“Bankruptcy and commercial law provide the essential rules necessary for any country’s daily life; these laws affect every type of exchange, from buying a Twinkie to building a hydroelectric dam. No company or entrepreneur can do anything without considering their effect on each transaction undertaken.”
Do you agree?
The quote above comes from Bruce Markell, currently a professor of law at Florida State University, formerly a highly regarded United States Bankruptcy Judge, and a very long time ago the partner for a bankruptcy research project assigned to me when I was a summer associate in a large law firm. I have an enormous amount of respect for Judge Markell, and I genuinely like him, and for many years I would have been inclined to say that his statement above is correct. However, I can’t agree with his statement as drafted. To help the analysis, let’s separate the statement into two separate components, each to be evaluated independently:
Bankruptcy and commercial law provide the essential rules necessary for any country’s daily life; these laws affect every type of exchange, from buying a Twinkie to building a hydroelectric dam.
I agree with this as an absolute truth, and you probably do, too. OK, there’s a reasonable challenge to this assertion as applied to countries whose exchanges are driven by cultural norms as much as (or even more than) laws. But in modern industrial democracies, it’s hard to argue with the accuracy of the first part of Judge Markell’s statement. Now on to part 2:
No company or entrepreneur can do anything without considering [the] effect [of bankruptcy and commercial law] on each transaction undertaken.
I agree that no company or entrepreneur can rationally do anything without considering the effect of bankruptcy and commercial law on each transaction undertaken. However, business decisions, like personal ones, sometimes get made with irrational disregard for factors that would be dispositive to a rational actor. I know this from my own experience, and you probably do, too–maybe it’s because of trust in a valued relationship. Or maybe it’s fear of derailing a deal’s momentum, or some other psychological factor. Ultimately, companies act and decide through people, and people are, well, human, with human psychological foibles.
Most economists now recognize that the long-cherished hypothetical rational actor is just that, hypothetical. If you’re a traditionalist and continue to believe in the economic rationality of people, then I encourage you to read Predictably Irrational by Duke professor Dan Ariely. (If you’re more comfortable reading in French, its translated version is called C’est (vraiment) moi qui décide?) In that book, Professor Ariely summarizes many of the insights of the field now known as behavioral economics, and makes them accessible, relevant, and entertaining. (He himself is responsible for some of those insights, even if the Nobel prize glory for behavioral economics went to his psychologist colleague and occasional collaborator Daniel Kahneman.)
We’ll come back to American bankruptcy and commercial law in future Law Talks. If you do business in the United States, or if you advise companies that do business in the United States, then it truly is irrational for you to ignore their effect. To paraphrase Judge Markell, “no company or entrepreneur doing business in the US can rationally do anything without considering the effect of American bankrupcty and commercial law on each transaction undertaken.”
For now, simply enjoy Dan Ariely’s entertaining and informative 2008 TED Talk “Are we in control of our own decisions?”:
And if you have an experience with irrational decision-making in business, whether or not it involves bankrupcty and commercial law, please feel free to share it in the comments!