Law Merchant

Interesting information I did not know. From Law Merchant by Bruce Benson.

Law Merchant is not a merchant selling law but rather the body of common law developed among merchants in the late medieval era.

Lex mercatoria, or the “Law Merchant,” refers to the privately produced, privately adjudicated, and privately enforced body of customary law that governed virtually every aspect of commercial transactions by the end of the 11th century. Thus, the Law Merchant provides libertarians with an important example of effective law without coercive state authority.

Rapid expansion in agricultural productivity during the 11th and 12th centuries meant that less labor was needed to produce sufficient food and clothing for Europe’s population. The effect of this increase in production was that individuals were able to specialize in particular crafts and population began to move into towns, many of which rapidly became cities. Specialization effectively functions only with trade and the class of professional merchants expanded to facilitate such trade. These merchants spoke different languages and came from different cultures. However, although geographic distances often prevented direct communication, let alone the building of strong personal bonds that would facilitate trust, the effect of this increased trade across large distances required numerous middlemen to move products from producers to their ultimate consumers. All of this activity generated mistrust among merchants. Internationally recognized commercial law arose as a substitute for personal trust. As one historian has pointed out, it was during this period “that the basic concepts and institutions of … lex mercatoria … were formed, and, even more important, it was then that [this] … law … first came to be viewed as an integrated, developing system, a body of law.”

The Law Merchant developed within the merchant community, rather than through government fiat; the police power was not the source of incentives to recognize its rules. Indeed, the Law Merchant was a voluntarily recognized body of law willingly embraced by its adherents. The reciprocity necessary for voluntary recognition arose, in part, from the mutual gains generated by repeated exchange. Furthermore, each merchant traded with many other merchants, so the spread of information about breaches of commercial conduct would affect a merchant’s reputation for all his subsequent transactions. Indeed, the Law Merchant was ultimately backed by the threat of ostracism by the merchant community at large because individuals known to engage in illegal behavior would not have found trading partners.

Merchants also established their own courts. One crucial reason for doing so was that royal courts often were not prepared to enforce customary merchant practices and usage (e.g., royal courts would not recognize contracts that involved interest charges because these courts regarded all interest as usurious). In addition, merchant court judges were merchants chosen from the relevant trading community (whether from a fair or a market), whereas lawyers and royal judges often had no knowledge of commercial issues. The effect was that the risk of an inefficient ruling was substantially lower in a merchant court, particularly when highly technical commercial issues were involved. Additionally, merchants traditionally had to complete their transactions during a brief period, at one market or fair, and then quickly move on to the next. The need for speed and informality in settling disputes was unmet when confronting judges who had no knowledge of commercial issues.

As the power of the state grew, Law Merchant receded but vestiges remain.

Kings gradually asserted authority over commerce, generally to tax it or to extract other types of revenues by selling monopoly franchises or other special privileges to politically powerful business interests. The Law Merchant became less recognizable as royal courts supplanted merchant courts and as statutes, precedents, and treaties supplanted or supplemented business tradition and practice. Nonetheless, the rules that were initiated in the Law Merchant have survived in varying degrees within nations and particularly in international trade.

A standardized body of law which could and did evolve with circumstances, voluntarily undertaken due to its benefits, speedily delivering consistent verdicts and enforced via ostracism and reputational gain or loss. Interesting. It is easy to think of the law as being a coercive exercise of the state but apparently it does not have to be.