The Scope of the State as a Function of Transaction Costs: How Will Digitization Change the Role of Public Law?

Radbruch (1980), emphasis added. Our translation.

See, for example, Senn (2015), pp. 471, 477; Gasser and Drolshammer (2015), p. 83, esp. 87. See also the various contributions on the topic in the thematic issue of the Columbia Law Review 7/119 (2019).

For the context of international law, concerning the Tallinn Manual, see Langer (2019), pp. 3, 10; Braun Binder (2019), p. 467.

Boehme-Neßler (2009), pp. 145, 148. The fact that digitization has a ubiquitous and limitless effect does not, however, exclude the possibility of strongly differing effects. There is a strong possibility of a “digital divide”.

Yermack (2017), p. 28; Desai (2014), pp. 1469, 1476. See also Boehme-Neßler (2009), p. 147.

Cf. Wükert et al. (2017), pp. 1, 11. As the research project “Transformation of the State” of the German Research Institute for Public Administration, puts it: “The state as a social system of order and as an institutional order will (further) transform itself in its outer and inner form in the course of advancing digitalization and undergo an assimilation to the digitized life and experience of its citizens and of the subparts of its society”: Martini (2016), p. 26. Our translation. See also De Filippi (2018), pp. 267, 276.

Cf. Gasser and Drolshammer (2015), p. 98, which emphasizes how digital transformation depends on its institutional environment. Our chapter deals with the reverse relationship, the question of how the character of (public) institutions depends on their technological environment. See also Cavelti and Jaag (2019), p. 66.

See Wükert et al. (2017), p. 14.

Yuval Harari, for instance, predicts that “(…) it is likely in the next 200 years or so homo sapiens will upgrade themselves [sic] into some idea of a divine being, either through biological manipulation or genetic engineering by the creation of cyborgs, part organic, part non-organic” Knapton (2015). The relationship of such speculations to the analytical grid of transaction costs is not immediately clear. However, Adam, the man-machine in Ian McEwan’s “Machines like me”, predicts that the fusion of men and machine will bring us into the vicinity of a transaction cost-free world: “[W]hen (…) a brain-machine interface is efficient and cheap, you’ll become a partner with your machines in the open-ended expansion of intelligence, and of consciousness generally. Colossal intelligence, instant access to deep moral acumen and to everything known, but more importantly access to each other. It could be the end of mental privacy. You’ll probably come to value it less in the face of the enormous gains. (…) We’ll inhabit a community of minds to which we have immediate access. Connectivity will be such that individual nodes of the subjective will merge into an ocean of thought, of which our Internet is the crude precursor. As we come to inhabit each other’s minds, we’ll be incapable of deceit” (McEwan 2019, p. 148f).

See also Weber (2019), p. 19f.

Oliver E. Williamson provides a helpful and somewhat more detailed analytical grid in this context by identifying four superimposed layers of institutions: the highest layer forms the socio-cultural context (informal institutions, religion, customs, etc.) which remains relevant for centuries; the second is constituted by the institutional environment, the “rules of the game” (i.e. primarily public institutions) which remain stable for decades; the third is the “play of the game” (i.e., in particular, the question of how corporate structures and contractual relationships are designed) and the fourth the everyday decisions on resource allocation. Our point is that the literature on digitization and law to date has focused too much on the third and fourth levels, and too little on the rules of the game and the socio-cultural context in which they are embedded, both of which may also come under strong pressure to change as a result of digitization. Williamson also mentions that above these levels lies a higher level, level 0, which is an evolutionary level where the structure of the human mind or consciousness is formed—again over a much longer period than on level 1 (Williamson 2000, pp. 596–600).

For an example of the discussion on this third level, concerning the legal issues in connection with the use of artificial intelligence in decisions in public administration, see Braun Binder (2019). However, the question of the extent to which the external form, the processes of everyday legal life will shape the content of substantive law is a complex question that lies at the interface between the second and third levels of analysis. See Gasser and Drolshammer (2015), p. 92; see also Fries (2018), p. 414, and especially 429.

Boehme-Neßler (2009), p. 147.

A very good discussion of the various conceivable meanings and the origin of the term can be found in Wükert et al. (2017).

Cf. Weber (2019), p. 20f.

Coase (1937), p. 386.

Coase (1960), pp. 1, 17. The question to what extent states are free from competition among each other should be discussed a new in a time of seamless mobility of people and factors of production as compared to the time in which Coase penned this remark.

See also Calabresi (2016), p. 96; Barzel (2012), p. 3.

This terminology is introduced by Calabresi (2016), especially pp. 24ff.

Desai (2014), p. 1482.

See Richter and Furubotn (2010), p. 70.

As will be explained below, the approach used here assumes that transaction costs are the reason why there are hierarchically integrated institutions such as firms and states. However, the normative requirement that transaction costs be reduced to such an extent that states become obsolete does not follow from this analytical approach.

Explaining the emergence and scope of the field of government activity based on transaction costs also helps to understand the separation between public law and private law as a gradual, not a systemic, separation (to admit this gradual nature is a prerequisite for an analytical framework on digitization of public law). Both private and administrative law, are entrusted with the allocation of goods—for example with the allocation of silence or cleanliness. We call the property rights to protect these goods a prerogative (or a regalian right, to use Piketty’s terminology [see: Piketty 2020, p. 45]) when public law deals with them. When private law, we call them (neighbourhood) rights of defence against nuisance. The instruments used by the two fields of law vary, but the function is the same: to reduce transaction costs to such an extent that social costs can be internalized as far as possible. Similarly, their respective functions cannot be understood without their continuity and complementarity being seen in the other field of law. Expressed in the language of interest theory, law is considered to be private law for as long as the protection of the interests of a group of private individuals is concerned. Where that group of private individuals with the same interest has become so large (or where the interest to be pursued is so widely dispersed) that it can be assumed that the interest in question is actually the public interest, legal rules are considered public law. Changes of the technological context are an important indication of how the boundary between private and public law has shifted in the past and could shift in the future.

