Law, development and innovation. Of these three themes, it is development in
which we are ultimately most interested: development is what has lifted a third
of the world population out of the direst poverty over the past quarter century and
holds the promise of doing the same for others still there. Law and innovation both
serve this deeper purpose. How the causality amongst the three runs we do not
know precisely. Law may be an enabling factor for innovation, but successful
innovation may also call for legal change to facilitate future innovation. Both
stimulate development, but development may in turn feedback with a lag to call
forth legal adjustments and further innovation.
The questions of how to stimulate development and how law contributes to this
process have a long history. Once the economic take-off had occurred in Western
Europe, thinkers from Hobbes and Locke, through Rousseau, Montesquieu, Hume,
Adam Smith, Adam Ferguson, Bentham, to Marx and Max Weber, to name just
these, sought to understand what caused that development and what would need to
be done to bring forth further growth.1
With the worldwide decolonisation after the Second World War, a new question
appeared on the social science research agenda: how to stimulate economic
development in the newly free countries, with the pressing request to come up with
practical advice for policy makers. The advice must have been all over the map,
considering the wide variety of designs that were experimented with in different
parts of Africa, Asia and Latin America: from collectivisation and full-scale
socialism with five-year plans through nationalisation of key industries to open
market economies. Over time we have learnt that most of these experiments have
turned out unsuccessful and painful to those subjected to them. The success stories
—the Asian tigers, and later China and India—largely relied on open economy
models, albeit with local adaptations.
What role law might play in economic development was studied from the 1960s
on by the “Law and Development” movement, composed mostly of lawyers and
sociologists. One of its main proponents, David Trubek (2012), recently drew up a
balance sheet of 50 years of that movement. The results must be judged mixed at
best.
1The argument that follows has been more fully developed in Mackaay (2009).
v
Economists tried their hand at the problem following an initial opening by
North and Thomas (1973). They insisted on the essential role of secure property
rights, shielded from too greedy takings by local power holders, as essential for
development. Later research further worked out this and related ideas (Jones
1981; Rosenberg 1986; Landes 1998; Bernstein 2004). Amongst the follow-ups
were two books by the Peruvian economist de Soto, pointing out that strong
protection of property rights was perhaps not the full story, as it did not lead to
the expected growth in Peru and other developing countries (De Soto 1989,
2000).
A more practical turn came when Gwartney and co-workers (1996), starting in
1996 and continuing yearly afterwards, related growth rates to a set of indices
reflecting economic freedom and showing that greater freedom was clearly correlated
with (and perhaps caused) better economic performance. This was followed
by a group of Harvard economists, La Porta, López-de-Silanes, Shleifer
and Vishny (1998, 1999), who proposed a broader platform relating a host of
indices reflecting the quality of the legal system and other institutions to indicators
of economic performance. These papers stirred up an enormous academic
debate and led to a host of follow-on studies by a variety of researchers. The
World Bank adopted their methodology and applied it at a much larger scale in
reports, published from 2004 on, under the title of Doing Business, in which the
bank formulated specific advice to different countries about legal and policy
changes to be implemented with a view to improving economic performance
(growth).
The Doing Business reports have been controversial in that their early versions
attached much importance to differences in legal families, with common law-based
systems being thought to perform best, followed by German Civil Code-based
systems and at the tail end French Civil Code-based systems. Studies by the
Harvard group first highlighted these differences under the title “legal origins”
(Glaeser and Shleifer 2002). They led to much acrimony in the French legal
community (Muir Watt 2009). A critical discussion in 2005 between French legal
scholars and World Bank representatives contributed to clearing the air (Canivet
et al. 2005). By 2008, the discussions that followed the “legal origins” research as
well as the Doing Business reports had led to the realisation that the legal origins
thesis was not tenable; in later Doing Business reports, it was dropped (La Porta
et al. 2008; World Bank 2015).
All the data and the methodology used in the preparation of the Doing Business
Reports are public and have been widely discussed, and improved as a result. The
controversy about legal origins should not obscure the considerable accomplishment
of the reports in helping to convince a range of countries to implement legal
changes that improve their business climate and accelerate economic growth.2
Research has continued on what does and what does not contribute to development.
