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III. THE NEED FOR ADDITIONAL LEGAL RESEARCH

While law and governance institutions, broadly defined, clearly are relevant to economic growth, that finding by itself is not very helpful. For practical purposes, governance requires an understanding of precisely what laws and implementing organizations are most effective at enhancing growth and what actions might affirmatively interfere with such growth. While the role of law may be important in promoting growth, it is clear that more law is not always better than less law. One cannot even generally say that “more” or “stronger” property rights are better than fewer or weaker property rights. Lon Fuller stressed that while property and contract rights were vital to growth, a legal system must restrain the “rigidities of property and contracts” so that the society could “direct its resources toward their most effective use.”235 Interest groups may demand the creation of inefficient property rights that amount to rights to a monopoly status. The creation of property rights in, say, continued employment at a private company could be economically counterproductive and increase unemployment levels.236 So the questions are regarding what property rights are beneficial and how they best should be enforced.

Property rights may be viewed merely as protection of private owners against state expropriation. Even in the absence of such a threat form the state, though, property rights may be seriously limited by legal constraints on alienability or collateralization.237 There are different bundles of legal entitlements associated with property rights and the composition of those bundles may be critical to the economic consequences of those rights. Such rights may be of limited utility absent effective judicial systems, and they may also require some sort of credible commitment to future preservation of effective property rights.

In some circumstances, even the most traditional property rights, widely recognized as economically valuable, may affirmatively interfere with growth. De Soto ascribes the great economic expansion of the United States to the fact that it abandoned conventional British common law and violated the property rights of large landowners in order to grant titles to squatters and spread property rights to a larger number.238 Experience in Peru shows that programs to provide property to the poor “have failed over the past 150 years whether they followed the bias of the right (protecting property through mandatory law) or of the left (protecting poor people’s land in government-run collectives).”239 There is no obvious simple recipe for success. Studies around the globe have found that titling ownership in real property

235 Lon L. Fuller, THE MORALITY OF LAW 28 (rev. ed. 1969).

236 This is the classical economic wisdom. See, e.g.,, Daniel S. Hamermish LABOR DEMAND 273


(1993) (noting that common explanation for slow employment growth in Japan and Western Europe is
difficulty in firing workers). There is some empirical research supporting this position. See Edward P.
Lazear, Job Security Provisions and Employment, 105 Q. J. ECON. 699 (1990).

237 See, e.g., Besley, supra note 000, at 906-907 (noting that in Ghana there was relatively little threat


of expropriation but that the value of recognition of property rights was reduced by restrictions on the rights
of transfer, bequeath, and collateralization).

238 See THE MYSTERY OF CAPITAL, supra note 000, at 110-127.

239

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has sometimes, but not always, been economically beneficial.240 While the protection of some property rights is now recognized as invaluable to economic expansion, the issue is not really a binary one. Key questions are the scope of the rights and the circumstances in which they may be enforced, or compromised.



Even the “rule of law” cannot simplistically be regarded as beneficial. The rigid application of laws may be an economic problem. Latin American courts have been criticized for their “strict adherence to legal form and the letter of the law.”241 While a stable legal system has benefits, a “modern market economy requires laws that are able to adapt” and there is a “tremendous flexibility that the legal and judicial systems require in order to adapt laws to a dynamic economic system.”242 The stabilizing benefits of precedent may become stifling in effect.

While new institutional economists have often focused on private law, public law may also play a substantial role in economic growth. Interventionist state policies may in fact contribute to economic success, at least within a generally capitalist framework. The East Asian miracle could be attributed to an activist, even mercantilist, state that created cartels, channeled capital investments, and subsidized research.243 After their initial takeoffs, however, these nations have migrated in the direction of more traditional economically liberal policies.244 The optimal legal rules may depend upon the underlying economic situation of a nation.

One legal question of some importance is the extent to which constitutionalization of law matters. William Riker has declared that “everytime I convince myself that I have found an instance in which constitutional forms do make a difference for liberty, my discovery comes apart in my hands.”245 Constitutional protections may represent nothing more than parchment declarations without real world effect. Some empirical research suggests that constitutional recognition of rights is not significant.246 Other research suggests that such provisions may sometimes have an effect, depending on the circumstances of other institutions.247 Beyond

240 BUILDING INSTITUTIONS FOR MARKETS, supra note 000, at 36 (discussing evidence of


positive effects in Thailand and Brazil but lesser success in other very poor regions of the world).

241 Judicial Reform and Civil Society, supra note 000, at 87.

242 Edgardo Buscaglia, Introduction, in THE LAW AND ECONOMICS OF DEVELOPMENT, supra
note 000, at 3.

243 See, e.g., Katharina Pistor & Philip A. Wellons, THE ROLE OF LAW AND LEGAL


INSTITUTIONS IN ASIAN ECONOMIC DEVELOPMENT, 1960-1995 10 (1999) (reporting that a
“relatively high level of state involvement was compatible with, and perhaps even conductive to, economic
growth”).

244 See Ginsburg, supra note 000, at 839 (reporting that by the mid-1980s, these nations “shifted to


more market-oriented solutions” and had an “increased recourse to formal law” and associated increase in
litigation in all the East Asian nations other than Japan).

