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Robin Paul Malloy
University of Bologna Law Review
Property
Law, Market and Marketization
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Articles & Essays
2016-10-26
2016-10-26
2016-10-26
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166-184
UBLR
Robin Paul Malloy
2016/10/26
10.6092/issn.2531-6133/6356
166
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Property
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Law, Market and Marketization
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ARTICLES & ESSAYS                                                                    DOI 10.6092/issn.2531-6133/6356




                                    Law, Market and Marketization


                                             ROBIN PAUL MALLOY†




TABLE OF CONTENTS: 1. Introduction; 2. Law & Markets; 3. Law & Marketization; 3.1.
Assetization; 3.2 Transferring Assets; 3.3 Authentication and Valuation of Assets; 4.
Conclusion.



ABSTRACT: Marketization is a process occurring in many transitional economies as
countries seek to adjust their legal systems to facilitate broader market participation
while expanding global trade. This essay sets out one way of understanding this
process by focusing on the relationship among, law, markets, and marketization. It
identifies and explains basic legal requirements for marketization and links these to a
need to transform legal thinking by integrating a greater understanding of economics
into both law and public policy.



KEYWORDS: Law and Economics; Markets; Marketization; Rule of Law; Property.




                                           UNIVERSITY OF BOLOGNA LAW REVIEW

                                                   ISSN 2531-6133

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          This article is released under the terms of Creative Commons Attribution 4.0 International License


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     1. INTRODUCTION

In the second decade of the new millennium, as we deal with the post-
financial market meltdown and the failure of self-correcting market theory
to prevent a global financial crisis, the legal pragmatists among us realize a
need to think carefully about the relationship between law, markets and
marketization.1 Putting the recent financial collapse into perspective, we
should note that we have already spent some forty years with law and
economics as an important influence in jurisprudence, 2 bringing market
thinking firmly into law, and that we have already been through the
processes of globalization, harmonization, and the transition to market
economies in such countries as China, and in some of the countries of
Eastern Europe and the former Soviet Union. Therefore, it is a fitting time to
reflect on the role of law in facilitating the ongoing process currently
referred to as marketization.

         The process of marketization can be understood in at least two
different ways. First, it might simply refer to the process of expanding
competition       and     choice.     This     interpretation       is   consistent          with       the
jurisprudence of people such as Adam Smith. A second way of understanding
marketization is in terms of legal commodification. This article uses the
second     interpretation.        The    process       of   marketization        as     a     form        of
commodification is one in which various social, legal, political, and cultural
†
   E.I. White Chair and Distinguished Professor of Law, and Kauffman Professor of
Entrepreneurship and Innovation at Syracuse University. He has published sixteen books and
over 30 articles on subjects including law and market economy, real estate, land use, and Adam
Smith. This paper is the product of participating as a member in a series of meetings with the
Working Group on Marketization sponsored by the University of Helsinki, Finland. The working
group was interdisciplinary and comprised of about two dozen people from several countries
working in economics, sociology, biology, linguistics, science, and law.
1
  See THE FUTURE OF FINANCIAL REGULATION (Ian G. MacNeil & Justin O’Brien eds., 2010); LAW AND
ECONOMICS OF GLOBAL FINANCIAL INSTITUTIONS (Peter Nobel, Katrin Krehan, & Anne-Catherine
Tanner, eds., 3d ed. 2010); MICHAEL MALLOY, ANATOMY MELTDOWN: A DUAL FINANCIAL BIOGRAPHY OF
THE SUBPRIME MORTGAGE CRISIS (2010); Robin Paul Malloy, Mortgage Market Reform and Fallacy of
Self-Correcting Markets, 30 PACE L. REV. 79 (2009); David Reiss, Subprime Standardization: How
Rating Agencies Allow Predatory Lending to Flourish in the Secondary Mortgage Market, 33 FLA. ST. U. L.
REV. 985 (2006); THOMAS E. WOODS, MELTDOWN: A FREE-MARKET LOOK AT WHY THE STOCK MARKET
COLLAPSED, THE ECONOMY TANKED, AND GOVERNMENT BAILOUTS WILL MAKE THINGS WORSE (2009).
2
  Ronald H. Coase, The Problem of Social Cost, 56 J.L & ECON 837 (1960); GUIDO CALABRESI, THE COSTS
OF ACCIDENTS: A LEGAL AND ECONOMIC ANALYSIS (1970); RICHARD A. POSNER, THE ECONOMICS OF JUSTICE
(1981); RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW (9th ed. 2014); ROBERT COOTER & THOMAS
ULEN, LAW & ECONOMICS (2000); ROBIN P. MALLOY, LAW AND MARKET ECONOMY: REINTERPRETING THE
VALUES OF LAW AND ECONOMICS (2000); NICHOLAS MERCURO & STEVEN G. MEDEMA, ECONOMICS AND THE
LAW: FROM POSNER TO POST-MODERNISM AND BEYOND (2d ed. 2006).




