Rule of Law in a Mixed Economy

Rule Of Law In A Mixed Economy | Overview

• Introduction
• Mixed Economy
• Importance of rule of law in Economics
• Interlinkage of Rule of law and Mixed Economy
• Criticisms
• Conclusion

This article talks about the Rule of Law in a mixed economy like that of India. Rule of law is an essential factor of a mixed economy that has equal parts played by public and private enterprises and hence needs regulation through the proper effectuation of the Rule of Law.

Introduction

The rule of law over the years has gone from various meanings and interpretations, relevant to its time and need. From the Magna Carta to Aristotle, to Locke and Montesquieu, to A.V Dicey and the thinkers after him like Hayek, Rule of law has changed in its scope but not in its aim to promote the utmost public welfare by keeping the administration in check. Rule of law aims at guiding the behaviour and actions of its subjects.

With the enormous expansion of scholarship on this subject, “rule of law” has come to mean different things—ranging from security and order to the operations of courts and the administration of justice.

Mixed Economy

Mixed economy refers to the type of economy where both capitalism and socialism co-exist. Under capitalism, the private industries and businesses have a free reign, with minimum government interference and ownership of factors of production.

And under socialism where the state is involved in every ownership and transaction. A mixed economy strikes a balance between the two. It has the public sector and private sector working hand in hand for-profit and public welfare together. A few salient features of a mixed economy are as follows :

1. A balance between the market economy (capitalism) and planning mechanism (socialism)
2. A clear demarcation between the public and private sectors. For example, some industries like the railways etc stay solely under the state, whereas telecommunications and others are opened for private involvement
3. The authority of the government to intervene, when necessary, to regulate the concentration of power and keep monopolistic and restrictive trade practices in check
4. The existence of ‘Joint sector’ where both government and private organisation are involved in an enterprise together and sharing profits. Also called as Public-Private Partnerships
5. Economic freedom to consumers to choose what they want and occupational freedom too
6. The profit motive, as well as social welfare, is achieved
7. Not merely an economic concept but the rights of the individuals have also secured accordingly with public law and order and morality

Having some features of a mixed economy doesn’t qualify a country to be one, for example, the USA is capitalism focused similarly Russia is a socialist country. Purely mixed economy based countries are countries like Sweden, India, Norway, France, etc.

Importance of rule of law in Economics

A. Hayek has provided one of the clearest and most powerful formulations of the ideal of the rule of law: ‘stripped of all technicalities this means that government in all its actions is bound by rules fixed and announced beforehand—rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances, and to plan one’s individual affairs on the basis of this knowledge.[1]

The International Commission of Jurists regards the Rule of Law as a living concept permeating several branches of the Law and having great practical importance in the life of every human being.^[2]

The commission raised questions on the application of rule of law in the daily proceedings of the state, there were disagreements about its relevance to only a few institutions or governments, but eventually, it was agreed upon that rule of law is universally applicable to all legal systems, forms of government, economic order or cultural tradition.

As explained rule of law is integral for economic development. It is a wide, multidimensional theory that includes a lot of components like fundamental rights, security, property rights and going up till checks on government and control of corruption.

All of these proponents help increase trade and investment in an economy thus helping its growth and development. But these rights given to the citizens depend on the institutions of the state, thus formal institutions are very essential, and thus rule of law assists and regulate them.

There are two concepts in an economy, that economic growth and of economic development. Economic growth consists of quantitative factors and uses measures like Gross Domestic Capital, Per capita income and etc, whereas economic development is a qualitative concept that takes long-term effects into account with measures such as Infant mortality rate, Literacy rate and etc.

Amartya Sen developed the Human Development Index for the measurement of this economic development of a country. Thus it is evident that factors like quality of life, liberty, freedom and other fundamental rights are equally or rather more important than the monetary factors alone. This includes the removal of tyranny, poverty, unequal opportunities and distribution of wealth, good health, access to education, and democratic decision making.

Usually, these factors are left out of traditional economic planning. The role of Rule of law by the state plays an important role here. Because when we talk about rule of law substantively, its focus is mainly on human welfare, human rights, and the welfare of the people.

