Law

Policy Implementing vs. Dispute Resolving

Property rights are fundamental to law and economics. La Porta et al. (1997) show that countries with poorer investor protections, measured by both the character of legal rules and the quality of law enforcement, have smaller and narrower capital markets. These and other authors argue in a succession of articles that the common law is economically superior to the civil law system. The term civil law describes those systems which have developed out of the Romano-Germanic legal tradition of continental Europe. It is the civil law tradition which dominates whithin the present European Union, but common law is economically superior to civil law because common law systems

  • have stronger investor protection and provide easier access to equity. This leads to larger stock markets, more numerous companies and more IPOs;
    [La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1997) Legal determinants of external finance, Journal of finance, pp. 1131 – 1150]
  • have better protection of outside investors relative to insiders and agents (compared e.g. to French civil law);
    [La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000) Investor protection and corporate governance, Journal of financial economics, 58(1), pp. 3 – 27]
  • have lower entrance barriers to markets (procedures, time, cost);
    [Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2002) The regulation of entry, The quarterly Journal of economics, 117(1), pp. 1 – 37]
  • have more efficient courts, measured by the procedures used by litigants and courts to evict a tenant for nonpayment of rent and to collect a bounced check;
    [Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2003) Courts, The Quarterly Journal of Economics, 118(2), pp. 453 – 517]
  • show lower labour market regulation and a higher labour-force participation rate, and therefore lower unemployment rates (with some exception);
    [Botero, J. C., Djankov, S., Porta, R. L., Lopez-de-Silanes, F., & Shleifer, A. (2004) The regulation of labor, The Quarterly Journal of Economics, 119(4), pp. 1339-1382]
  • have laws mandating disclosure (e.g. to mortgage borrowers) and facilitating private enforcement through liability rules that benefit stock markets.
    [La Porta, R., Lopez‐de‐Silanes, F., & Shleifer, A. (2006) What works in securities laws?, The Journal of Finance, 61(1), pp. 1 – 32]
  • have more efficient procedures in case of insolvency – measured by time, cost, and the likely disposition of the assets (preservation as a going concern vs. piecemeal sale);
    [Djankov, S., Hart, O., McLiesh, C., & Shleifer, A. (2008) Debt enforcement around the world, Journal of political economy, 116(6), pp. 1105 – 1149]

This boils down to higher levels of investment and higher rates of growth in common law countries.
[La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1997) Legal determinants of external finance, Journal of finance, pp. 1131 – 1150]

‘First, the built-in judicial independence of common law, particularly in the cases of administrative acts affecting individuals, suggests that common law is likely to be more respectful of private property and contract than civil law.
Second, common law’s emphasis on judicial resolution of private disputes, as opposed to legislation, as a solution to social problems, suggests that we are likely to see greater emphasis on private contracts and orderings, and less emphasis on government regulation, in common law countries. To the extent that there is regulation, it aims to facilitate private contracting rather than to direct particular outcomes. Pistor (2006) describes French legal origin as embracing socially conditioned private contracting, in contrast to common law’s support for unconditioned private contracting. Damaska (1986) calls civil law “policy-implementing,” and common law “dispute resolving.”
Third, the greater respect for jurisprudence as a source of law in the common law countries, especially as compared to the French civil law countries, suggests that common law will be more adaptable to the changing circumstances, a point emphasized by Hayek (1960) and more recently Levine (2005). These adaptability benefits of common law have also been noted by scholars in law and economics (Richard Posner 1973, Paul H. Rubin 1977, George L. Priest 1977, Giacomo A. M. Ponzetto and Patricio A. Fernandez forthcoming), who have made the stronger claim that, through sequential decisions by appellate courts, common law evolves not only for the better but actually toward efficient legal rules.’
[La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2008) The economic consequences of legal origins, Journal of economic literature, 46(2), pp. 285 – 332]

Swiss Legislation: The Breakdown of the Social Contract Between the Generations

When the legislator seeks to overrule a previous law or decision, it can adopt one of three different approaches (Holland and Webb, 2013):

  1. Approach 1: say that the law becomes [x] and, if that differs substantially from what the understanding of law was until now, then hard luck – it was always [y] but it becomes [x] now. Here, any decision which changes the law from what it was previously used to be operates retrospectively as well as prospectively. It is retrospective in that the parties to the case are caught by the ruling and so are all those who have created leases or contracts on the basis of what used to be the law. Of course this can produce disturbance.

    For example, this year Romania’s President signed into law a bill that enables property buyers to walk away from overpriced mortgages, setting it on a potential collision course with commercial banks, the central bank and the European Commission. What the news conceal, however, is that the banks in Romania (about 90.2% of bank assets are held by institutions with foreign [read: EU] capital) transferred full currency risk to the borrowers, imposing credits in Swiss francs (CHF) instead of Romanian lei (RON). Since the Swiss unpegged the franc from the euro (€), those credits have become a borrower’s trauma.

  2. Approach 2: say that the new law is [x] but, because everyone has organised their affairs until now on the basis that the law was [y], the new view of the law only affects events occuring after the decision. So only contracts or leases formed after the date of legislation would be affected by the new law [x]. Contracts and leases, etc. formed before the ruling would continue to fall under the old law [y]. This is the ‘purest’ form of prospective overruling.
  3. Approach 3: it is possible to come up with other variations (mixtures). For instance, the decision might be held to be prospective as regards everyone not involved in the case but retrospective in its effect as between the parties to the case in which the ruling is given.

This month, the Swiss people will get the final say on reforms to the pension system in a referendum. Instead of a real reform with a flexible retirement age, the set of reforms would see the retirement age for women raised to 65 – it is currently 64 – bringing it in line with men. Secondly, pension payments will decrease from 6.8% of the capital per year to 6%, although salary deductions will go up slightly. That will be compensated with a ridiculous monthly 70 franc bonus in AVS/AHV (state pension) payments for everyone (Giesskannenprinzip). On top of that, the reforms will be financed by a 0.6% increase in VAT, a change to the constitution that will be put to the people – and especially to the young. The whole package is another symptom of the breakdown of the social contract between the generations.

How can politicians make a mark? By creating new laws and regulations. Preferably, these laws carry their names and have such fancy designations as the ‘Dodd-Frank Act’. As Niall Ferguson (2013) puts it: “Among the most deadly enemies of the rule of law is bad law.”