Law, Informal Rules and Economic Performance
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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.
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Chapter 3: From the Middle Ages to Capitalism

Svetozar Pejovich and Enrico Colombatto


The collapse of the Roman Empire eliminated both Roman law, which was based on private ownership and contracts, and the machinery that enforced it. When the Germanic tribes, collectively known as the barbarians, took power in Rome towards the end of the fifth century ad, their customs replaced Roman law. Given the nomadic background of the Germanic tribes, the Germans held the notion of private property as less important than the preservation and development of group solidarity. Thus, incentives were in place for the development of new social arrangements. A survival strategy for a weaker man was to turn to a stronger man and give the latter nontransferable right of ownership in his land in exchange for protection and an inalienable right of tenancy: the right to hold the land of the lord. This relationship, which was named the lord–vassal relationship, slowly evolved into a basic social institution in medieval Europe. A lord could and often did become the vassal of still another man; that is, he became both the lord of a weaker man and the vassal of a stronger man. The king was at the top of this chain, and the actual tillers of the land (serfs) were at the bottom. The Catholic Church (hereafter, the Church) provided cultural unity to a politically fragmented Western Europe. In addition to monopoly in the market for salvation, the Church also had monopoly in the market for knowledge.1 To secure the former, the Church relied on persecution of heretics, inquisition,...

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