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institutions reform themselves with reference to market mechanisms and
market values. Thus, lawyers move from discussions of “natural law” and of
the moral foundations of law, to conversations of “cost and benefit” analysis
and the economics of justice.3           Similarly, legal institutions increase their
focus on matters of “efficiency”, and increasingly speak of “justice” in terms
of economic opportunities and outcomes. The process of marketization
involves a reinterpretation of legal and social relationships in terms of the
needs of commerce, and it increasingly makes reference to economic terms
such    as   efficiency    and    wealth     maximization        when     evaluating           such
relationships. While this process does not equate law to economics, it does
mean that the legal interpretive frame of reference changes and that more
and more decision making is based on price calculations and other economic
considerations. In the process of marketization law serves the purpose of
commercialization by protecting property, promoting production, and
facilitating consumption and trade. Freedom, equality, fairness, and progress
become understood in terms of law’s relationship to market interests;
including     the    perceived      interests      of   owners,     creditors,         investors,
entrepreneurs, consumers, and workers.

        In this brief essay, I approach the process of marketization as one of
understanding the market from a legal perspective rather than one of doing
an economic analysis of law; and, I outline the way in which law functions as
a form of infrastructure to facilitate trade and exchange. Because the law and
legal institutions function primarily as infrastructure for trade and exchange,
they are frequently underappreciated. To many people, trade seems to happen
by operation of an invisible hand; with law appearing primarily when a
transaction goes bad and the parties need to resolve a dispute. 4 Dispute
resolution is, of course, an important function of law, but much of law deals
with making transactions stable, efficient, and predictable, even as between
parties who are unknown to each other.




3
  See POSNER [THE ECONOMICS OF JUSTICE], supra note 2; POSNER [ECONOMIC ANALYSIS OF LAW], supra
note 2; COOTER AND ULEN supra note 2; MALLOY, supra note 2; ROBIN PAUL MALLOY, LAW IN A MARKET
CONTEXT: AN INTRODUCTION TO MARKET CONCEPTS IN LEGAL REASONING (2004).
4
  See MALLOY, supra note 2; MALLOY, supra note 3; Malloy, supra note 1.




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The starting point for identifying the connections among law, markets, and
marketization probably goes back to Adam Smith.5 In THE WEALTH OF NATIONS,6
published in 1776, Adam Smith observed that legal and economic systems
developed together and reflected a community’s’ economic stage of
development. Smith identified four stages of development and suggested that
the age of commerce; based on the specialization of labor, the protection of
property, the freedom of contract, and the development of good legislation,
produced more prosperity and greater freedom than observable in any one of
the earlier three stages of hunting, herding, and farming. 7 Each stage also
involved a stronger emphasis on property, and on the need for more
advanced legal arrangements to deal with property. For Smith, the age of
commerce and the process of marketization facilitated social progress. This
was because Smith understood that advancing through these stages involved
expanding opportunities for competition and choice, and this in turn
facilitated a rising standard of living for everyone.

         Today, political and economic elites in emerging and developing
countries see the prospects for a more prosperous future arising from
marketization and the transition to a market economy. In such a market
economy, relationships are structured in terms of costs and benefits and are
translated in to value neutral exchanges. Talk of morals and politics are
implicitly sidestepped as interaction is driven by the desire for making money
and for turning a profit. This may potentially reduce interpersonal conflict as
people are motivated by self-interest to work at making money and
improving their personal fortunes rather than engaging in conflict over
abstract ethical, moral, and theological matters. In Smithian terms, this may
also be beneficial because individuals pursuing their own self-interest




5
  ADAM SMITH, THE THEORY OF MORAL SENTIMENTS (1759); ADAM SMITH, AN INQUIRY INTO THE NATURE
AND  CAUSES OF THE WEALTH OF NATIONS (1776); ADAM SMITH, LECTURES ON JURISPRUDENCE (Glasgow
ed., Lexicos Publishing 1982) (1896).
6
  See SMITH, supra note 5.
7
  See generally C.A. Cooke, Adam Smith and Jurisprudence, Neil McCormick, Adam Smith on Law,
Peter Stein, Adam Smith’s Jurisprudence—Between Morality and Economics, David Lieberman, Adam
Smith on Justice, Rights, and Law, Fabrizio Simon, Adam Smith and the Law, in ADAM SMITH AND LAW
(Robin Paul Malloy ed., forthcoming Feb. 2017).




