Law and Regulation in Late Modernity

Sociology of Law, Lund University, Lund, Sweden



This chapter examines how the law fares under socio-cultural conditions specific to late modern societies. Section 1 uses the financial global crisis of 2007–2008 as a backdrop against which to formulate a number of concerns regarding the limits of legal regulation in late modernity. Section 2 explores the formation and operations of the late modern state, asking if power is separated from politics and has moved to the level of global organisations. Section 3 asks what kind of law is emerging de facto in response to the fluidity of late modernity, and how legal imagination envisages the future of law.

This chapter is based on ‘Law and Regulation in Late Modernity’ in Banakar R, Travers M (eds) (2013) Law and Social Theory. Oxford: Hart, 305–324.

Modernity, Marx and Engels (1848, p. 224) observed about a century and half ago, is the experience of time and space as ‘[a]ll fixed, fast-frozen relationships, with their train of venerable ideas and opinions, are swept away, all new-formed ones become obsolete before they can ossify. All that is solid melts into air…’. They meant that capitalism’s insatiable need to create and dominate new markets compelled it to incessantly renew itself, thus endlessly revolutionising the social and economic conditions. This in turn liquefied society by not allowing relationships, forms of organisation or social institutions to remain solid or permanent over time. In this sense, the notion of ‘liquefaction’ is hardly new and was already envisaged by Marx and Engels as a form of life and employed to describe the stage when ‘all that is solid melts into air’. Marx and Engels could not, however, have imagined how the advent of digital technology would take the liquefying properties of modernity to new heights. Nevertheless, what we experience as a novel or unprecedented shift is part of the unfolding of modernity and its unrelenting drive to change and renew itself.

In this final chapter of the book, we explore further the stage when the pace of social change has accelerated by globalisation, thus breaking down all social, cultural and geographical boundaries, and causing ‘a maelstrom of perpetual disintegration and renewal, of struggle and contradiction, of ambiguity and anguish’ (Berman 1991, p. 15). Under these conditions, both the individual and the collective face ‘disembeddedness’, i.e. they experience how ‘culture and norms become loosened from their moorings in time and place: normative borders blur, shift, overlap, detach’ (Young 2009, p. 3). Durkheim did, admittedly, conceptualise the breakdown of social norms, or anomie as he called it, and widespread individualism as a consequence of industrialisation, but for him anomie was a by-product rather than the product of modernity. It marked a pathological state brought about by exceptional societal developments, resulting in periods of social disruption and severe crisis. In contrast, the experience of disembeddedness we are concerned with in late modernity, constitutes a normal rather than an exceptional social condition. It is in this context that we shall explore how law, which crystallises values and norms by embedding them in institutional settings, thus ensuring durability and certitude in social relationships, fares in late modernity’s increased liquefaction of social structures.

1 Regulating Global Corporations?

On the day that the UK government was warned by charities and campaigners against cutting welfare benefits to the poorest—an austerity measure aimed at reducing the country’s deficit (Independent 3 December 2012)—a parliamentary report revealed that certain multinational corporations, which generated huge amounts of income by operating in the UK, had used ‘secretive jurisdictions, royalties and complex company structures’ (Guardian 3 December 2012) to avoid paying UK taxes (also see HM Revenue and Customs 2013). They had been enjoying the right to operate businesses in the country, unfettered by any sense of responsibility such as declaring their true taxable income to the UK authorities.1 They were, however, not breaking any UK laws and had been simply making use of existing domestic rules and international agreements to move their profits to low-tax jurisdictions. Although these companies had not committed any illegal act, the revelation nonetheless provoked a barrage of public criticism followed by demands for new legislation aimed at curbing the tax avoidance practices of multinational corporations. Some argued that legislative intervention was the only way to ensure that these corporations reported their gross profits as well as their taxable income. Others argued that in order to introduce and enforce a regulatory regime capable of clamping down on this type of tax avoidance, one first needed to ensure international cooperation between various countries. There was therefore no point in the government of the UK legislating against global companies’ tax avoidance strategies on its own. Vince Cable, the Business Secretary, summed up the situation in this way:

Governments have been very fragmented. They are behind the curve. We operate national systems of business taxation and enforcement in a world where companies operate on a global scale, seeking out low tax jurisdictions. Governments are at a disadvantage. (Guardian 12 December 2012)

