A friend of mine suggests that in contemporary mainland China, people in business think that only their families are part of the group with whom they should be honest. (Or people with whom they have, over time, developed a deep relationship, with whom they have a `connection'.) Outsiders are not salient at all. No one thinks of the kinds of business dispute resolution that is practiced in Europe, America, and related countries. It is not a question of disagreement or misunderstanding, but of disregard.
This issue has nothing to do with the way one should treat a parent or with criminal law; it is about business dispute resolution: how one business settles a dispute with another, the other being, perhaps, distant and its people strangers. In the United States this is the subject of `tort law'.
In Europe and places whose customs descend from Europe, businesses draw up contracts with each other and resolve disputes by suing each other in court. Law and courts provide the mechanism for business dispute resolution. As courts became a more common place for business dispute resolution, judges became less arbitrary and politicians took less notice of `ordinary' settlements (but not of `important' ones).
When courts or legislatures do not come to mind, one mechanism by which a dispute may be resolved is to fight. The stronger business wins. The resolution does not depend on `right', but on `might'.
Perceived injustice is sometimes a cost, since it reduces the range of people with whom you can deal. Thus in dealing with a stronger business, a weaker one may count on managers in the stronger firm acting justly, even if the result goes against their short term interest.
The same calculus applies to other costs. Their importance varies depending on how far managers look into the future and on their rate of discount. Some look only a few months into the future; others a few generations.
In all cases, however, a successful business needs to gain a great deal of information about another before doing a deal. It dare not work with strangers, lest they rob it. Connections become important.
An advantage of a reliable, quick, and honest legal system is that it provides a dispute resolution mechanism that reduces transaction costs since it becomes safer for a business to work with strangers. (The importance of this depends on other costs, such as those for labor, capital, energy, and transport.)
Another advantage for a court-based dispute resolution mechanism is that it enables a competitive, free market to develop: because slight preferences will magnify, a competitive, free market will contain many differently sized firms. In a world in which firms are owned and operated by families, their sizes are limited. But in a world of corporations, firms can grow very large. If the prime dispute settlement mechanism is `might' rather than `right', the larger and more unscrupulous firms will tend to overwhelm the smaller. New competitors will stay away. But in so far as `right' gains support from a powerful court, the smaller will be able to thrive.
A court system is a good example of a high initial/low incremental cost operation. The high initial cost comes from the need for a society to adopt the notion of courts as fair and from their set-up.
Dictatorships generally have courts, but no one thinks of them as fair. Businesses avoid them.
Hernando de Soto, a Peruvian activist, argues that for modern economic success, a country must enable businesses to engage in transactions that are not too costly and which do not discriminate too much against newcomers who are small. His solution is to argue that countries should adapt the formal law to existing, actual social contracts, not to attempt the reverse.
Unfortunately, his solution only goes part way. It solves one necessary aspect, which is to bring formal law into line with existing practice. But when people do not think of courts, when existing social contracts exclude courts in general, then de Soto's solution fails.
I do not see what will happen. When `might makes right', larger corporations will beat smaller businesses, unless the corporations are vulnerable in some other way. For example a large corporation may respond more sluggishly than small business to an interruption of fossil energy supplies. A large corporation may respond more sluggishly to changes in customer taste.
In so far as large corporations succeed, they will become oligopolists or monopolists. Customers will find themselves transferring more of their resources to the business than they think is just. A traditional dislike of `merchants', as in old China, will be confirmed by modern experience.
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