December 28, 2004

DOES the British common law tradition kick French ass when it comes to economic prosperity? Friedrich Hayek often suggested that the British common law system supported the rule of law required for a market economy far better than the French civil law tradition (see e.g. The Constitution of Liberty or Law, Legislation and Liberty). Well, four economist claim they've proven it. Quotable:
Malaysia and Indonesia couldn't be called twins, but they might be called siblings. The adjacent Southeast Asian nations possess similar natural resources and their citizens speak similar languages and follow similar strains of Islam. But Malaysia's economy is prospering while Indonesia's is floundering. Malaysia's stock market is far more vibrant than its neighbor's, and its average resident is three times richer .. Malaysia was a British colony and its legal system is based on the common law: the set of rules, norms, and procedures that has guided the legal system of England and the British Empire for about nine centuries. Indonesia was a Dutch colony and its legal system derives from French civil law, a set of statutes and principles written under Napoleon in the early 19th century and imposed upon the lands he conquered, including the Netherlands.

According to research published by a group of scholars beginning in 1998, countries that come from a French civil law tradition struggle to create effective financial markets, while countries with a British common law tradition succeed far more frequently. While the scholars conducting the research are economists rather than lawyers, their theory has jolted the legal academy, leading to the creation of a new academic specialty called "law and finance" and turning the authors of the theory into the most cited economists in the world over the past decade ..

The idea that legal origin can explain national market differences comes from four economists who are referred to in their field by the acronym LLSV: Rafael La Porta of Dartmouth's Tuck School of Business, Florencio Lopez-de-Silanes of the Yale School of Management, Andrei Shleifer of Harvard's economics department, and Robert Vishny of the University of Chicago's business school ..

Shleifer and Vishny are the authors of The Grabbing Hand: Government Pathologies and Their Cures. Shleifer is also the author of Inefficient Markets: An Introduction to Behavioral Finance.

Find a contrarian view here. Posted by Greg Ransom | TrackBack