The Constitutive Role of Law and Politics in the Economy: An LPE Perspective

This podcast episode, featuring Jamie Modud, a professor of Economics at Sarah Lawrence College and board member of the Association for the Promotion of Political Economy and the Law (APEL), delves into the core tenets of the Law and Political Economy (LPE) tradition. It fundamentally challenges the orthodox view, often associated with the Chicago-style Law and Economics school, that the economy is "pre-political" and that law serves merely as an apolitical technology to maximize efficiency. Instead, the LPE framework, rooted in the insights of legal realists and original institutional economists, argues that law and politics play a constitutive role in shaping the foundational categories of the economy, such as property and contracts. The economy is presented as fundamentally socially embedded, with background legal and political rules forming the very basis of market action, including supply and demand, profit-seeking, and corporate decisions.

Modud emphasizes that there is no baseline, perfectly competitive economy from which to deviate, and thus, the concept of "market failure" as a starting point for intervention is misleading. All markets, he asserts, are "legally coded," meaning their structure and operation are inherently defined by legal and political frameworks. This perspective shifts the analytical focus from external market failures to the internal distribution of power relations, which are directly shaped by these legally and politically coded rules of property rights and contracts. Historical examples like the Lochner v. New York Supreme Court case illustrate how legal rulings, even those framed as promoting "freedom of contract," are in fact forms of regulation that distribute power and benefits in specific ways, a point famously articulated by Carl Polanyi regarding the regulated nature of all markets.

The discussion extends to the "Constitutional theory of money," which posits money itself as a legal institution with a public foundation, challenging the neoclassical notion of mechanical central bank control over money supply. This aligns with the endogenous money school but further emphasizes the legal and political "hardwiring" of monetary systems, where public liabilities underpin private financial instruments. The indeterminacy of property rights is also highlighted, demonstrating how the "bundle of rights" associated with property is context-dependent and subject to societal norms and legal frameworks, as seen in German co-determination laws requiring employee representation on corporate boards.

Practical implications of the LPE framework are explored, particularly for economic development and addressing inequality. Modud suggests reconceptualizing Central Bank independence, advocating for their mobilization to finance social and economic development with accountability to legislatures, echoing John Maynard Keynes's ideas. Furthermore, he stresses the critical importance of intellectual property rights in foreign trade and export-oriented industrialization, arguing that effective development requires building domestic legal capacity to challenge global corporations and ensure access to technology. Ultimately, the LPE framework places the spotlight on how assets and economies are legally coded as the root cause of inequality, demanding a focus on the political and legal foundations of economic structures to address contemporary challenges.

"the legal realists argued that in fact the law is constitutive of the economy so the foundational categories such as property and contracts those are legal categories and they arise through a wide range of political factors struggles court cases the Constitution including."

"the LPE the law and political economy tradition argues that in fact the that law and politics play constitutive roles in constructing uh the categories of the economy in terms of the structured property rights because property for example is fundamentally social."

"it's saying that all markets are legally coded all economies are legally coded there's no benchmark."

"that distribution of power relations as Robert Lee Hale who is one of the great figures in this tradition early 20th century he was at he was an economist at Columbia uh economics department but he was also a law professor at the law school."

"the legal realists argued that in fact this was not the absence of Law and regulation it was regulating workers in a particular way so in other words there was no such thing as deregulation quite simply all markets are deregulated or are regulated."

"Carl polani I mean he made this point very famously right that all markets are regulated and so then the question arises what's the form of the regulation and who benefits and who loses."

"the Constitutional theory of money uh essentially characterizes money as a legal Institution right which has a public base."

"what this says is that the bundle of rights that determine property are enormously shaped by context."