A significant compilation of this research may be found in a book by
2The 2013 Report, p. 11, mentions over 2000 such changes worldwide.
vi Foreword
Acemoglu and Robinson (2012).3 They argue that it is not culture, the weather,
geography, ignorance of the right policies or colonial history that hold back
development; it is man-made political and economic institutions. Nations that adopt
“extractive” institutions allowing those in power to enrich themselves at the
expense of the rest will advance not at all or very little. By contrast, those adopting
“inclusive” policies that support the accumulation of capital, risk-taking and
innovation, and hence respect private property will do well. The remarkable fact of
development in Western Europe is that nations there stumbled upon such institutions
and retained them.
From a legal point of view, Cooter and Schaefer (2012) sum up what these
“inclusive” institutions would comprise: whatever is required for innovators and
financiers to shake hands and trust each other. That would include well-protected
property rights, contract, civil liability rules, business enterprise rules, the stock
market, as well as reasonably efficient and non-corrupt courts and other dispute
resolution mechanisms. In a recent study, Easterly and Levine (2012) show that
European colonists, carrying this institutional as well as technical knowledge with
them to countries they colonised, made a long-term positive difference in growth
rates for these parts. In their view, this positive contribution largely offset what
negative influence their extractive tendencies may have had.
An impressive overview of what we think we know about development may be
found in a book by Ferguson (2011). Ferguson argues that six factors—“killer
apps” he calls them, to appeal to his then teenage sons—are critical for development.
They have been discovered, somewhat fortuitously, in Western Europe, but
once known can be “downloaded” and implemented elsewhere, as in fact they are in
many parts. These “killer apps” are:
1. The essential role of exchange and commerce.
2. The role of science in driving innovation to improve our lot.
3. Property: representative government and the rule of law.
4. Medicine to improve our life expectancy.
5. The consumer society driving the innovation machine to provide goods consumers
are willing to buy.
6. The work ethic (not specific to Protestant countries, as Weber held).
Law, the third factor, is seen here not as given once for all and to be applied by
forever interpreting holy scriptures, but as a modifiable institution serviceable to an
open economy. The gain is flexibility in the law; the danger is overconfidence in
our ability to “social-engineer” law. This overconfidence may lead to redistributive
legislation, which amounts to rent-seeking or “extraction,” to use Acemoglu and
Robinson’s term. Even without such perverse intention, the ability to
“social-engineer” law is limited, as Hayek (1945, at pp. 521–524; see also Rizzo
and Whitman 2009) has pointed out, by the impossibility for a central authority to
3A similar argument is made in North et al. (2009). Easterly (2014) argues, similarly, that reigning
in power holders and leaving scope for individual entrepreneurial freedom is essential for growth.
Foreword vii
know all the circumstances of time and place that will make for the most profitable
(or efficient) arrangement as actors in the field, with knowledge of those unique
circumstances, would conceive it. This consideration imposes a certain respect for
legal arrangements that over time have proven themselves to work well in dealings
amongst interested actors. And yet, where such arrangements lead to cartel-like
structures or to opportunism, legal change is called for. Legal science should
develop the knowledge necessary to distinguish the two, and recognise and correct
the latter, without disturbing the former. This is where law and economics has an
essential role to play.
In a later book, Ferguson (2012) observes that many nations in the world are
now “downloading” the killer apps and implementing them to their advantage.
None of them has as yet, in his view, successfully implemented all six of them, as
they have been in the “West”. By contrast, he observes that in the West, where the
killer apps were originally discovered and implemented, confidence in their
beneficent effects is on the wane; some question whether the discipline the killer
applications impose on civil society is warranted. These voices advocate policies
that would weaken incentives to innovate under the guise of protecting the weaker
from the uncertainties of the innovation machine. Such moves, if generalised,
would lead to the demise of the great innovation machine that was discovered or
invented there.
These considerations set the broader background for the reflexions in this book
on law, innovation and development. The relations to be highlighted amongst these
three elements are part of this broader scene, in which other factors may intervene
as well. May we learn more precisely how law can be fashioned to favour innovation
and development!