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naturally advance the public interest at the same time; even though the
public interest may be no part of their original intention. 8

        To be effective, the process of marketization requires embracing a
need to reform other institutions to reflect the language, values, and
outcomes that a market economy will hopefully bring. This is because market
economies not only need the infrastructure of open and unrestricted trade;
they need the validation of desirability from a variety of other social
institutions. Marketization, thus, becomes the process of cross validation of
institutional support for a more open, competitive, and decentralized
coordination of scarce goods, resources, and services; and, ultimately for
stronger legal rights. In the process, law not only provides the infrastructure
for more efficient market activity, it normalizes the power dynamics of
market relationships and makes them appear “natural.”9

        In exploring these ideas, this essay describes some of the key ways
that law and legal institutions facilitate market exchange. The essay is not
intended to be all encompassing nor overly detailed. It is meant to offer a
general and overarching understanding of the various ways in which law
usefully functions to incentivize and protect market expectations. In
proceeding, therefore, I should note that many of the ideas expressed herein
extend on work explored in two of my early books: Law and Market Economy:
Reinterpreting the Values of Law and Economics;10 and Law in a Market Context: An
Introduction to Market Concepts in Legal Reasoning.11 In each of these books I
develop the idea of law and market economy. This approach is one based on
understanding the market as a dynamic process of exchange in which the act
of exchange itself creates and transforms meanings and values in the
relationships of participants and the things they trade. 12 For instance, when
the United States engages in trade with China, both countries have a change
in values over time. While the United States may believe that trade facilitates
China becoming more invested in freer markets and in democratic reforms,
the United States simultaneously experiences pressure to adjust its labor and

8
   See MALLOY, supra note 2; MALLOY, supra note 3; Malloy, supra note 1.
9
   See generally ADAM SMITH AND LAW (Robin Paul Malloy ed., forthcoming Feb. 2017).
10
    MALLOY, supra note 2.
11
   MALLOY, supra note 3
12
    Id., MALLOY, supra note 2.




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production   practices   in   order   to   be   more   competitive        with       China.
Consequently, as with any exchange relationship, both sides to the exchange
influence each other because exchange requires the continuous mediation of
conflicting cultural-interpretive tensions.

       In this approach, the problems of the law are economic because law
governs the ways that people deal with the competition for limited resources;
and, the problems of economics are legal because law provides the “tools”
and infrastructure for trade and exchange. Consequently, this approach
focuses on the strategic role of law in relation to the stages of social
development; and, marketization involves the movement of a community
from the early stages of economic development (the age of hunters, herders,
and farmers), to the more advanced stages of commerce. In this transition to
a commercial society, it is also important to understand that the value of any
given market transaction depends on its position and its relation to all other
elements of a given system of exchange (a given market context). Thus,
exchange and the values generated by it are contextually informed by a
variety of factors such as history, ideology, and culture. In such an
environment, price functions as a relative interpretation of value; and is not
value itself. An important implication of this is that cost and benefit analysis
implicitly incorporates within its calculus a set of historical, ideological, and
cultural values. For this reason, cost and benefit analysis cannot provide a
neutral and objective approach to legal decision making. Cost and benefit
analysis must reflect community values with respect to relative pricing, and it
favors values that are easily priced over values that are abstract and difficult
to price, while privileging the preferences of those with many resources over
the preferences of those with few resources. In this context, law not only
facilitates these transactions, it normalizes them and makes them appear to
be natural and desirable.

       In exploring the ways that law functions as an infrastructure for
markets and marketization, I proceed in two steps. First, I consider the
relationship between law and markets; where trades are organized, stabilized,
and pursued in ways that respond to the legal environment in which trade
takes place. Second, I address the relationship between law and the process of




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marketization; where marketization is understood as the process of
institutionalizing and incentivizing interpersonal relationships in terms that
facilitate the capture and creation of value through trade.




     2. LAW & MARKETS

Markets are about the human process of exchange; a giving of a “this” for a
“that”. In this process, the rules, standards, and norms of law mediate the
tension between private and public interest so as to peacefully promote the
common interest.13 Importantly, law organizes exchange by creating the
infrastructure to expand beyond local and informal trade networks. 14 It does
this in several ways. For the purposes of this paper, discussion is focused on
five key functions of law. These functions include establishing and
enhancing:      1)   acceptable      networks      and    patterns     of     exchange;            2)
transparency; 3) predictability; 4) stability; and 5) trust.

