Working Paper

The State, the Market and the Rule of Law

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State and market are often depicted as distinct, even antagonistic. Markets appear as natural products of spontaneous ordering; states as leviathans that if left untamed will distort, if not destroy markets’ natural state.

The rule of law shall ensure that everyone plays by the rules of the game. A rule bound State corrects for market failure, but goes no further; rule-observant market actors operate within the constraints the rule of law imposes on them.

Consider an alternative image of how state, market and the rule of law relate to one another: Financial markets are legally constructed. State law has transformed relational finance into large-scale market-based financial systems. The specific configuration of contemporary global finance has made markets’ survival in the last instance dependent on discretionary rather than rule bound state action. This is eroding the rule of law, the legitimacy of the state and confidence in markets.