The news of global corporations’ tax avoidance belongs to a long line of public scandals—including the irresponsible conduct of ‘greedy bankers’2 and their bonuses, the MPs’ expense scandal3 and more recently the News International hacking scandal4—in the UK. These ‘scandals’ raise a number of questions: why do growing numbers of politicians, journalists, bankers, global corporations and other professional and interest groups, who rely on legal rights to safeguard and promote their ideal and material interests, seem unconcerned with their responsibility towards the society in which they operate? Furthermore, why do governments appear either unwilling or unable to regulate the activities of these groups in a more stringent fashion? These questions can, admittedly, lure us into moralising on the conduct of bankers, politicians, journalists or global corporations. However, they are posed here, firstly, to examine how and why, in a society that is becoming progressively individualised and rights-based, rights are being gradually divorced from a sense of social responsibility and, secondly, to ask why the traditional forms of regulations have proved inadequate, or simply ineffective, in constraining what appears as socially irresponsible public conduct. Is it because the interests of global capitalism, people of wealth and the political elite coincide to such an extent that governments appear indecisive when regulating corporate activities? Has domestic politics been drained of power, while power has been moved to the global level of transnational organisations and corporations? Have the forces of globalisation created, as some have suggested, new ‘law-free spaces’ where the global elite and corporations may operate unencumbered by external regulation? Although any attempt to answer these questions would inevitably brush against ethics and politics, in the following pages we shall seek a better understanding of these concerns by exploring the social conditions generated by the unfolding of modernity. Following Zygmunt Bauman, it will be argued that in tandem with the move from industrialisation to late (or reflexive) modernity, social norms, relationships and structures, which were previously considered as enduring and stable over time, have become rapidly unstable—thus giving rise to new, short-lived social formations which do not generate or require ethical commitments. The aim of this chapter is to explore how law fares under these conditions.

Two issues should be stressed at the outset. Firstly, the idea of late modernity will be employed critically to tease out the novelty of ongoing social developments, but without endorsing the idea of liquid society as an adequate description of contemporary society. A point will be made that Bauman underestimates the power of domestic politics and the nation state; a flaw which is linked to his tendency to underrate the force of existing social structures and the continued ‘solidity’ of many institutional relationships. Secondly, this chapter will use recent events in the UK to advance its theoretical arguments, and thus it will first of all describe the unfolding of late modernity in a British context. Economic developments in Britain often echo events in the US, or are influenced by EU policies, regulations and directives, but they do not set the standard for assessing social change in other countries. In the same way that different forms of modernity have emerged in countries with different socio-political histories and economic preconditions (cf. Eisenstadt 2010, p. 3), different forms of late modernity will also appear in different parts of the world.

The following is divided into three sections. Section 1 uses the financial global crisis of 2007–2008 as a backdrop against which to formulate a number of concerns regarding the limits of legal regulation in late modernity. Section 2 explores the formation and operations of the late modern state, asking if power is separated from politics and has moved to the level of global organisations. Section 3 asks what kind of law is emerging de facto in response to the fluidity of late modernity, and how legal imagination envisages the future of law. The chapter concludes by discussing why late modernity, which marks the agency’s heightened powers of reflexivity, appears paradoxically wanting in transcendental imagination and determination.

2 Reflexivity

2.1 When Controlling Risks Generates More Risks

The global financial crisis, which began in 2007–2008, was a multidimensional crisis brought on by the unfolding of new social and economic conditions driven by, to borrow from Castells et al. (2012, p. 2), ‘the dynamics of a deregulated global capitalism, anchored in an unfettered financial market made up of global computer networks and fed by a relentless production of synthetic securities as the source of capital accumulation and capital lending’. Davies (2010) lists 38 separate macro and microeconomic factors which have been used to explore the causes of the crisis. These include the build-up of considerable global imbalances that generated a surplus of liquidity in the years before the crisis, growing income inequality among countries, flawed macroeconomic policies which financed the rising consumption trends by borrowing, the undisciplined financial markets which facilitated and encouraged this borrowing, and the failure of regulators to bring these markets under some form of control (Davies 2010). Although the crisis was systemic and caused by a combination of these factors, it was initially forced to the surface by ‘the accumulation of small, and in themselves relatively harmless, decisions made by individual traders or bankers and banks’, who were trying to refine the market (Engelen et al. 2011, p. 9). Relatively harmless as these decisions arguably were, they concealed an irresponsible attitude towards excessive risk-taking at the expense of others, illustrated by the subprime mortgage scandal, where mortgages were sold on to another party who had no interest in whether or not they defaulted, and the private equity and hedge funds’ so-called ‘greed game’ (Peston 2008).