        Law is critical to formalizing exchange networks that operate
effectively    across time,       and   beyond      reliance    on   local and           personal
relationships.15 Law defines and frames the terms, consequences, and
acceptable objects of exchange. It also categorizes different types of
exchanges; such as by consent (contract), gift, and operation of law. Each of
these categories of exchange has different rules. Likewise, law informs us
about who may engage in certain types of exchanges. For example, minor
children (under the age of eighteen years) often have no power or only
limited power to engage in certain types of trades, and corporations have to
meet certain tests to qualify as legal persons able to enforce contracts or
conduct legal trades. In a similar way, law often regulates pricing and the
content of exchange agreements, while also limiting legally permissible
objects of exchange. For example, law permits trade in oil, diamonds, and
automobiles but does not generally permit transactions for the sale of babies,
body parts, or governmental elections.


13
   MALLOY, supra note 2; MALLOY, supra note 3.
14
   See, e.g., DE SOTO HERNANDO, THE MYSTERY OF CAPITAL: WHY CAPITALISM TRIUMPHS IN THE WEST AND
FAILS EVERYWHERE ELSE (2000); MALLOY, supra note 2, at 109.
15
   See, e.g., DE SOTO, supra note 14; MALLOY, supra note 14.




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Law must also define consequences of trades. Some trades, if permitted and
properly executed, are upheld by law, other types of trades such as those in
violation of the appropriate exchange rules (exchanges on the black market,
for instance), may be disallowed and the parties may be charged with crimes.
Some exchanges may be legally classified as fraudulent or be unenforceable
because of the way in which one party obtained the consensual compliance of
the other party. The nature of what is exchanged, who participates in
exchange, and the terms and consequences of exchange are all structured in
reference to law and legal institutions. Even informal and illegal trades make
reference to formal law by the simple fact that they hold the status of
informal and illegal exchanges because they are outside of the formal
framework.

        In addition to identifying the permitted objects of exchange, law
functions to describe, quantify, and represent the objects of trade. For
example, the law may provide for private property ownership and for the sale
and purchase of property within certain approved exchange networks. For
this to work effectively, law must also describe and define the interest being
exchanged. Thus, law has to provide a representation of the property that can
be easily dealt with; this can be accomplished with a deed or other document
of title. The deed is not the property but a representation of the property that
is easier to deal with.16 Extending this example, the deed can be used to
represent a person’s interest in a particular property and can be used to
support credit, as in using it to secure a mortgage.17 The mortgage is thus a
representation of a right against the property by the creditor in the event of
nonpayment, and simultaneously a representation of the right to receive a
stream of cash flow under the terms of the mortgage repayment schedule. As
a representation of the cash flow under the mortgage, this representation can
be used to support the issuing of a security based on the expected value of the
cash stream (e.g. mortgage backed securities).18 All of this facilitates trade
and enhances the opportunities for capturing and creating value from
exchange.

16
   MALLOY, supra note 14; MALLOY, supra note 3.
17
   MALLOY, supra note 3.
18
   Malloy, supra note 1; ROBIN PAUL MALLOY & JAMES CHARLES SMITH, REAL ESTATE TRANSACTIONS:
PROBLEMS, CASES AND MATERIALS 400 (4th ed. 2013).




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Law plays an important role in establishing transparency in the exchange
network.      Transparency         is   very    important       for    purposes        of    reducing
transactions costs, particularly in large and impersonal trading networks. 19
Transparency performs at least two very critical functions. It reduces
information and search costs across the network, and it facilitates the process
of authentication. The idea of information and search costs is well known.
Authentication is probably less well understood. 20 Authentication is a key
factor in exchange. It involves the ability to “prove out” the substance of a
trade. This includes confirming the identity of the other parties, the validity
of the documents, the accuracy and availability of credit, and the substance of
the underlying object of the trade. For example, in a ponzi scheme (such as
that undertaken by Bernie Madoff)21, and as in the recent collapse of
mortgage markets in the United States, there was little or no reality in the
underlying economic substance of the trade to support the represented value
of the exchange. In each case the underlying value was misrepresented such
that the exchange at the level of a representational interaction (e.g. buying
securities based on an underlying real estate transaction) was not an
authentic reflection of the actual economic substance of the underlying
situation.22 People were engaging in trades that had no sound basis in
economics because they either did not or could not properly authenticate the
underlying arrangements upon which their trades were based. Law can
provide mechanisms for making it possible to better authenticate the trades
people are making. Transparency thus reduces risk and lowers the cost of
exchange.

