The rule of law

The Economist magazine has an interesting article on the concept of the "rule of law". The article points out that rule of law has become a big idea in economics. But it has had its difficulties. It is noted that people use two quite different definitions, which can be called "thick" and "thin".

Thick definitions treat the rule of law as the core of a just society. In this version, the concept is inextricably linked to liberty and democracy. Its adherents say a country can be spoken of as being ruled by law only if the state's power is constrained and if basic freedoms, such as those of speech and association, are guaranteed. The "declaration of Delhi" drawn up by the International Commission of Jurists in that city in 1959 followed this line in saying that the rule of law "should be employed to safeguard and advance the civil and political rights of the individual" and create "conditions under which his legitimate aspirations and dignity may be realised." Among other proponents of a thick definition are Friedrich Hayek, an Austrian economist, and Cass Sunstein of the University of Chicago. In their view, the rule of law includes elements of political morality.

Thin definitions are more formal. The important things, on this account, are not democracy and morality but property rights and the efficient administration of justice. Laws must provide stability. They do not necessarily have to be moral or promote human rights. America's southern states in the Jim Crow era were governed by the rule of law on thin definitions, but not on thick.

It may seem that having competing definitions of the rule of law would undermine its usefulness. If you argue that the rule of law is vital to growth, you give rise to the question which definition do you mean. Is the one that defends human rights or the one that guarantees property rights? But economists love competition in the market for ideas as in the market for goods. The different definitions of the rule of law reflect competing explanations of what drives economic growth.

One account of growth—associated with Douglass North of Washington University in St Louis, Missouri—is "institutional". It focuses on the importance of property rights, transaction costs and economic organisation. On this view, stable, predictable laws encourage investment and growth. Thin definitions of the rule of law fit this well. The other—associated with Amartya Sen of Harvard—says that if you expand people's "capabilities" (Mr Sen's term), they will do things that help countries grow rich. Freeing people to take advantage of their capabilities usually means lifting the oppressive burden of the state and guaranteeing certain basic rights—a much thicker concept.

The distinction between the different versions of the rule of law overlaps another distinction between legal traditions.

Starting in 1997, a group of economists led by Andrei Shleifer of Harvard and Robert Vishny of Chicago started to compare the economic performance of common-law countries (such as America and Britain) with that of civil-law ones (France, Germany and Scandinavia). They argued that common-law countries have more secure property rights, better protection of shareholders and creditors, more diversified share ownership, and tougher disclosure and liability laws—to the benefit, they claimed, of stockmarket performance.

Other research has found strong evidence that

... civil-law countries encourage government ownership of the media and banks, a higher burden of entry into business, more labour-market regulation and greater formalism of court procedures—to their detriment, they claim

The article ends by noting that the more economists find out about the rule of law, the more desirable it seems and the more problematic as a universal economic guide it is. Research over the past few years have thrown up mixed messages. Some suggests the rule of law can be improved sharply; that rule-of-law reform is at root a political not a technical undertaking; and that it is linked to growth. But other work goes against the assertion that the rule of law is an underlying prerequisite for growth. The whole article is worth the time to read.

(HT: Not PC)