Rule of law provides predictable and stable economic planning for budding entrepreneurs to utilise fully the opportunities of an open market and create new possibilities and innovations. Without the rule of law in an economy, the decisions in the market would be ad hoc, hence having opacity and no predictability, which will further the less involvement of entrepreneurial capacities.

Interlinkage of Rule of law and Mixed Economy

In an ideal democracy, there are a few elements that are highly essential in the interlinking of the rule of law and mixed economy are- i. forsaking the laissez-faire economy and accepting the positive and wide involvement of the government compared to its role in the past ii. Insistence on pluralism, basic rights, welfare state social organisation.

The 4 main functions which the state undertakes in modern democracies when related to the economic functions:

1. provider of social services;
2. regulator of private economic activity, through the licensing of investment, the management of exchange controls, and the like;
3. entrepreneur of a nationalized public sector; and
4. Umpire, seeking to meet the community’s standard of justice in resolving conflicts and competing for claims to economic resources, privileges and opportunities.”^[3] Friedman a pluralist society is indispensable.

In a pluralist society, he writes, that the mixed economy is very important and the help of the state can be used for restriction of private powers in cases of price controlling (during inflationary economy) or anti-trust regulations which keep the competition in check, for the nationalisation of enterprises, etc. And against public power through judicial restraint on administrative abuse of power or arbitrariness etc. One arm of state power is used to control another.

The quintessential function of it is to guide in the making and articulation of public policy and after its implementation, to supervise and regulate its perfect execution. In a modern mixed economy, Professor Friedman points out that the onerous task is of protecting the autonomy of individuals and private groups and allowing the government to utilise its function as a protector of public welfare too.

He suggests that the tool to be employed in the situations of controlling the administration can be unified judicial review, by specialised tribunals to check unrestrained power against the rights of the citizens. This will provide predictability, consistency and uniformity and would assure the rule of law in public and private economic functions, and the establishment of fair rules to restrict unfair competition.

Rule of law governs and manages the State’s fiscal and monetary policies, that aim at providing the private sector incentives to control inflation and maintain full employment. The role of the state is growing in the regulation of various contracts, agreements, arrangements that affect employment and also to check the concentration and abuse of power.

In such a society, under the guideline of proper law, the autonomy of numerous independent groups, including the state, ought to counteract the development of a monopoly of power in any one of the organizations, private or public, and in this manner save the likelihood that freedom is ensured for the individuals.

In this procedure and such circumstances, as Friedmann sees it, the law has both negative and positive effects: as far as possible on contention, consequently ensuring the network against the development of a single power and to satisfy the citizens’ standards of equity and justice.

Criticisms

Hayek gives many objections to governmental interference with the economy: He says “We must now turn to the kinds of governmental measures which the rule of law excludes in principle because they cannot be achieved by merely enforcing general rules but, of necessity, involve arbitrary discrimination between persons.

The most important among them are decisions as to who is to be allowed to provide different services or commodities, at what prices or in what quantities—in other words, measures designed to control the access to different trades and occupations, the terms of sale, and the amounts to be produced or sold.” ^[4]

Hayek has recognized a few reasons why welfare state policies are inflationary. Inflation removes governments from the substantial monetary burden of social security programmes, it extends government incomes, under frameworks of dynamic tax collection, by moving citizens into higher tax brackets which increases their taxable income but doesn’t have the same increase in their disposable income.

The government’s full employment strategies joined with coercive compensation pressures by worker associations and labour unions, lead to spiralling inflation. Hayek calls attention to the fact that welfare state arrangements and inflation have an inverse relationship, because of the fact that inflationary effects increase the need for a welfare state.

If in such a scenario the power of government to intervene is stopped and it is transferred completely to the market, It might help short term to control inflation and deflation but it will not be advisable long term as the central agency of control will be removed, and the financial policy of the government will be overlooked.

Thus in this manner, it’s unavoidable and under current conditions, that control of fiscal policy ‘ought to be generally practised by governments’[5]. But then again as is with the general contentions to rule of law everywhere, arises the question of the amount or the limit of discretion given to the government.