Some authors insist on the difference between legal and economic property rights. Accordingly, legal property rights are those possibilities of action that are enforced by the legal system. Economic property rights are those that can actually be enforced or exercised. The terms are therefore not congruent. A world in which the legal system would lose its task because there would no longer be any transaction costs, however, also entails the assumption that legal property rights have become completely congruent with economic property rights. See Allen (2015), pp. 379, 387.

Hesse (1983), p. 80. Our translation.

Schäfer and Ott (2012), p. 72; Calabresi and Melamed (1972), pp. 1089, 1092.

Coase (1988), pp. 655, 656.

Mathis (2019), p. 88.

Richter and Furubotn (2010), p. 80.

Richter and Furubotn (2010), p. 82; see also Calabresi and Melamed (1972), p. 1095.

Oreskovic (2020).

Samaras et al. (2020).

Hao (2020).

Posner (2011), pp. 638–641.

Barzel (2012), pp. 19–20.

Coase used the term “marketing costs” before the more general concept of transaction costs was at hand. Coase (1937), p. 392.

For the most comprehensive possible definition of transaction costs, see Allen (2015).

One of the reasons for this is that there is no theory for discerning transaction costs and factor costs. See Schlag (2013), pp. 175, 219.

Allen (2015), p. 380, Fn. 4; Mathis (2019), p. 86.

Allen (2015), p. 380, Fn. 4.

Schlegel (2017), p. 58; Mathis (2019), p. 81; Cooter and Ulen (2014), p. 89.

Barzel (2012), p. 3, distinguishes a state theory based on the Coase Theorem from normative state theories and describes “operationality” as the former’s objective.

Langer (2019), p. 9.

Barzel (2012), p. 18.

Platforms are online applications for the purchase or exchange of services such as car lifts, food delivery, online trade and tourism.

Guggenberg (2017), p. 2577.

Statista Digital Market Outlook, Individuals who use Facebook via any device at least once per month (for services such as car lifts, food delivery, online trade and tourism) https://​www.​statista.​com/​statistics/​568790/​forecast-of-facebook-user-numbers-in-germany/​ (accessed on July 4th, 2020).

Gasser and Drolshammer (2015), p. 86.

According to Guggenberger, the NetzDG violates higher-ranking law by, for example, unduly restricting the communication rights of citizens of the Federal Republic of Germany (Art. 5 I and II GG) without the obvious necessity of the measure. See Guggenberg (2017), p. 2581.

“In the Chinese context, the state will run the show and own it, not as a market project but as a political one, a machine solution that shapes a new society of automated behavior for guaranteed political and social outcomes: certainty without terror.”: Zuboff (2019a), p. 225.

“Surveillance capitalism diverged from many norms and practices that define the history of capitalism, especially the history of market democracy.” Zuboff (2019b). Accessed 23.10.2020.

The term “Smart Contract” describes digital programs that, based on a blockchain architecture, execute themselves when certain conditions occur and which, due to the decentralized and cryptographic design of the blockchain, are almost self-assertive and tamper-proof. Thus, they can execute legal obligations, such as payment obligations, on their own if the aforementioned conditions are met, which leads to a high level of security and low transaction costs. For these payments to trigger a change in the legal world (and not just within the programme), they require an underlying will of the parties to be bound by a contract. The will to be legally bound involves the (more or less) voluntary submission of a private relationship to the legal system of a state, including its contract law under private law and its civil procedural law under public law. The contract is embedded in the assumption that the parties wish to be legally bound and that, in the event of non-performance or defective performance, the other party may require performance and/or compensation awarded and, following a court ruling, leave the enforcement of the contract to the state with the full force of state authority.

Nozick (2013), p. ix.

Szabo (2019): according to Szabo, the difference between technological institutions (such as blockchains) and institutions such as the rule of law is primarily social scalability.

Cf Boehme-Neßler (2009), p. 189.

Whereas Meyer and Schuppli argue that the intent to legally bind oneself and thus the existence of a binding contract is called into question by idealized smart contracts (Meyer and Schuppli 2017, pp. 204, 208), Frankenreiter claims that the likelyhood of such a development is low (Frankenreiter 2019, pp. 149, 154). However, due to their inherent determinism, smart contracts can hardly reflect the dynamic nature of contracts: what was initially a contract based on mutually agreed declarations of intent can change over time, e.g. exceptions to the principle of pacta sunt servanda, such as the legal figure clausula rebus sic stantibus, may nullify formerly valid contracts for contracting parties ex tunc. Thus, smart contracts cannot cover the entirety of the existing and future contract components at the time of the conclusion of the contract. In this light, smart contracts appear as a promising means to reduce transaction costs, but not as an alternative to the contract enforcement regime based on states and courts.

Schumpeter (2005).

It is more useful to think of the relation of markets to states as a spectrum, rather than as a dychotomy: Ostrom (2010), p. 2.

Regarding this analogy, see Desai (2014).

See Weber (2019), p. 4; Bauböck (2018), p. 261.

See also Häberle (1984), p. 43. Another essential reading is North (2005), p. 41.

See Silver (2012), p. 2.

Khan (2017), p. 780.

See North (2005), pp. 50–51.

North (2005), p. 47; Desai (2014), p. 1477; Wallis and North (2007), pp. 95, 122f.

Desai (2014), p. 1468.

See Senn (2007), p. 2.