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 12: The Carriers of Change: The Role of Entrepreneurs

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

Extract

The carriers of change are individuals. Individuals conceive ideas, formulate policies, convince others to accept their ideas, and bear the cost of failures. Decisions that in everyday language we attribute to governments, corporations and organizations are in fact decisions made by individuals. The carriers of change make decisions at both levels of social activity. At the level of the rules, individuals carry out institutional changes. In product markets, individuals run businesses. The voluntary acceptance of institutional changes in the market for institutions, and the profitability of one’s business in the market for products, mean that the carriers of change have made the community better off. Otherwise proposed changes at either level of social activity would have been rejected. To distinguish between the carriers of change in the market for products and in the market for institutions, I refer to them as entrepreneurs and pathfinders, respectively. The focus of this chapter is on the effects that entrepreneurship in product markets has on institutional changes. The carriers of change or entrepreneurs are individuals acting in the market for products. They make investments, decide what to produce and/or sell, market their products, capture the benefits and bear the cost of their decisions. Some entrepreneurs in product markets are doing more of the same, while others are doing something that has not been done before. The former are routine business activities. The latter we call innovation. A major difference between the two types of entrepreneurship is with respect to risk and expected returns. The...

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