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How Countries Deal with Incomplete Law
Legislation cannot cover every possible topic and circumstance. Societies use courts and regulation to fill in the gaps. A country's history and social features affect the ways that gaps in the law are handled, which, in turn, shape the operation of markets.
Legal scholars Katharina Pistor and Chenggang Xu say that law is necessarily incomplete.
What Is Incomplete Law?
Lawmakers cannot foresee all situations in which the law may be applied or needed. Changes in social conditions, innovations in markets and developments in new technologies may create circumstances not contemplated when the law was created. A very specific law may very quickly become obsolete. So, legislatures often formulate general law that can be applied to all conditions and individuals covered under the law. While a general law prevents arbitrariness with respect to the application of the law, it makes it impossible to create a complete law. New circumstances always arise.
Two Ways the Law Is Incomplete
Pistor and Xu identify two ways in which law may be incomplete:
Because law is incomplete and cannot cover every situation or action, legislatures often use others to decide how the general principles of the law are applied in concrete circumstances. This is called “residual lawmaking and enforcement.”
Who Is Responsible for Residual Lawmaking and Enforcement?
There are two main ways that countries deal with the incompleteness of law.
A country may attempt to minimize residual lawmaking through legislation. That is, the legislature may try to create legislation to cover every circumstance. However, this approach is very ineffective since legislative bodies are cumbersome and generally reactive (for instance, they respond more slowly to changing market conditions and innovations).
Approaches to Dealing with Incomplete Law
Different social factors that may affect whether governments rely on courts or regulators for residual lawmaking and enforcement. England, the U.S. and Germany provide good examples of how government divide up responsibilities for applying and enforcing the law.
Social Factors Shape the Way Countries Deal with Incomplete Law
Even though different countries may confront similar problems (for example, incomplete law for handling damages within a securities market), the way that they seek to remedy the incompleteness of law depends on a number of different factors. Some of the social factors that affect the allocation of residual lawmaking and enforcement include:
In short, the peculiar history and context of a country’s legal system affects the manner in which the country divides up the work of applying and enforcing the law.
The ways that countries deal with incomplete law also has important effects on markets. The "flow" of the effects from the incompleteness of law to the effect on markets is illustrated in Figure 1.
Figure 1. Relationship between Incomplete Law and Markets
England, the U.S. and Germany provide a good example of different ways of dealing with incomplete law in securities markets. Each country’s approach to allocating residual lawmaking and enforcement between courts and regulators had important effects on the country’s markets.
Placing the "path" of each country into the framework in Figure 1 provides a way to compare the way the three countries responded to the challenges of incomplete law governing securities markets.
Table 1. Institutions, Residual Lawmaking and Market Effects in Three Countries.
So, even though all three countries were responding to the incompleteness of law with respect to the securities market, social conditions affected the way that residual lawmaking and enforcement powers were allocated which, in turn, had important effects on the securities markets.
Data and Methods:
Analysis of legal and historical research.
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Pistor, Katharina, and Chenggang Xu. 2003. "Incomplete Law—A Conceptual and Analytical Framework and its Application to the Evolution of Financial Market Regulation." Journal of International Law and Politics 35:931-1013.