Economics and the Rule of Law

18 March 2008 at 9:37 am Leave a comment

| Peter Klein |

This week’s Economist features a summary of recent economic controversies about the rule of law (thanks to Fabio Chaddad for the pointer). There is near-universal consensus among specialists in economic history and economic growth that the legal rules — and institutions more generally — “matter,” though the precise mechanisms are in dispute, and aspects of the institutional environment such as the quality of legal rules are difficult to measure consistently across societies and over time. We’ve touched on the closely related “legal origins” debate before. As with that controversy, the arguments in this one have become more subtle and complex in the last decade. As the Economist notes:

[A]s an economic concept the rule of law has had a turbulent history. It emerged almost abruptly during the 1990s from the dual collapses of Asian currencies and former Soviet economies. For a short time, it seemed to provide the answer to problems of development from Azerbaijan to Zimbabwe, until some well-directed criticism dimmed its star. Since then it has re-established itself as a central concept in understanding how countries grow rich — but not as the panacea it once looked like.

The Economist piece focuses on the distinction between “thick” and “thin” understandings of the rule of law.

In “The Rule of Law and Development” (to be published next month by Edward Elgar), Michael Trebilcock of the University of Toronto and Ron Daniels of the University of Pennsylvania tackle the question of what economists mean by the rule of law. A report by a new research group, the Hague Institute for the Internationalisation of Law, does the same thing. Both publications argue that people routinely use two quite different definitions, which they call “thick” and “thin”.

Thick definitions treat the rule of law as the core of a just society. In this version, the concept is inextricably linked to liberty and democracy. Its adherents say a country can be spoken of as being ruled by law only if the state’s power is constrained and if basic freedoms, such as those of speech and association, are guaranteed. The “declaration of Delhi” drawn up by the International Commission of Jurists in that city in 1959 followed this line in saying that the rule of law “should be employed to safeguard and advance the civil and political rights of the individual” and create “conditions under which his legitimate aspirations and dignity may be realised.” Among other proponents of a thick definition are Friedrich Hayek, an Austrian economist, and Cass Sunstein of the University of Chicago. In their view, the rule of law includes elements of political morality.

Thin definitions are more formal. The important things, on this account, are not democracy and morality but property rights and the efficient administration of justice. Laws must provide stability. They do not necessarily have to be moral or promote human rights. America’s southern states in the Jim Crow era were governed by the rule of law on thin definitions, but not on thick.

To put it differently, are social systems “discrete structural alternatives,” in which formal legal rules, informal norms, political institutions, commercial practices, and the like are clustered in particular combinations, or do these attributes function in isolation? Do we need a typology of feasible social systems like Coff and Makadok’s classification of feasible hybrids? How can we understand social systems more generally in a “syndrome of attributes” framework?

Entry filed under: - Klein -, Business/Economic History, Classical Liberalism, Institutions, Law and Economics, New Institutional Economics, Theory of the Firm.

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