         Law facilitates predictability in exchange. This also reduces risk and
cost. By establishing uniform documents, and promoting the standardization
and harmonization of the terms and conditions of trade, law enhances
predictability while reducing bargaining costs. Law identifies the background
legal framework and default rules that apply to certain exchanges and it
establishes remedies for particular types of failures in performance among

19
   MALLOY, supra note 2; MALLOY, supra note 3.
20
   Malloy, supra note 1.
21
   See STEPHANIE YANG, 5 Years Ago Bernie Madoff Was Sentenced to 150 Years In Prison – Here's How His
Scheme Worked, BUSINESS INSIDER, (Jul. 1, 2014), http://www.businessinsider.com/how-bernie-
madoffs-ponzi-scheme-worked-2014-7.
22
   Malloy, supra note 1.




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the parties. With shared knowledge of these criteria, strategic planning and
structuring of a trade is greatly enhanced because the parties have a more
predictable basis for assessing and managing risk.

           Law, through legal institutions, must also establish stability. Even
though markets are dynamic and fluid, the legal system must impose a sense
of stability on the networks of exchange. Just as it is difficult and costly to
work in an environment when one never knows if there will be electric power
available, or if the computer system will be working, or if the banks will be
open and operating from one day to the next, so too if the stability and
longevity of the legally supported network is in doubt. Markets can be
destabilized when governments simply confiscate private property, or
unexpectedly deflate the currency. Likewise, if the very governance structure
and functionality of a state and its legal system are in question, exchange will
be much more difficult and costly.

           Finally, we know from the success of some informal exchange
networks that trust is an important element of a strong, extensive, and
efficient trading network.23 Trust can arise within kinship groups, in local
communities where everyone knows each other, and in other specified
circumstances. Trust, however, is really about reputation value. Close friends
can trade with each other because they probably have good information about
each other and they have a sense of the reputational value of the likely
performance of the other party to the exchange (trust). Law can facilitate
trust by backing up and enhancing that which already exists in the network
of trades taking place. It can also make many more trades possible by
providing a substitute reputational reference point. A party can effectively
trade with another unfamiliar party over a very long distance and across a
long time horizon if both parties place a high value on the rule of law and
legal framework applicable to their exchange. In other words, a transparent,
predictable, stable, and well defined legal system can provide the reputational
trust value necessary to facilitate trade on a global scale.

           Some aspects of a legal system may even become individually
“branded”. While there are a number of strong legal systems from which to

23
     See FRANCIS FUKUYAMA, TRUST: THE SOCIAL VIRTUES AND THE CREATION OF PROSPERITY (1996).




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choose when doing trades (choice of law rules), some aspects of a particular
system may take on the status of a highly sought after brand product. For
example, many exchanges involving admiralty and maritime law select
England and English law to govern the trades. 24 Similarly, in the United
States, many people select the law of the state of Delaware in choosing to
incorporate their business.25 Maritime law and England, and corporate law
and Delaware; these are examples of particular legal institutions that have
gained “brand status” for facilitating trust among distant and impersonal
exchange partners trading in these particular legal categories.

        While particular details of law and legal institutions are subject to
many variables, it seems critical for law to perform the above five functions.
In facilitating markets by providing a formal infrastructure of exchange, law
reduces the cost of trading and it makes it possible to extend the networks of
exchange beyond that of purely local and personal arrangements. This is
important because value and opportunity are greatly enhanced as the scale of
trading increases and the flow of information expands. Global market activity
and economic growth on a large scale are only really manageable under a rule
of law. Among other things this rule of law must address are: exchange,
transparency, predictability, stability, and trust.




     3. LAW & MARKETIZATION

By the term marketization I refer to the process of institutionalizing the
meanings and values of exchange in networks designed to transform,
capture, and create value from economically beneficial trades. This process
is facilitated by law in several ways. Law provides infrastructure for: 1) fixing
of assets (defining property / the process of assetization); 2) transferring of
assets (most significantly for markets the voluntary transfer by contract); 3)
authenticating and valuing assets; and 4) sustaining a dynamic process of
value formation.



24
    See generally Joseph C. Smith, Comparative Aspects of Commonwealth and U.S. Law Since the
Collision Convention, 57 TUL. L. REV. 1092 (1983).
25
   See FRANKLIN A. GEVURTZ, CORPORATION LAW 38-40 (2d ed. 2000).




