Does the Common Law Make for Successful Markets?

From Legal Affairs, a piece about the field of Law and Finance. Which legal system is better at creating reliable financial markets and economic growth: civil-law systems, such as Germany, France and most of South America; or common-law systems, such as England and the United States? A team of four ecomonists put together a dazzlingly complex study, and in 1998 announced their answer:

[C]ountries 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.

It’s mostly about the judges, they claim. Common-law systems create strong judges who have a great deal of power and independence, while judges in civil-law systems are much less powerful; they are meant only to faithfully apply the detailed laws passed by the legislator. Powerful and independent judges, in turn, act as an effective check on the kind of corruption and inefficiency that can sabotage markets.

Skeptics have arrived from both the law and economics faculties. The lawyers deride the simplistic splitting of legal systems into common law and civil law. Economists dispute the nature and importance of the variables the group’s using, and doubt whether you could ever control for enough variables to actually link the nature of the legal system to economic performance:

[C]ommon law may be linked to strong markets without causing them. Common law countries tend to speak English (a big advantage in the latter half of the 20th century, given American economic dominance) and tend to be Protestant (scholars dating back to Max Weber have connected Protestantism with hard work). Many historians also believe that the British did a much better job than the French of finding economically viable locations to set up colonies. "What LLSV has done is a very clever relabeling of things," said Zingales. "We all know that Anglo-American countries are different. You can call it the English language, the English tradition, and you can code it in all sorts of ways."

I don’t really have a dog in this fight, but I found the article interesting and balanced, and maybe some readers will enjoy it

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