Economic value of English law | Oxera

2.4: Considering the law as infrastructure on which transactions take place

Published: October 5th 2021
Chapter 2

2.4: Considering the law as infrastructure on which transactions take place


One way to conceptualise the way in which the law creates economic value by underpinning transactions is to think of the role of infrastructure in supporting economic activity. Broadly defined, infrastructure is a set of systems and facilities that support the operation of individuals, businesses, and society as a whole.[1]For example, the UK government describes national infrastructure as comprising ‘networks, systems, sites, facilities and businesses that deliver goods and services to citizens, and support our … Continue reading In supporting and enabling wider economic activity, physical and virtual infrastructure generates economic value.

Thought of in this way, it is clear that the law is a critical infrastructure that enables and encourages the growth of economic value through an increase in business transactions. Contracts and their enforceability through the legal system (including a robust dispute resolution system) give parties confidence to enter into transactions. As such, the law that governs contracts and transactions provides the infrastructure under which parties can transact.

To illustrate this point further, consider rail infrastructure—a large network of bridges, tunnels, tracks and stations. This directly generates economic value through the operation and maintenance of the railways (analogous to the legal services sector’s relationship to the law). However, the wider value emerges from the role that the rail infrastructure plays in enabling transactions in other parts of the economy. Goods can be moved over long distances between cities and countries. Individuals can travel to work or conduct business. Thus, the infrastructure supports transactions across the entire economy, enables economic growth, and generates significant value for the UK.

Indeed, the domestic rail network is estimated to have generated up to £29.3bn in value for the UK economy in 2014.[2]Oxera (2015), ‘What is the contribution of rail to the UK economy?’, September. This includes £14.3bn in value directly from rail and freight services. Reduced congestion generated £12.9bn in overall benefits, and transport cost savings led to an increase in output of £400m. Finally, agglomeration effects arising from businesses and employees locating in clusters near rail links enhanced the productive potential of the economy by £1.7bn.

Many other examples of infrastructure exist, such as payment systems, broadband and freight networks. These are pieces of critical infrastructure that are vital to a well-functioning economy and upon which many businesses have been built. For all of these types of infrastructure, their economic value is not defined by the number of people they employ or the profits that they generate; it is the economic activity that they facilitate that is the real source of value: without these pieces of infrastructure, there would be increased costs of doing business, reducing the number of transactions happening, and whole industries that rely on the infrastructure to operate would not exist.

Box 2.1 Value created by infrastructure

The UK freight system plays a critical part in supporting economic activity, transporting raw materials and intermediate products to producers and retailers, and allowing demand for goods to be met. It is estimated that the domestic UK freight system transported 1.4bn tonnes of freight in 2017, supporting £400bn in manufacturing sales.1High-quality broadband networks are another example of an integral piece of infrastructure for modern-day economies, providing users with communication services, data transmission and access to information. The UK government’s Superfast Broadband programme connected 5m UK premises to superfast broadband,2 generating £1.7bn in benefits from faster, more reliable broadband between 2010 and 2016.3 This included productivity gains of £690m, and gains of £38m from a reduction in unemployment. The social value of improved quality of life due to faster and more reliable broadband was estimated to be £932m.

Note: 1 Vivid Economics (2019), ‘The value of freight’, April. 2 This extended UK superfast broadband coverage to 95% of UK premises. 3 Department for Digital, Culture, Media and Sport (2018), ‘Evaluation of the economic impact and public value of the Superfast Broadband Programme Final report’, August.

Source: Oxera analysis.

Overall, infrastructure generates significant value for the UK economy beyond the activity related to the infrastructure itself. The rail network generates £29.3bn in value for the UK economy annually. Freight supports almost £400bn in UK sales and GVA annually. Finally, connecting 5m UK premises to superfast broadband generated £1.7bn in additional value for the UK.

So far, this discussion has focused—in a general way—on how the law creates economic value. We have established the general manner in which the law generates economic value in any society, but the focus must now turn to the more specific question of how English law creates value for the UK economy.

The value of the infrastructure of English law is likely to bring immense benefits to the UK economy, much like better-understood infrastructure such as rail, freight and broadband. A large part of this value is derived from the significant international portability of English law. This is discussed in more detail in section 3.

References

References
1For example, the UK government describes national infrastructure as comprising ‘networks, systems, sites, facilities and businesses that deliver goods and services to citizens, and support our economy, environment and social well-being’. See Cabinet Office (2010), ‘Section A: Introduction, definitions and principles of infrastructure resilience’, para. 2.2.
2Oxera (2015), ‘What is the contribution of rail to the UK economy?’, September.