He also gives some policies that cannot fall under the ambit of rule of law and economics together and he says “These are ones that ‘cannot be achieved by merely enforcing general rules but, of necessity, involve arbitrary discrimination between persons”

Hayek thinks about three sorts of prohibited arrangements, the first is giving specific people the privilege to take part in various occupations or to give administrations or commodities. Disallowing partiality of this sort doesn’t, in Hayek’s view, doesn’t prevent capabilities or requiring a permit to practice certain work or trade, inasmuch as these measures adhere to a general standard that applies to any certified individual and gives everyone the right, whenever disregarded, to ‘have his case examined and enforced by a free court.

The second is with respect to price control, which he says have to be administered arbitrarily and not according to a rule. All the more extensively, free markets will work just if singular choices are guided by price changes.

There are a few reasons why all immediate control of prices by the government is hostile with a free system, regardless of whether the government really fixes prices or simply sets down rules by which the admissible prices are to be set.

In any case, it is difficult to fix prices as per long term rules which will successfully control production. Suitable prices rely upon conditions that are always showing signs of change and dynamism and thus need continuous acclimatization. Then again, prices that are not fixed directly, but indirectly done dictated by some rules, won’t be the equivalent for all sellers and, therefore, will keep the market from functioning fairly.

A still progressively significant solution to this could be deciding who is permitted to sell and buy and this would essentially result in discretion on part of the government. And third is the government bound by the Rule of Law can’t undertake to remunerate individuals as indicated by their alleged qualifications and merit. Hayek rehashes here his issue with the government not performing distributive justice. The regulatory quest for distributive justice is contrary to treating people as per general rules.

This clearly shows that there are certain policies that are not right for monetary policies and that infringe the Rule of law and the utilisation of these will eventually result in the power being used arbitrarily.

Conclusion

This is an endeavour to show that the economic framework incorporating the rule of law improves human life through its positive effect on monetary development and advancement. Conforming to it makes the law a necessary instrument for accomplishing certain objectives, however, adhering to the rule of law isn’t itself an ultimate objective.

This compliance with it shows the two its capacity and its confinements. From one viewpoint, if the quest for specific objectives is altogether contradictory with the rule of law, at that point these objectives ought not to be sought after by legitimate methods. Be that as it may, the exclusion of the quest for achieving significant social objectives for the sake of the rule of law ought not to occur.

All things considered, the rule of law is intended to empower the law to advance social welfare. Giving up such a large number of social objectives only to incorporate the rule of law in monetary and fiscal policy may make the law desolate and void.

One reaction to these discoveries is to continue burrowing: to discover more instruments, with an end goal to discover the golden intersection line of the rule of law and economic development. An option is to concentrate on the complementarities among rule of law establishments: how various elements of the rule of law system collaborate. The connection between the rule of law and development is multi‐faceted and goes through different pathways.

---

References

1. The Rule of Law and its Virtue By Joseph Raz
2. “An Unqualified Human Good”? On Rule of Law, Globalization, and Imperialism by Mark Brown
3. Hayek’s The Constitution of Liberty An Account of Its Argument by EUGENE F. MILLER
4. Rule of law and economic development: A Comparative Analysis of Approaches to Economic Development across the BRIC Countries
5. The Political Economy of Rule of Law Reform in Developing Countries by Ronald J. Daniels and Michael Trebilcock
6. The Rule of Law and Economic Growth: Where Are We? By Stephan Haggard
7. Rule of Law, Development, and Human Capabilities by Peter Boettke and J. Robert Kubrick
8. The State and the Rule of Law in a Mixed Economy by Eugene V. Rostow

---

[1] The Road to Serfdom (London, 1944), p. 54

[2] THE RULE OF LAW IN A FREE SOCIETY, A REPORT ON THE INTERNATIONAL CONGRESS OF JURISTS, NEW DELHI, INDIA JANUARY 5-10, 1959

[3] The state and the rule of law in a mixed economy, Tagore law lectures, Wolfgang Gaston Friedmann

[4] The Road to Serfdom (London, 1944), Hayek

[5] Hayek, 1941 [2007a]: 367

---

1. Law Library: Notes and Study Material for LLB, LLM, Judiciary and Entrance Exams
2. Legal Bites Academy – Ultimate Test Prep Destination