Beyond legal origin: Rethinking law's relationship to the economy-implications for policy

American Journal of Comparative Law

Volumn 57, Issue 4, 2009, Pages 831-846

  Milhaupt, Curtis J ^a  

^a The Earth Institute at Columbia University   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 72449124793     PISSN: 0002919X     EISSN: None     Source Type: Journal    
DOI: 10.5131/ajcl.2008.0025     Document Type: Review

References (33)

1. Max Weber, General Economic History (Social Science Classic Series, 1981). For Weber, the "rationality" of law came from its autonomous, universal and consciously constructed character.
2. Friedrich A. Hayek, The Road to Serfdom (1944) ;
3. Anthony I. Ogus, Law and Spontaneous Order: Hayek's Contribution to Legal Theory, 16 J. Law & Soc'y 393 (1989).
4. See, e.g., Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, & Robert W. Vishney, Law and Finance, 106 J. Pol. Econ. 1113 (1998).
5. The main arguments of the body of literature are summarized in Rafael La Porta, Florencio Lopez-de-Silanes, & Andrei Shleifer, The Economic Consequences of Legal Origins, 46 J. Econ. Lit. 285 (2008).
6. Paul Mahoney, The Common Law and Economic Growth: Hayek Might be Right, 30 J. Legal Stud. 503 (2001). (Pubitemid 33648834)
7. Weber did not see a link between English common law and economic development. Indeed, England presented a serious problem for Weber: the country was an early industrializer despite the fact that its legal system was very different from the civil law regimes he associated with "rationality."
8. This is not the place to delve into the voluminous literature on the definition of the rule of law and the various ends to which scholars have used the term. See, e.g., John Ohnesorge, The Rule of Law, Economic Development, and the Developmental States of Northeast Asia, in Law and Development in East and Southeast Asia (Christoph Anions ed., 2003) for an extended treatment of the topic.
9. Joon-Hyung Hong, The Rule of Law and its Acceptance in Asia: A View from Korea, in Mansfield Dialogues in Asia 147 (1999).
10. Any scholar approaching the question of law's relation to the economy faces a critical initial decision: how to define "law" for purposes of the analysis. We made a strategic decision to focus on state-created (or what we called "formal") law. This is obviously a top-down approach to understanding the relationship between law and markets. An alterative, bottom up approach would examine the organizing principles shaping market activity and the enforcement actions of the relevant community. We could have examined the grass roots formation of informal norms, practices and organizational codes that support market exchange in the absence or in support of formal law. Weber himself was careful to define law in such a way that it included both rules created and enforced by agents of the sovereign, as well as rules created and enforced by other groups, such as the Church, gangs, merchants, and so on. Max Rheinstein, Introduction, in Max Weber on Law and Economy in Society xiii (Max Rheinstein ed., 1954). Similarly, Hayek believed that law-in the sense of an accepted set of basic norms that govern society-precedes legislation. There is no question that informal rules are absolutely crucial to economic activity. In fact, informal rules and non-legal governance mechanisms figure prominently in our analysis as key variables affecting demand for formal law. The focus on formal law is an attempt to clearly define the scope of analysis, not a normative pre-conception about the merits of legal versus non-legal governance.
11. For a critical perspective on this Weberian legacy
12. see also Charles Sabel, Bootstrapping Development: Rethinking the Role of Public Intervention in Promoting Growth, Working Paper (2005).
13. Other scholars have used the terms "rolling rules" and "rolling regulation" to describe new trends in administrative law.
14. See Michael Dorf & Charles Sabel, A Constitution of Democratic Experimentalism, 98 Colum. L. Rev. 267 (1998). We borrow the term "rolling, " but use it to describe the iterative process of feedback and development between law and markets. A more technical approach would describe institutions as endogenously developed.
15. See Avner Greif, Institutions and the Path to the Modern Economy: Lessons from Medieval Trade; Political Economy of Institutions and Decisions (2006).
16. Over the long run, there is no clear correlation between the common law and more rapid economic growth. In simple regressions of legal origin (as defined in the law and finance literature) on economic growth from 1870 to 2000 (divided into four periods commonly used by economic historians), we found no sustained correlation between legal origin and growth. In some periods, the common law countries grew faster; in others, civil law countries grew faster. The results were not affected meaningfully after controlling for population growth, educational attainment, and a country's GDP level at the beginning of the period. Law & Capitalism, supra note **, at 24.
17. The notion that governance mechanisms may be more or less centralized as such is not new, but the extent to which this is reflected in the organization of legal systems has not been explored fully.
18. We do not claim that any legal system is actually capable of a complete and clear allocation of rights. Instead, we are referring to the aspirations of legal systems as reflected in substantive law and in the legal mechanisms available for rights enforcement.
19. Co-determination is the legal requirement that large German firms provide half the seats on the Supervisory Board to employee representatives. The Supervisory Board appoints and monitors the Management Board, which has day-to-day managerial responsibility over German firms. In this system, the rights of employees are not carefully defined ex ante. Rather, employees are provided a seat at the table where their rights are negotiated.
20. Again, "law" as used here refers to formal rules promulgated and enforced by the state, not to informal norms, codes of best practice, or other informal institutions.
21. See supra note 8.
22. Or time series regression analysis, for that matter.
23. This index groups countries according to their legal origin (as defined by the authors of the index) and assigns an aggregate score to each country ostensibly on the basis of the "quality" of the statutory protections provided to investors.
24. Rafael La Porta, Florencio Lopez-de-Silanes, & Andrei Shleifer, The Economic Consequences of Legal Origins, 46 J. Econ. Lit. 285, 302-03 (2008).
25. CIA World Factbook (2008), available at https://www.cia.gov/library/ publications/the-world-factbook/rankorder/2004rank.html. (France ranks 39th in per capita GDP (PPP basis) out of 229 countries.)
26. The rejoinder of the pioneers of the law and finance literature is that they never asserted a link between legal origin and economic growth; only between legal origin and capital market development and share ownership structures. But other scholars have made this direct link (
27. see Mahoney, supra note 4), and still others assert a linkage between financial market development and economic growth (
28. see, e.g., Robert King & Ross Levine, Finance and Growth: Hayek May Be Right, Q. J. Econ. 717 (1993). Certainly the World Bank has made use of the literature as a policy tool for something broader than financial market development. More to the point, if economic growth is not the ultimate focus of the research, then the law and finance literature diminishes greatly in importance.
29. See Ronald J. Gilson & Curtis J. Milhaupt, Economically Benevolent Dictators: Lessons for Developing Democracies, unpublished working paper (2009) (examining the growth experiences of Chile, South Korea, and China).
30. United States, Germany, Japan, South Korea, China, and Singapore. The only arguable case among the countries we examined is Russia.
31. See Ok-Rial Song, Improving Corporate Governance through Litigation: Derivative Suits and Class Actions in Korea, in Transforming Corporate Governance in East Asia 91 (Hideki Kanda, Kon-Sik Kim & Curtis J. Milhaupt eds., 2008).
32. International Development Law Organization, Strategic Plan 2009-2012, at 8.
33. World Bank, Economic Growth in the 1990s: Lessons from a Decade of Reform 26 (2006).