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 14: Informal Institutions or Cultural Traditions: The Role of Pathfinders

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


The rule of law serves to tame the predatory instincts of the state and its enactment of top-down formal rules, while informal rules assure the predictability of human behavior under the protective umbrella of the rule of law. The magnitude of transaction costs reveals the relationship between top-down formal rules and informal institutions. The present discussion is in accord with the scholars who use the terms culture and informal rules interchangeably. They define culture as the synthesis of a community’s traditions, customs, moral values, religious beliefs and all other informal norms of behavior that have passed the test of time and that bind the generations (North, 1990, p. 34; Gellner, 1988, p. 14).1 That is why informal rules are more durable than formal rules and change slowly. And the enforcement of informal rules is different from that of formal rules. They are enforced from within the community and lead to rejection by neighbors, loss of reputation, and expulsion from the community. Since the development of new informal rules is a slow and time-consuming process, whenever formal and informal rules are in conflict, an easy way of correcting the problem is for the state to change some formal rules. However, throughout history, governments have tried to force informal rules to adjust to formal laws and regulations. Such attempts have always met with stubborn resistance. In a well-researched book on Russian culture, Orlando Figes (2002) wrote: ‘There is a Russian temperament, a set of native customs and beliefs, something visceral, emotional,...

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