Tag Archive: efficiency

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]

A Production Possibilities Frontier

The engine of economic progress must ride on the same four wheels (supply side factors), no matter how rich or poor the country:

  • Human resources (including labor supply, education, discipline and motivation)

Labor inputs include, of course the quantity of workers. However, many economists believe that the quality of labor inputs, the skills, knowledge, and discipline of the labor force, is the single most important element in economic growth. capital goods can be effectively used and maintained only by skilled and trained workers.

Improvements in literacy, health, and discipline, and most recently, the ability to use computers, add greatly to the productivity of labor.

  • Natural resources (including land, minerals, fuels and environmental quality)

The important resources here are, arable land, oil and gas, forests, water, and mineral resources.
But the possession of natural resources is hardly necessary for economic success in the modern world. New York City prospers primarily on its high density service industries. While many countries that have virtually no natural resources, such as Japan, have thrived by concentrating on sectors that depend more on labor and capital than on indigenous resources.

  • Capital formation (including machines, factories and roads)

Tangible capital includes structures like roads, and power plants, and equipment, like trucks and computers. In this regard, some of the most dramatic stories in economic history, often involve the rapid accumulation of capital.
Accumulating capital requires a sacrifice of current consumption over many years. Countries that grow rapidly tend to invest heavily in new capital goods. In the most rapidly growing countries, 10 to 20% of output may go into capital formation. In this regard when we think of capital we must not concentrate only on private sector investment. In fact, many investments are undertaken only be governments, and provide the necessary social overhead capital and infrastructure for businesses to prosper. Roads, irrigation and water projects, and public health measures are important.

Government projects involve external benefits that private firms cannot capture so government is necessary to provide them.

  • Technology (from science and engineering to management and entrepreneurship)

Historically, growth has definitely not been a process of simple replication, adding rows of steel mills, or power plants next to each other. Rather, a never-ending stream of inventions and technological advances led to a vast improvement in the production possibilities of Europe, North America, and Japan. Technological change denotes changes in production processes or the introduction of new products or services.

Technological change is a continuous process of small and large improvements.

While the four supply factors of growth relate to the physical ability of the economy to expand, there are two other factors that are equally important:

  • First, there is the demand factor

To realize its growing production potential, a nation must fully employ its expanding supply of resources. This requires a growing level of aggregate demand.

  • Second, there is the efficiency factor

To reach its production potential, a nation must not only achieve full employment, but also two kinds of economic efficiency. Specifically, a country must achieve productive efficiency. That is, it must use its existing and new resources in the least costly way to produce what it does. And it must also achieve allocative efficiency, meaning that the specific mix of goods and services it produces must maximize society’s well-being.