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 8: Capitalism, Economic Freedom and Performance

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


A growing body of literature supports the premise that formal and informal institutions affect economic performance, and empirical evidence supports it as well. Given that premise, linking capitalism with economic performance are incentives that the institutions of capitalism generate and the effects of those incentives on transaction costs. And this linkage between capitalism and economic performance has produced economic results that no other institutions and systems have been able to duplicate. A few simple observations suffice to confirm this statement. The capitalist West has done much better than the rest, while Hong Kong and Singapore have become the economic showcases for the rest of the world. The economy of China started growing as soon as its leaders replaced the little red book with the bottom line. Many countries in East Asia and Africa gained independence from colonial regimes at various times in the 1950s and 1960s. At that time those two regions were at about the same level of economic underdevelopment. Just a few decades after gaining independence East Asia became a model of economic success, while Africa stagnated.1 A plausible explanation for observed differences in economic growth between those two regions is that East Asian societies found a way to integrate their informal rules with the institutions of capitalism, while most African countries opted for ‘their own way’ to socialism. It is also observable that, at the turn of the twenty-first century, Anglo-American capitalism, which is much closer to the roots of classical liberalism, has been doing better than...

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