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         3.1 ASSETIZATION

Assetization is the process of fixing assets so that they are capable of easy
exchange.26 This includes fixing a writing for purposes of copyright, and
fixing an invention for purposes of patent law, just as much as it includes
fixing a legal description and an estate interest for the identification of real
property.27 Thus, while real property and intellectual property may have
significantly different qualities, each is able to be properly understood as a
property asset because each involves the fixing of an interest within the basic
framework of a property law regime. The idea that certain interests might
also be describable in non-property terms does little to diminish the reality
that such an interest can also be a legally fixed property asset. 28 Not all
property assets need to share exactly the same qualities or characteristics.

         Fixing an asset involves identification, definition, and assignment of
certain qualities, characteristics, and categories to it. 29 The underlying
qualities include definitional matters such as fixing a legal description and
the particular estate interest for real property. In terms of assigning
characteristics to the asset, the typical characteristics of ownership include
the right of use and possession, the right to exclude, the right to transfer, and
the   right    to    the    profits    attributed     to   the     asset    (including          equity
appreciation).30 Finally, property related assets are categorized in such terms
as real, personal, intangible, cultural, and intellectual property. This permits
a more nuanced treatment of the asset. Fixing the asset also involves
ascribing certain default rules, such as remedies, for example, to transactions
in that asset.31 Thus, by simply categorizing something as “real property” one
can ascribe certain qualities, characteristics, and potential causes of action to
the asset. This makes dealing with the asset more efficient by reducing




26
    See, e.g., Robin Paul Malloy, Real Estate Transactions and Entrepreneurship: Transforming Value
Through Exchange, 43 IND. L. REV. 1150 (2010); DE SOTO, supra note 14.
27
   Malloy, supra note 26.
28
   Malloy, supra note 26.
29
   Malloy, supra note 26.
30
   See JOSEPH WILLIAM SINGER, PROPERTY LAW: RULES, POLICIES AND PRACTICES (4th ed. 2006).
31
   See RICHARD H. THALER AND CASS R. SUNSTEIN, NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH
AND HAPPINESS (2008).




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various transaction costs associated with learning about its potential value.
Property law and property lawyers focus primarily on the fixing of assets. 32

           Assetization is a more flexible term than property because the idea of
property has different meanings in different communities, and the legal
mechanisms for dealing with property vary significantly among and between
common law and civil law jurisdictions. There are some interests such as
trademark which function in many ways like property but are not categorized
as property.33 We can talk about “property-like” assets in a broader context
of discussing assets that express property-like characteristics in certain
circumstances and under certain conditions.

           Once fixed, assets become commodified and they are capable of being
more readily traded and exchanged in the marketplace.Part of assetization,
therefore, involves the creation of standard and formal representations of the
assets; such as developing paper representations of assets that are difficult to
move or are abstract in nature; including deeds for real property that
“represent” the interest held in an underlying piece of land, and mortgage
documents that represent the right to cash flow from payments being made
to purchase land on a credit basis (as well as contingent rights to the land
itself if the borrower defaults), and a patent or copyright representing rights
in a given invention or expression.

           3.2 TRANSFERRING ASSETS

There are generally three methods of transferring property: by gift, operation
of law, and by exchange for value. A gift is generally not a market event in
the sense that it need not involve a quid pro quo exchange. A transfer by
operation of law involves such things as a transfer of ownership under the
rules applicable at death; the law by its operation transfers the asset from
one party to another. Exchanges for value can be consensual or forced.
Consensual exchanges make up the biggest part of market transactions
between willing buyers and sellers. Forced exchanges might include transfers
by trespass with a remedy, or a takings with just compensation under the
United States Constitution, or a taking under the property provisions of

32
     Malloy, supra note 26.
33
     Malloy, supra note 26.




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constitutional documents as they exist in many countries. 34 Law must
provide rules, standards, and institutional infrastructure for each type of
transfer, with consensual transfers being of most interest to the idea of
market exchange. Thus, there are rules on contract formation, performance,
and enforcement, as well as rules dealing with gifts and other types of
transfers.

        Two important concepts that facilitate incentivizing transfers are
liquidity and leverage. In turn, both of these are enhanced by the fact that
assets can be fixed and represented in documentary form. Liquidity involves
the velocity of value capture, formation, and transformation through market
exchange.35 Assetization involves the fixing of assets, and liquidity relates to
the efficiency of the exchange networks. Liquidity is enhanced by a system of
uniform and predictable contract rules, standardization of forms and
documentation, certainty of pricing, ease of spreading risk, and availability of
good information. Liquidity is also enhanced by expanding the scale of the
market to include more and more potential traders.

