Why common law trumps all else
The economics of why the British approach to Law has made us richer
Hi guys, thought I’d try something different for blog number 2. Personally, I’m a Law student and wanted to devote some of the blogs on this Substack to that topic. However, policy has always been my prime interest so I think this should be able to combine the two.
One of my favourite economists has always been Friedrich Hayek. It was his Road to Serfdom that first got me interested in the subject, and made me quite the Libertarian when I was younger. However, he wasn’t just an economist; before Hayek took up what Thomas Carlyle famously christened the dismal science, Hayek was a lawyer.
Lately, I’ve been thinking about an argument he made about the Law and trying to relate it to my own studies. In Law, Legislation & Liberty, Hayek explains -
“[T]he ideal of individual liberty seems to have flourished chiefly among people where, at least for long periods, judge-made law predominated.”
What Hayek is referencing here is the civil/common law distinction. In many countries, a Roman system is adopted whereby statutes and codes are used as the primary legal materials. Here, legal scholars are often relied upon to ascertain and formulate rules - this is known as civil law. Contrastingly, much of the Anglophonic world uses what’s called common law. This works differently whereby large volumes of law route from cases where Judges are empowered to ascertain the meaning of the law after an adversarial process. It is the latter that Hayek prefers.
The historical context of how these systems arose tells us a lot about their modern application. In England, the common law developed as a result of its aristocratic system. Wealthy landowners and merchants wanted a system that would support their rights of property and of contract. Common law, therefore, developed with the intention of supporting capitalist activity and ensuring that a stable market was maintained.
On the other hand, France’s legal system comes from a very different place - revolution. From the revolutionary generation, and later from Napoleon, there was a wish to use the force of the state to deliver favourable outcomes even if it meant altering property rights and preventing judicial oversight of this conduct. Mirjan Damaška helpfully summarised the difference as follows - civil law is policy implementation whilst common law is dispute resolving.
This difference is important. In Why Nations Fail, Daron Acemoglu and James Robinson argue that it is not things like environmental factors that best explain why some countries are rich and successful, and others are not. Rather, it is the institutions that that country uses that best explains its success. This makes a lot of sense - take the example of the border town of Nogales between the US and Mexico. Geographically there is nothing obviously separating the two - however, in terms of wealth, the gap is massive. They find that the average citizen of Nogales, Mexico income is as much as a ⅓ of that of their American counterpart. Why is this - institutions.
So, we’ve established that institutions matter. So, is Hayek right to diagnose that having those adopted by nations like the United Kingdom and South Africa, are preferable to the legal institutions seen in places like France and Brazil.
Several papers by Rafael La Porta, Florencio Lopez-de-Silanes Andrei Shleifer (and Robert Vishny) answers this question with a resounding yes. They hold that legal protection of outside investors limits the expropriation of those investors by corporate insiders - an essential quality for development. From this, they found that there was a large discrepancy between common law regimes and civil law. Common law regimes were a lot more protective of outside investors than those of a civil law background - which makes sense given the historical context of both.
So, one may counter the above by saying that both England and France are similarly wealthy and have taken very different approaches to law. This argument is right - other factors like democracy, the rule of law, and property rights are much better determinants of economic development.
However, where this distinction does excel is in areas like financial development, the role of the formal sector and unemployment. Common law countries have less (what they call) anti-director rights across almost all categories. They’re prone to having higher dividend payouts, stock market capitalisation as a % of GDP, and ownership dispersion. This may explain why London has occupied the spot as the financial capital of Europe as opposed to a civil law regime like Frankfurt or Paris.
There are many more examples of how common law benefits a country's development in a way that civil law regimes do not. I’m already over my planned word limit, so I won’t write anymore, but I’d strongly recommend you read the paper if you want to hear more. You can find it by clicking here.
I’d also recommend this paper more specifically analysing Hayek’s claims from a property rights perspective.
So, thanks for reading and please do share it if you enjoyed the blog.
Thanks
Tom
This is interesting, it's the first time I've seen a good argument for why common law might be preferable to civil law.
It also works with the observation that civil law countries are better at building physical infrastructure - if civil law is for policy implementation, it makes sense that it'd correlate with better government ability to implement policy and build things.