Max Weber developed the thesis that the existence of a ‘logically formal and rational legal system’ is a condition for the successful operation of the market economy. However, although China has had the fastest growing economy in the world over the last 20 years and its growth is market-driven, its legal system (which has only begun to be rehabilitated since 1978) has been far from ‘rational’ in the Weberian sense. This confounds adherents to Weber’s thesis. Some scholars point out that guanxi (personal relationship) practices in Chinese culture may serve as the functional substitute for rational law for the purpose of reducing transaction costs and facilitating economic growth. This article examines this view, and develops a revised version of Weber’s thesis by drawing on economic sociology (particularly Mark Granovetter and Francis Fukuyama) and the new institutional economics (particularly Douglass North). It reflects on both the view that the establishment of a ‘rational’ legal system will be essential in assuring long-term economic development in China, and the ‘critical perspective’ that casts doubts on the validity of Weber’s thesis.
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