        Related to liquidity is the idea of leverage. Leverage advances the
quantity and volume of trade value by allowing current access to future value
by way of debt and equity financing.36 Leverage can facilitate liquidity by
making more exchanges possible by expanding the amount of money/credit
in circulation. Liquidity focuses on the velocity of exchange and leverage
expands the pool of credit available for exchange.

        Connectivity is also important to transactions and trade. An expanding
market creates more and more opportunities for interactive exchange
combinations.37 As the exchange combinations expand, the system can
become more diverse and organize more and more information, thereby
enhancing the potential for value-adding creativity. Connectivity is akin to


34
   TOM ALLEN, THE RIGHT TO PROPERTY IN COMMONWEALTH CONSTITUTIONS (2000).
35
   See JEFFREY J. HAAS, CORPORATE FINANCE 25 (2014).
36
   Id. at 157.
37
   See generally OZ SHY, THE ECONOMICS OF NETWORK INDUSTRIES (2001); Brett M. Frischmann, An
Economic Theory of Infrastructure and Commons Management, 89 MINN. L. REV. 917 (2005); BRETT M.
FRISCHMANN, INFRASTRUCTURE: THE SOCIAL VALUE OF SHARED RESOURCES (2012); YOCHAI BENKLER, THE
WEALTH OF NETWORKS: HOW SOCIAL PRODUCTION TRANSFORMS MARKETS AND FREEDOM (2006); 1 MANUEL
CASTELLS, THE RISE OF THE NETWORK SOCIETY: THE INFORMATION AGE – ECONOMY, SOCIETY, AND CULTURE
(2nd ed. 2010); KECHENG LIU, SEMIOTICS IN INFORMATION SYSTEMS ENGINEERING (2000).




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expanding the network architecture of exchange. As with a computer or cell
phone network, expanding the legal infrastructure of exchange to enhance
liquidity, leverage, capacity, accessibility, and strategic interaction can
increase participation value for all users. The more interconnected (in the
sense of degrees of connectivity) the system and the larger the scaling of
exchange, the more strategic the network is to the value of market activity.

           Law facilitates connectivity by developing uniform documents,
standardizing and harmonizing rules and norms, and by establishing a set of
default rules that lower the cost of bargaining. Law also functions to expand
the market by creating a partial substitute and an enhancement to “trust”.
Law can provide a formal, transparent, predictable, and stable substitute for
local and personal contacts. In this way, the trust functions of personal
knowledge and experience can be substantially shifted from the individuals to
the reputational value of the legal system governing exchange, and if the
system is highly regarded it can function to reduce the risk associated with
impersonal exchanges across place, space, and time. This reputational value
may be associated with strong protection of rights to assets, well developed
contract rights and remedies, objective (apolitical) decision making, and a
variety of other factors.

           3.3 AUTHENTICATION AND VALUATION OF ASSETS

In order for the marketization process to work effectively law must provide
mechanisms to facilitate authentication and valuation. 38 Authenticating a
transaction is similar to the idea of authenticating a password access to
certain web pages on the internet, or authenticating a right to be in a given
place by use of encrypted codes driven by finger prints and other devices. In
the typical transactional setting it means authenticating the existence of the
asset, its basic quality and quantity, and such things as the authority of the
person        transferring   the   goods.   It    also   involves   authenticating             the
“originality” and completeness of all documentation. Some ways of dealing
with these issues require reference to information recorded on the public
records; review of corporate documents with respect to corporate existence
and authority of particular individuals to transfer assets; surveying with

38
     Malloy, supra note 1.




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respect to land, and other similar action such as credit checks. The basic idea
is that markets with good tools for authentication have more liquidity, better
capacity for leverage, and greatly reduced risk.

        As to valuation, law must provide a means for translating value into
easily measurable units, usually in terms of money for purposes of trade. In
the marketization process, price, to a large extent, serves as an interpretation
of value. Through pricing mechanisms, complex systems become easily
comprehensible in terms of the relative exchange values between different
positions in the system. Pricing performs the function of translating
numerous competing preferences and values into a common language. This
enhances the speed and ease of comparing relative tradeoffs across a large
scale network. Law and legal institutions need to define the acceptable and
enforceable methods of translating price into value and the degree to which
particular translations will be backed up with legal sanctions and remedies. 39

        More particularly, value is a complex theoretical subject but we can
begin to understand some basic elements of value by thinking in terms of
three transactional categories of value: use value, exchange value, and
network value. Simply and briefly stated: use value is the value derived from
being able to use an asset (a house provides shelter); exchange value is the
value, and potential value, that an asset represents as an access point to the
market (the ability to borrow against one’s home, or its value in resale); and,
network value is the value of an asset in relationship to an integrated plan of
asset exchanges (such as the value of housing in terms of being a source of
employment for construction workers and lumber companies, and as an
engine for furniture and appliance sales, and in terms of an input item, via
mortgage activity, to securitized asset markets).