In Fool’s Gold, Tett (2009), a social anthropologist working as a financial journalist who was given access to the inner circles of elite bankers, describes how the ‘tribe’ of young traders at JP Morgan unleashed forces which caused the near collapse of the global financial system. This group of investment bankers, who were fervent believers in the efficiency and superiority of free markets, was largely responsible for engineering a sophisticated financial product known as a ‘credit derivative’. This complex financial instrument disembedded and re-commodified loan transactions, creating a new and opaque culture of finance, which as Picciotto (2011, p. 159) explains, was ‘underpinned by arcane techniques and mathematical modelling based upon calculations of relative volatility’. The young traders combined derivatives5 with the process of ‘securitisation’, which involved a lender selling its loans to an investment bank. The amalgam enabled banks to turn the risk attached to their loans, i.e. repayment risks, into a financial product and sell it as if it were bonds or shares. This innovative use of derivatives reduced the capital reserves the banks required for lending more money to a larger number of investors. Put differently, derivatives allowed them to take risk off their books, package it as ‘securities’ and sell it on in the market for high fees. When employed conservatively, derivatives, according to Tett, were capable of bringing security to global finance and worked as a means of controlling risk. At the same time, Tett (2009, p. 15) admits that there were also many investors who used derivatives to ‘make high-risk bets in the hope of windfall profit’. Once used in this way, derivatives not only generated more risk, but also dispersed the risk of investment bankers’ excesses across the financial system and around the globe.

As the application of credit derivatives spread across the sector, and other banks such as Citigroup, USB, Deutsche Bank and Merrill Lynch also adopted them, they inevitably fell into the wrong hands and were perverted. The largest application of derivatives was in subprime mortgages, which allowed the repackaging of loans to homeowners, who failed to meet the usual requirements, into bonds for sale on an industrial scale. What had been started by a group of traders at JP Morgan as a financial innovation and an attempt to control risks gradually cascaded into a full-scale crisis of global dimensions, a crisis over which (we were told) no one had any control. The governments of the US and other countries could step in only once the international economic crisis was in full bloom to bailout investment banks with hundreds of billions of dollars of taxpayers’ money to avoid a collapse of their national economies.

Tett worked on the assumption that complex derivatives were not responsible for the crisis, and if anyone was to be blamed, it was the few ‘bad apples’ within the banking community who exploited them. There are good reasons for paying attention to the actions and decisions of those individuals who acted recklessly, yet the forces which triggered the financial crisis were, as pointed out above, multi-layered, caused by macro and microeconomic factors, and cannot be reduced to the actions of one group of individuals. One cannot ignore that Tett’s ‘greedy bankers’ operated within a system which lacked transparency and did not allow the external monitoring of the way derivatives were traded. The system was, moreover, driven by an insatiable appetite for profits and paid little heed to warnings about the spread of a speculative economy divorced from production.6 When examining the financial crisis in terms of the actions of the few ‘bad apples’, we run the risk of overlooking the role of macroeconomic factors as well as the impact of laissez-faire capitalism that has been spreading in the UK and the United States since the 1980s.

With these points in mind, I use Tett’s description of the financial crisis to articulate three sets of concerns at the levels of the individual (human agency or social action), social system (or social structure) and global economy (transnational relations). Focusing on individual bankers and mortgage brokers, the question begging an answer is how they could act in such an unrestrained fashion. How could they make highly risky decisions motivated by what appears to be their own short-term interest alone, as well as without a sense of responsibility to their investors, financial institutions upon which their livelihood depended and the larger society? To repeat, these questions are not meant as an invitation to moralise on the culture of banking, but to explore the limits of formal regulatory regimes under the normative conditions of late modernity. Notwithstanding Tett’s attempt to blame ‘greedy bankers’, the actions of individual actors also need to be assessed in the context of the financial institutions in which they worked and in view of the imperatives of a financial system based on profitmaking and speculation. Although banking and finance are regulated domestically (e.g. the Banking Act in the UK and the Glass-Steagall Act in the US) and internationally (e.g. the Basel Accords), the story of the elite traders who manufactured these complex derivatives nevertheless suggests that there are social spaces within which the tribe of bankers may roam free, beyond the reach of the usual forms of regulation and undeterred by external monitoring. Thus, we are led to ask: how can public spaces and networks, such as those of elite bankers, exist beyond the reach of the formal (official) and informal (unofficial/extra-legal) regulatory mechanisms of early modernity? Do they exist because they are de facto out of reach of the public authorities, such as central banks and regulatory agencies, with the responsibility for the financial system, or because the liberal state is unwilling to interfere in the operations of the market economy for ideological reasons? Alternatively, could it be that a regulatory system, which has been founded on the market economy’s past performance and dysfunctions, is doomed to failure because its formal mechanisms cannot stay abreast of the continuously changing structures of the capitalist system? (cf. Hayek 1952). These questions will allow us to sharpen our focus on the role of the state, which is responsible for introducing and enforcing formal regulatory regimes, and ask: why were Western governments unable to prevent the crisis and could do so little after the event to redress its consequences?