245 William Riker, Comments on Vincent Ostrom’s Paper, 27 PUB. CHOICE 13, 13 (1976).

246 See Xavier de Vanssay & Z.A. Spindler, Freedom and Growth: Do Constitutions Matter?, 78
PUB. CHOICE 359 (1994) (reporting that the constitutional entrenchment of rights had no apparent effect
on growth); Joel S. Hellman, Constitutions and Economic reform in the Post-Communist Transitions, in
THE RULE OF LAW AND ECONOMIC REFORM IN RUSSIA, supra note 000, at 55 ( reporting that the
establishment of a constitution had at best marginal value in promoting economic reform in Eastern
European nations).

247


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constitutionalization, there is a question whether the substantive content of any law genuinely matters, or whether all is politics and results are contingent on institutional arrangements rather than legal text. One study has, intriguingly, found that constitutional protection of religious freedom seems to be a significant factor in the protection of economic freedom.248

Legal academics are positioned to make a substantial contribution to the investigation of law and economic growth and help answer questions such as the importance of constitutionalization and legal text. The participation of law professors would undoubtedly enhance the accuracy of the measures of factors such as property rights and rule of law. Those who are familiar with the law may also identify other variables that might appropriately be employed in the empirical investigations, variables that economists or political scientists may overlook. Legal academics may also broaden the scope of the research and address relatively unexplored areas of the law.

The study of tort law offers much promise. Legal academics are in the best position to assess differences, both substantive and procedural, in comparative laws of tort liability and design research to test for the effects of such differences. One might expect such standards to have material economic impact. To the extent that such law internalizes the costs of production, it should contribute to economic efficiency and growth, but commentators have conversely lamented that tort litigation can be oppressively redistributive and inefficient.249 Some limited

research on data from eleven nations found no significant effect of tort litigation on economic wellbeing.250

Law professors may also contribute to study of the practical functioning of legal institutions. While considerable attention has been paid to judges and court systems, the role of lawyers should be examined. Attorneys are agents and producers of the law, who may serve as transaction cost engineers that facilitate the development of business enterprises.251 Yet the same legal profession that may be “necessary for growth” is also the group best-positioned “to sabotage capitalist expansion.”252 The raw number of lawyers may affect its growth rate, as “developing countries face serious shortages of lawyers with the training and skills to play these roles in a market economy.”253 Some economists have argued that the U.S. and other nations have too many lawyers with a negative economic effect,254 though these studies are disputed.255 More

248 Zane A. Spindler & Xavier de Vanssay, Constitutional Design and Economic Freedom
(September 16, 2000).

249 Critics have claimed that “current legal arrangements led to major detrimental effects on the U.S.


economy,” such as “limitations on the availability of products, increases in product prices, and
discouragement of innovation.” Steven Garber, Tort Liability and Economic Performance: Research
Challenges, in JUDICIAL REFORM IN LATIN AMERICA AND THE CARIBBEAN, supra note 000, at
27.

250 See Frank B. Cross, Lawyers, the Economy, and Society, 35 AM. BUS. L.J. 477, 504-508 (1998).

251 For a review of some of the valuable services that lawyers provide business, see Charles Silver &
Frank B. Cross, What’s Not To Like About Being a Lawyer?, 109 YALE L.J. 1468-69 (2000).

252 THE MYSTERY OF CAPITAL, supra note 000, at 197-198.

253 Webb, supra note 000, at 38.

254 See, e.g., Stephen P. Magee, et al., BLACK HOLE TARIFFS AND ENDOGENOUS POLICY


THEORY 119 (1989) (reporting empirical test indicating negative effect of lawyer numbers); Kevin M.
Murphy et al., The Allocation of Talent: Implications for Growth, 106 Q. J. ECON. 503 (1991) (reporting
that ten percent increase in law school enrollment caused 0.3% decline in economic growth).

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important than raw numbers may be the local legal culture256 or the self-regulation practices of the bar.



CONCLUSION

The advancement of economic wellbeing is an important societal objective. The law may play an important role in achieving that objective. Yet law professors have not attended to this relationship as much as they should. The importance of legal institutions and governance for economic growth is now relatively well accepted in the economics profession. The association has been well demonstrated, both theoretically and empirically. But this generalized finding of economists leaves many of the most important questions unanswered.

Those of a “law and economics” bent have certainly helped explicate some aspects of the association between legal rules and economic development. Within law schools, though, this research has been produced by a small segment of the professoriate and has not been particularly comparative or even commonly empirical. Nor has it been especially evenhanded. Broader research is needed on the economic effects of law. This need not take the form of large cross­country studies such as most of those I have described. Individual country studies of legal change are informative. Within the United States, comparisons of state laws may inform. At whatever level, it would behoove legal academics to conduct additional research on the practical consequences of the law, including economic growth.

255 See Frank B. Cross, The First Thing We Do, Let’s Kill All the Economists: An Empirical
Evaluation of the Effect of Lawyers on the United States Economy and Political System, 70 TEX. L. REV.
645 (1992) (reporting evidence showing no negative economic effect to lawyer numbers; Charles R. Epp,
Do Lawyers Impair Economic Growth?, 17 LAW & SOC. INQUIRY 585 (1992) (reviewing and
reanalyzing Magee’s data and finding no negative effect to lawyering).

256 See Walde & Gunderson, supra note 000, at 80 n.80 (reporting that the “emphasis on legal culture


the specific habits, procedures, attitudes, induction and community rituals and communication media of
the professional community of the lawyers – seems to be a condition for the mergence of at least a Western
system of market economy law”).
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