churches, princes and lords—helped to solve as economies grew more differentiated and complex.
They are the problems that the emergence of the nation-state and centralized, democratically controlled legal systems responded to as the bounds of the Commercial Revolution of the Middle Ages gave way to the industrial revolutions of the 18th and 19th centuries.
Those earlier solutions are no longer working well. More than half of the world’s population lives in poor places that are still waiting for the arrival of last century’s legal solutions, in informal economies that operate outside any formal legal framework.
Legal infrastructure has a critical role for levelling playing fields and flattening production processes. Rules don’t just happen, they have to be made. And our technology of making them has to keep up with the complexity of what the rules are trying to regulate.
FASTER PACE
In the decade since Friedman’s book first appeared, the pace at which the world is being flattened has only accelerated.
Back in 2005, for example, Facebook was still an online directory for college students. YouTube had not yet launched. Twitter was a year away. Netflix streaming and the iPhone were two years out, the App Store three.
Global online freelance platforms like oDesk (rebranded UpWork) and Mechanical Turk were just gearing up. Amazon Web Services (the first significant cloud-computing platform) wouldn’t be around for a year; Google and Microsoft’s entries into cloud-based IT infrastructure and browser-based services for businesses wouldn’t show up until 2008 and 2009, respectively. Bitcoin was four years away. The U.S. Securities and Exchange Commission had only just introduced new rules for competition between stock exchanges that would fuel the race among high-frequency traders to shave transaction times down to microseconds; the general public wouldn’t notice until the first stories started appearing in the New York Times and the Wall Street Journal in 2009.
The global platform was getting ready to do much more than just reduce communication costs and expand labor markets to enable the global supply chains and opportunities for horizontal collaboration:
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• Mass digitization—the conversion of everything from phone calls, stock trades, movies and documents to identities, social networks, geographic locations and genetic information into flat sequences of zeros and ones that can race along fiber optic cables and over wireless networks—has made it possible to convert a vast array of our economic interactions from ones embedded in physical objects and fixed locations to disembodied ones that exist both nowhere and everywhere at the same time.
• Powerful computers that can analyze the information contained in those globally available ones and zeros in vastly greater quantity and at vastly greater speeds than the human brain have dramatically reduced the time it takes to develop a new product or spread an idea or complete a transaction.
• Virtual reality devices allow us to immerse ourselves in places thousands of miles away, and robots allow us to do things there.
• The 3D printer allows even physical objects—machine parts, clothing, food, human tissue—to exist only in digital form in the cloud until a user hits “print.”
• The internet of things connects our homes, workplaces, devices, bodies to the world, beyond our awareness. Cars talk to weather and traffic sensors, regulators, and each other—and they don’t need humans in the driver’s seat. Your printer can order the ink it needs all by itself.
The impact on the economic demand for law of all of these changes is enormous. With yet another massive leap in the complexity of the economy, our legal infrastructure has yet to catch up.
CENTRAL ROLE
Legal infrastructure still plays a central role in scaffolding the complex, information-rich relationships in our most innovative companies. I learned this in the research I conducted with Iva Bozovic, a former PhD student of mine and now an assistant professor at the University of Southern California.
We wanted to know if contracting was still “dead” in the way Stewart Macaulay had suggested it was in the 1960s. How were companies managing their most innovative-critical relationships, the strategic alliances and codevelopment arrangements they needed to compete aggressively in a fast-paced global environment?
What we heard from some of the leaders in Silicon Valley was: We use a lot of law. But not for the purposes of litigating and threatening big damages. We use a lot of lawyers and contracts to design our strategic alliances because it is critical that we have as much structure as we can put down to steer the informal development of our relationships in constantly churning waters.
These strategic alliances are still very much relational contracts largely enforced by the risk of losing a valuable relationship or doing damage to reputation, and trust and personal relationships play an important role.
But they also depend significantly on law, lawyers and legal advice to help define what actions will sink the relationship or reputation and what will keep everyone confident they are still on the same team.
In the flat world, infused with the complexities of contracting over information, off-the-shelf contracts and standardized legal reasoning and approaches don’t cut it. What’s needed are creative ways to manage enormously challenging and dynamic strategic relationships. Lots of our most innovative companies are struggling to find this kind of legal infrastructure.
Companies that excel at being proactive in anticipating the direction of legal change and in implementing effective responses earn a competitive advantage.
Finding, or helping to shape, a legal environment that does a better job of meeting the fundamental economic demands of business—helping to manage complex contractual relationships, for example, or reduce labor disputes, or protect against fraud and corruption—helps a company to secure those economic benefits.
There are at least as many gains to be had from expert management of global legal logistics as those to be found in global shipping, global information systems or global strategic alliances.
That too is part of the economic demand for legal infrastructure, and it is something that businesses need more and more of in a complex, globally connected economy.
Gillian Hadfield is a professor of law and economics at the University of Southern California, and author of Rules for a Flat World: Why Humans Invented Law and How to Reinvent It for a Complex Global Economy.
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