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Friday, 30 October 2015

Learning from Confucius? Lessons from Chinese law for rebuilding trust in the global economy

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

Presentation: Nicholas Morris, Balliol College
Blogpost: Alexandra Zeitz, St. Antony’s College

What is the relationship between trust and law? And is it possible that some systems of law are better able to encourage trust than others? In a PEFM seminar in October, Nicholas Morris presented a research project investigating the role of Chinese legal traditions in cultivating trust, examining whether tenets of Chinese law can be adopted globally in order to rebuild trust in the economy, particularly in the financial sector.

Morris’ comparative work on Chinese legal traditions and trustworthy behavior is part of a larger research project, led by Morris together with David Vines, on rebuilding trust in the financial sector in the aftermath of the global financial crisis. Vines and Morris have presented their work at PEFM in the past (see discussions of their presentations in these two previous posts) and the circle of experts and academics linked to PEFM continue to engage with this promising interdisciplinary research endeavor.

In order to function equitably and effectively, financial markets require strong trust among participants. This was Morris’ starting point. Merely relying on individuals’ desire for approbation and maintaining their reputation is insufficient to ensure robust trust. Instead, he argued, moral and normative structures are necessary to set out accepted and approved patterns of behavior.

These codes of behavior have often been part of religious doctrine, such as prohibitions on usury. Morris argued that secular legal structures can perform a similar function, by laying out society’s definition of acceptable behavior, establishing who is to be held responsible, and meting out punishment. As an aside, Morris was skeptical, perhaps excessively so, of whether contemporary religious norms and doctrines regarding finance, especially in the case of Islamic finance, can truly encourage moral behavior. Though many Islamic finance products do in fact do little to challenge mainstream finance, doctrines of Islamic finance continue to be used to argue for more sustainable finance based on principles of equitable risk sharing. See, for instance, Adam Ng’s recent book with Abbas Mirakhor and Mansor Ibrahim. 

Comparing common law, civil law and religious law to the Chinese legal framework, Morris ultimately argues that China’s ancient legal traditions may be best suited to sustaining relationships of trust. Chinese legal thought is composed of two strains: Confucianism and legalism. Confucian thought holds that traditional customs and mores, well understood throughout society, ought to be the means of inducing good, moral behavior. As people internalize the agreed-upon norms, they not only become better individuals, but also contribute to a more harmonious social order. This vision of law, called li, regards regulations and codified law as occasionally necessary, but less desirable since it can lead to observance of rules without an internalization of the ethics that underpin the rules.

A different strain of Chinese legal thought, legalism, takes a more cynical view of human behavior and prioritizes codified law and government regulation as a means of encouraging appropriate behavior. This type of law is referred to as fa. As a school of thought, legalism emerged in the same historical period as Confucianism, but has been reinforced by the importation of Western legal principles throughout the 20th century.

The notion of li translates into a legal doctrine highly dependent on relationships. For instance, Chinese legal practice makes extensive use of arbitration rather than litigation. As such, Morris argues that li can be a helpful model in building structures that encourage trustworthiness. He aims to further investigate the claim that “resort to formal penalties and prohibitions…is advisable only where it is not possible to use li or relationship-based norms to encourage trustworthiness”.

At this early stage of the research project, I would like to offer several pieces of constructive criticism, several of which were also identified by the seminar audience.

Firstly, greater conceptual clarity of both trustworthiness and trust is needed. Trustworthiness implies something about the actor to be trusted as well as suggesting an assessment of whether or not they merit trust, i.e. whether they are worthy of trust. However, people often trust others who a third party might conclude are decidedly not trustworthy. Trustworthiness may be a sufficient condition for trust, but it is certainly not a necessary condition. Is the project investigating legal determinants of trust or of trustworthiness? Systems that encourage trust might not be the same as those that limit deceitful, incompetent or unreliable behavior.

Secondly, though this comparative project promises to be illuminating, there are several notes of caution. An audience member familiar with the Chinese financial regulator stressed that the body has made concerted efforts to formalize legal codes over the last decades in view of the fact that relationship-based legal structures were thought to be vulnerable to corruption.  The current weaknesses in the Chinese financial system, in part arising out of the informal ties between banks and government officials, highlight potential risks.

It is important not to conflate Confucian thought with contemporary Chinese legal practices, nor to conclude that simply because Confucian legal teachings were aimed at cultivating trust they have in fact historically been successful in doing so. Furthermore, in advocating that these principles be adopted in legal systems outside of China, it is worth investigating whether they are so culturally embedded that they would be inappropriate, or at least difficult to integrate, in legal systems with different historical traditions.

Finally, in order to head off the possible critique that this project is looking for grounds on which to avoid tighter regulation, it would be helpful to spell out more clearly the relationship between trust sustained by relationships/li and regulation/fa. Why is the trust established by li preferable to that created by fa? Is it not the nature of the modern state that we trust our fellow citizens on the basis of adherence to law? In massive, diffuse, and opaque financial markets can participants establish the bonds and shared norms necessary for li? And can fa and li be mutually reinforcing?

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