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 10: The Method of Analysis

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 the product of Western civilization. Clearly, Western civilization has managed to create an efficiency-friendly economic system capable of producing innovations in both the market for products and the market for institutions. Toward the end of the twentieth century, the acceptance of capitalist institutions such as the freedom of contract and private property rights helped many non-Western countries to raise their standard of living relative to that of their neighbors. Some obvious examples are Slovakia vs Ukraine, South Korea vs North Korea, and Chile vs Cuba. However, the fact that capitalism has out-produced all other systems that have ever been tried has not deterred its critics. The critics of capitalism have offered a variety of models, each claiming superiority over the private-property, freemarket economy. Some of those models got their chance in the real world (e.g., Marxist socialism, National Socialism, Fascism, codetermination, self-management, etc.) and they all failed to duplicate the results of capitalism. Some models are untested inventions. Addressing scholars who market their own ideologies and blackboard fictions as workable economic models that should replace capitalism, Karl Brunner wrote (1970, p. 563): ‘The sacrifice of cognition is particularly easy to detect in objections to the market system introduced by discrepancies between one’s desires, glorified as social values, and the results of market processes. However, our ability to visualize “better” states more closely reflecting our preferences yields no evidence that this state can be realized.’ Institutions have predictable effects on economic performance, and changes in the economic conditions of...

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