2.2 How Could They Act in Such an Unrestrained Fashion?

To understand the constraints exerted on social action in late modern society we need to start with the cultural and political programme of modernity which, as argued by Eisenstadt, has ‘entailed a shift in the conception of human agency, of autonomy, and of the place of the individual in the flow of time’ (Eisenstadt 2010, p. 3). Many forms of modernity have developed in different parts of the world, but despite their differences they share a quest for emancipating human agency from the restraints of tradition. Modernity, liberally paraphrasing Giddens (1999, p. 39), replaced the claims of tradition by reason and conferred a durable appearance upon social institutions by transforming their authority from one based on traditional relationships to one based on legal bureaucracy, which facilitated the centralisation of institutional power. The combined power of modern institutions made the expansion of modernity unavoidable; yet this power, which reached its peak under industrialisation, could not totally dominate social developments because ‘reflexivity’, to borrow again from Giddens (1999, p. 39), subverted reason, ‘where reason [was] understood as the gaining of certain knowledge’.

In its most basic form, reflexivity refers to people’s ability to talk to themselves silently in their heads, or as Archer (2010, p. 5) explains, to have an ‘internal conversation’. In its more recent sociological conceptualisation, it indicates a state of self-knowledge through self-dialogue, which allows the individual to reflect on herself in relation to her circumstances and vice versa, to observe herself as subject and object and devise a plan of action accordingly. In this sense, reflexivity links social action and social structures by throwing light on the process through which human agency becomes socially embedded. However, in its radical or late modern form, it highlights the disembeddedness of the agency, or the increasing ability of the agency to reflect on structures in order to emancipate oneself from the constraints of social institutions in a way which, although not new in the context of modernity (for modernity has, admittedly, been partly about the liberation of human agency from the fetters of traditional authority, practices and institutions), is nevertheless unprecedented in its scope and societal consequences (Archer 2007, p. 2).

The reflexivity inherent in modernity has been enhanced by globalisation, accelerating the rate of structural change and causing what Bauman (2000) calls the ‘liquefaction’ of the ‘solid’ structures and relations of early modernity. Taking this idea to its final conclusion, Bauman (2005, p. 1) describes contemporary society in terms of ‘liquid modernity’, which refers to a society where ‘the conditions under which its members act change faster than it takes the ways of acting to consolidate into habits and routines’. Under these ‘liquid’ conditions, human agency becomes increasingly disembedded, i.e. independent of social structures and free from institutional and traditional ties which previously constrained social action at the level of social interaction. This also means that flexibility, i.e. ‘a readiness to change tactics and style at short notice, to abandon commitments and royalties without regret’, rather than ‘conformity to rules’ will serve the individual’s interest more effectively (Bauman 2010, p. 4). As the reflexivity of the agency is enhanced and disembeddedness spreads across society, the moral contingency of social action grows rapidly, influencing the way social institutions and systems operate. As pointed out by Beck (1992), systems such as polity and law become less capable of responding to socio-cultural complexity and moral diversity in their environment through further functional differentiation.7 Social forces, which could be evoked by law and polity to reshape society and mould behavioural patterns under the first stage of modernity, either become less effective or redundant, as formal regulation fails to keep pace with continuously evolving social structures.