        Value must, of course, also account for different underlying measures
of fair market, hedonic, and contingent valuation across the above three
mentioned categories. It also requires knowledge of present discounted value



39
  See EVE PREMINGER ET AL., TRUSTS AND ESTATES PRACTICE IN N.Y. § 9:249 (Volume D-E New York
Practice Series)(explaining that the three most common methods used to determine the fair
market value of real property are cost method, income capitalization and the comparable sales
method); see also MALLOY, supra note 3 (discussing contingent and hedonic value); see also HAAS,
supra note 35, at 53-5 (explaining how to calculate discounted present value).




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and the extent to which various legal rules account for different definitions of
value.

         The process of marketization can be positive when it expands the
opportunities for trade. For instance, being in a small village with an
informal market system provides much less value enhancing potential than
being connected to a larger scale national or global market network. In the
local market, people may know each other and have relatively good
information about the people and parties to an exchange. Larger and more
effective exchange networks bring in more and more people so that discrete
bits and pieces of knowledge (embedded within individual and personal
experiences) come into the market. It is the bringing together and mixing of
fragmented information that allows for opportunities to discover new, better,
and lower cost avenues of trade.

         Marketization can have negative implications to the extent that it
involves subordinating a variety of cultural and ethical values to a system in
which price stands not just for an interpretation of value but is interpreted as
value itself. Thus, rewriting the grounds upon which human relationships
take place. It can be a move away from the idea of the sacred, of nature, of
the spiritual, and the mystical, to the rational reduction of feelings and
emotion into a cost and benefit calculus; a calculus in which all human values
are expressed in terms of wealth calculations, whereby everything is given a
price, and wealth maximization becomes the highest value. Law must
function to “soften” the marketization process to ensure that it is understood
as a means to achieving desirable human ends, and that it avoids the
temptation to become a simplifying end in itself.

         To be positive, marketization has to be based on the advancement of
human values and the respect for community standards and norms.
Marketization does not involve merely privileging the individual pursuit of
self-interest. Market actors are social beings embedded within a culture. In
order for the pursuit of self-interest to be positive it must be tempered with a
regard for others, and this tempering and constraint is judged with reference




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to a third party; a party that Adam Smith identified as the impartial spectator.40
The idea of an impartial spectator might well define the modern day
understanding of the phrase, “the rule of law”. The impartial spectator is
symbolically akin to lady justice both representing impartiality and a sense of
blindness to the qualities of the individuals involved in the exchange. Law
functions as an impartial spectator to facilitate trades in ways that are
transparent, predictable, stable, and within the reasonable expectations of
the original intentions of the parties. At the transactions level, law frequently
imposes rules on exchange that focus on the protection of third parties. This
happens, for example, in terms of title registration and recording which
protects not on the immediate parties to an exchange but third parties who
might deal in the property at a future date. 41 Likewise, with rules related to
protecting bona fide purchasers and holders in due course. 42 A third party,
impartial spectator view is also apparent in such legal standards as those that
evaluate action with reference to that of a reasonably prudent person, custom
in trade, and course of dealing. Law functions to promote impartiality so as to
encourage a perception of fairness in exchange. At the same time, law seeks
to protect third parties so that future exchanges can be lower risk and thus,
more highly valued. The value of the property I acquire today includes the
potential for me to exchange it at a later date with a willing third party buyer.
Therefore, sustainability of exchange depends on including legal protections
for potential, yet possibly unidentifiable, future traders.




     4. CONCLUSION

Law plays an important role in the process of marketization. Through the
process of marketization law facilitates trades and exchanges in ways that
validate unequal distributions of resources and that protect the owners of
many assets from the desires of those who have fewer assets. At the same
time, law creates a network infrastructure capable of peacefully organizing
human activity across place, space, and time. This network infrastructure

40
   See ROBIN PAUL MALLOY, supra note 2; see also MALLOY, supra note 3; see generally ADAM SMITH AND
LAW (Robin Paul Malloy eds., forthcoming Feb. 2017).
41
   MALLOY & SMITH, supra note 18, at 235 –94.
42
   See, e.g., JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE 151-52 (4th ed. 1995).




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facilitates opportunities for all people to improve their well-being. In so
doing, law provides a foundation upon which a market society may rest, and
where the language of the market becomes ubiquitous in talking about and
describing activities and relationships that had not previously been thought
of in market terms.




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