Law, Informal Rules and Economic Performance

Law, Informal Rules and Economic Performance

The Case for Common Law

Svetozar Pejovich and Enrico Colombatto

Capitalism has outperformed all other systems and maintained a positive growth rate since it began. Svetozar Pejovich makes the case within this book that a major reason for the success of capitalism lies in the efficiency-friendly incentives of its basic institutions, which continuously adjust the rules of the game to the requirements of economic progress. The analysis throughout is consistent and is supported by evidence. Key components of the proposed theory are the rule of law, the market for institutions, the interaction thesis, the carriers of change, and the process of changing formal and informal institutions.

Chapter 4: Capitalism and the Rule of Law

Svetozar Pejovich and Enrico Colombatto

Subjects: economics and finance, institutional economics, law and economics, public choice theory, law - academic, law and economics, politics and public policy, public choice


Capitalism is institutionalized classical liberalism. Its cornerstones are competitive markets, the rule of law and the culture of individualism. There is a great deal of literature on the transformation of feudalism to capitalism. As for the dating of capitalism, Schumpeter argued (1954, p. 78) that, by the end of the fifteenth century, most institutions and behaviors we associate with capitalism were already in place. There is also a great deal of literature on the rise of capitalism. From the standpoint of this book, the most interesting debate is between Macfarlane and Weber. The former sees the origin of capitalism in the rise of individualism in thirteenth century England. Weber argued that the Puritan spirit emerging from Calvin’s teaching gave tremendous impetus to the development of the frugal, hardworking and accumulating individual. Macfarlane wrote (1978, pp. 197–8): ‘It is no longer possible to explain the origins of English individualism in terms of … Protestantism … If [capitalism] was present in 1250, it is clear that neither the spread of world trade and colonization, nor Protestantism, can have much to do with its origins.’ If one accepted that individualism is the key element of capitalism, Macfarlane wins the argument. However, there is also an argument that both scholars could have been right because what Weber meant by capitalism was quite different from what Macfarlane meant (Opp 1983, pp. 28–30). Analysis in this book accepts Macfarlane’s position that individualism is a major defining characteristic of capitalism. The transformation of ideas and concepts into...

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