Managing Systemic Risk in Legal Systems

Abstract

The American legal system has proven remarkably robust even in the face vast and often tumultuous political, social, economic, and technological change. Yet our system of law is not unlike other complex social, biological, and physical systems in exhibiting local fragility in the midst of its global robustness. Understanding how this “robust yet fragile” (RYF) dilemma operates in legal systems is important to the extent law is expected to assist in managing systemic risk — the risk of large local or even system-wide failures — in other social systems. Indeed, legal system failures have been blamed as partly responsible for disasters such as the recent financial system crisis and the Deepwater Horizon oil spill. If we cannot effectively manage systemic risk within the legal system, however, how can we expect the legal system to manage systemic risk elsewhere?

This Article employs a complexity science model of the RYF dilemma to explore why systemic risk persists in legal systems and how to manage it. Part I defines complexity in the context of the institutions and instruments that make up the legal system. Part II defines the five dimensions of robustness that support functionality of the legal system: (1) reliability; (2) efficiency; (3) scalability; (4) modularity, and (5) evolvability. Part III then defines system fragility, examining the internal and external constraints that impede legal system robustness and the fail-safe system control strategies for managing their effects. With those basic elements of the RYF dilemma model in place, Part IV defines systemic risk, exploring the paradoxical role of increasingly organized complexity brought about by fail-safe strategies as a source of legal system failure.

There is no way around the RYF dilemma — some degree of systemic risk is inherent in any complex adaptive system — but the balance between robustness and fragility is something we can hope to influence. To explore how, Part V applies the RYF dilemma model to a concrete systemic risk management context — oil drilling in the deep Gulf of Mexico. The legal regime governing offshore oil exploration and extraction has been blamed as contributing to the set of failures that led to the catastrophic Deepwater Horizon spill and is at the center of reform initiatives. Using this case study, I argue that the RYF dilemma model provides valuable insights into how legal systems fail and how to manage legal systemic risk.

Keywords: systemic risk, complex adaptive systems, complexity science, robustness, fragility, legal systems