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 6: The Economic Functions of the Constitution

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


In the Federalist Papers, no. 51, James Madison, a founding father of the US Constitution, argued that constitutional protection of the rights of individuals must precede the development of all other institutions, including a majority rule. Two centuries later, James Buchanan (1993, p. 59), a Nobel laureate, concurred with Madison, saying that, if individual liberty is to be protected, ‘constitutional limits must be in place prior to and separately from any exercise of democratic governance … “constitutional” must be placed in front of the word “democracy” if the political equality of individuals is to be translated with any meaningful measure of freedom and autonomy’ (Buchanan, 1993, p. 59). Fareed Zakaria, an American political commentator, went one step further. Having noted that many scholars and politicians do applaud the spread of democracies (118 out of 193 countries by the end of the twentieth century), he raised the crucial question: what happens in those countries after elections? One can surely adopt democratic procedures to select the rulers. However, this choice does not necessarily guarantee that, once in power, rulers are committed to the protection of liberty (e.g., Iran and Venezuela in the early 2000s) or that minorities are protected (pick any new country in the Balkans in the late 1990s). Zakaria observed that, in a majority of allegedly democratic countries, citizens may have political rights – that is, the right to select the ruling parties or coalitions – but they have few civic and economic freedoms. Zakaria (1997, pp. 42–3) defined such institutional contexts...

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