To reiterate, ‘the apparent solidity and timeless appearance of modernity offered an ostensibly durable foundation for building relationships based on trust, certitude, security and stability, which in turn provided a rational basis for social engineering and reform’ (see Chap. 12). These solid structures are now undermined by late modernity’s temporary assemblages of shifting and precarious positions, as well as transitory social spaces and forms of community. As we argued in the previous chapter, at the centre of this development we find the increased significance of agency vis-à-vis structures. To borrow from Martyn Denscombe again, this ‘does not imply that ‘structural’ factors cease to exert any influence at all. But it does mean that there is a tendency for them to exert less influence than in the past and for greater significance to attach to individual choices in terms of the creation of self-identities’ (Denscombe 2001, p. 160). This idea can tentatively explain the seemingly unrestrained conduct of the young bankers and other professionals we discussed above. The tribe of young bankers is increasingly ‘emancipated’ from the general social and moral constraints of the society in which they live and operate, and they belong to the mobile elite of well-to-do professionals who are not constrained by national borders and cannot be pinned down in any one locality or jurisdiction; consequently, their activities cannot be controlled through the traditional means of regulation external to their field of work. Their daily work provides a site (or a rudimentary type of ‘habitus’,8 which we shall discuss below as a technical habitat) for knowledge-based collaboration, but is largely carried out at the global—multi-jurisdictional9—level, where no single external normative system can effectively monitor or regulate individual conduct. For example, as soon as the UK government started considering a super-tax to regulate the bonus culture of investment bankers and brokers in the City, the Mayor of London warned that any such measure would only result in them moving to other centres of finance with more liberal tax regimes.10 The chief executive of one of the state-backed banks warned a few months later that a large number of investment bankers were quitting the UK, causing a ‘rapid exodus’ as a result of the ‘bonus fiasco’ (Evening Standard 4 March 2010.).

Tett’s use of the word ‘tribe’ to describe the young group of investment bankers at JP Morgan is significant in itself. In an unrelated study, Ethan Waters also employs the word to portray a group of college-educated young people in California, who being liberated from the structural (economic as well as cultural) pressures to which their parents were subjected choose not to form families, or they marry much later than their parents did (Watters 2004). At the same time, they are so driven by a culture of hyper-individualism that their lives, as described in Waters’ Urban Tribes, appear as completely self-absorbed and egoistic.11 Therefore, their heightened reflexivity, which emancipates them from certain constraining aspects of institutions, does not appear to empower them to look or step beyond modernity’s epistemological premises. There is, however, more to this emerging trend than liquefaction. Instead of forming traditional families, the young adults in question are forming their own communities of friends, which Waters calls ‘urban tribes’. Tett’s tribe is different from Waters’ in that it is created through the knowledge-based practices of traders: it requires of its members shared knowledge of how to trade in derivatives and other financial products, which temporarily joins them together in a collaborative network. However, Tett and Waters’ tribes, different as they are, draw attention not only to the rise of new social formations, but also to the emergence of new forms of inequality and alienation. These tribes consist of well-educated, economically independent and socially successful young professionals, whose privileged backgrounds have granted them access to economic as well as cultural resources required for living flexibly and detached from local concerns and structural pressures. They do not, in other words, represent the whole of society, but a privileged group.

As Petersen (2010, pp. 333–347) explains, a widening gap is emerging between elite citizens, the successful high-flying global citizens who feel responsible for little more than their own wellbeing and interests, and a local underclass consisting of those who feel socio-economically vulnerable and culturally defenceless. This underclass does not live a liquid life, but takes on more than its share of anxiety and uncertainty, as it is culturally and economically undermined by social processes and political forces beyond its control. In response to late modernity’s new forms of inequality, new kinds of social movements, such as the anti-globalisation movement, are born. Occupy Wall Street is an example of a new form of spontaneous social networking, which is organised in cyberspace as well as in urban space. This movement is also known as ‘We are the 99%’, which refers to the disparity in income and wellbeing between the majority of Americans and the 1 % who control the country’s wealth.

2.3 From Community to Transitory Social Networks

The individual never totally submitted to the normativity of social structures, institutions, customs and traditions. A gap has always existed between injunctive norms, which prescribe what ought to be done, and descriptive norms, which reflect empirically ascertainable patterns of behaviour (or how people behave in actual fact).12 Nonetheless, human agency’s growing potential to free itself from the normative constraints of social structures is decisive for understanding the limits of formal regulation under late modernity. ‘The central aspect of regulatory compliance’, as Casey and Scott (2011, p. 77) explain, consists of ‘institutionalisation and embedding of norms within some wider set of structures’. Employment law, which we shall discuss in Sect. 3, exemplifies how law was employed to embed certain values, such as fairness and equal treatment, in the structures of the labour market. This type of regulation requires the durable structural relations of early modernity capable of normatively influencing the agency. In the context of late modernity, however, the traditional form of regulation which employs law to ground values and norms in social structures and institutions loses its determinacy, as the agency’s reflexivity grows vis-à-vis structures and institutions. Does this therefore mean that the late modern agency exists in a normative vacuum? The fact that Tett considers the young bankers as a ‘tribe’ suggests that although they might exist as ‘nomadic individuals’ (Lee 2010

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