The Rule of Law, Freedom, and Prosperity.

Vol. 14 No. 6 (June 2004), pp.493-497

THE RULE OF LAW, FREEDOM, AND PROSPERITY, by Todd J. Zywicki (ed.). (The Supreme Court Economic Review, Vol 10). Chicago: University of Chicago Press, 2003. 278 pp. Cloth $45.00. ISBN: 0-226-99962-9

Reviewed by William A. Fischel, Department of Economics, Dartmouth College. Email: Bill.Fischel@Dartmouth.Edu

This volume consists of nine essays from a November 2001 conference at George Mason University. They are loosely united by the question of the extent to which stable legal institutions promote prosperity. Most of the authors are economists who have contributed to this literature in the past. The noneconomist reader will learn quite a bit about how economists think about legal institutions and economic development and what some of the newer ideas are. Most essays are not technical, and even those that contain some mathematics explain their results well enough that readers without economics training can grasp the essential points.

Robert Cooter’s “Who Gets to the Top in Democracy? Elections as Filters” leads the pack for having an original and interesting idea. He makes a rational case for what seems to be a quixotic quest: selecting politicians who have good character. Character is important because structural constraints – checks and balances – are imperfectly effective. One way to get more honest, caring, and intelligent people into higher political office, Cooter argues, is to have frequent elections, thus providing the voters a better look at those who govern them.

The structural reform to which this leads is federalism, in which politicians can prove (or disprove) their character at local levels before being elevated to higher office. Proportional representation systems in unitary states, in contrast, allow bad characters to avoid voter scrutiny. Cooter does not offer empirical evidence for this idea, which would suggest that the United States and Australia are governed by less venal politicians than, say, France and Japan. Perhaps its main appeal to me is that it is another vote for federalism and multiple layers of government, but it is in any case encouraging that economists are thinking creatively about topics that political scientists seem to have shelved in favor of game theory.

“Why Was the Industrial Revolution a European Phenomenon?” by Joel Mokyr is an outstanding essay about a major historical question. Many of the inventive periods that characterized the Industrial Revolution showed up much earlier in China and other countries, yet they did not trigger any important changes in their economies. Mokyr proposes that they lacked an “epistemic base” – a broad set of empirical and theoretical knowledge – in which to embed their discoveries. Without some understanding of microbiology, for example, medical discoveries in one field would less likely be applied to curing less-obviously related diseases.

The failure of many modern development schemes may thus be attributed to their attempt to insert some [*494] advanced technology in societies lacking the base of knowledge that allows them to apply it to apparently unrelated processes. The theme of Mark Twain’s “A Connecticut Yankee in King Arthurs’ Court” came to my mind: The time-traveling Yankee inventor failed to modernize Arthurian England because the medieval mind could not apply the marvels that the Yankee introduced except for their most obvious purpose. Mokyr’s thesis, incidentally, is actually contrary to the “rule of law” theme of the volume. He argues that law is less important than knowledge, and highly effective laws and honest government administrators can sometimes stifle useful innovation. Tort reformers, take note.

“Institutional Reform in Transition: A Case Study of Russia,” by Bernard Black and Anna Tarassova is not as well-written as others in the volume, but it nonetheless offers a fascinating and insightful tour of post-Communist Russia for readers willing to tolerate its Power-Point-like lists of reasons for things. The main question is why Russia has not done better after Communism, and the answer here is clearly a vote for the rule of law. Black and Tarassova, who have had much hands-on advisory experience in Russia and other post-Communist nations, argue persuasively that inattention to institutional integrity in the process of privatization has slowed Russia’s economic growth. Corruption, which most economists regard as a minor carbuncle on the body politic, is in Russia a pervasive and important detriment to collective prosperity.

Among the many examples is the corruption created by confiscatory tax rates. The rates on businesses were set high because alternative tax bases were not viable. The high rates and the low pay for tax examiners encouraged extortion and bribery to obtain lower tax bills. Businesses still paid a lot of money out, but the government did not actually get much of it. Moreover, this gravy train was self-reinforcing. Most Finance Ministry officials preferred the confiscatory rates and low collections, since bribes were their major source of income. Under the Putin regime, tax rates have been lowered and, in an unexamined example of the Laffer-curve principle, tax collections rose considerably.

The Black and Tarassova essay is not just a screed about the evils of extremely high taxes. Manipulative business oligarchs and mafia gangs – the authors’ generic term for organized crime, not invading Sicilians – are also major impediments to prosperity. Their major point is that governance and the rule of law matter. Without directly criticizing the advocates of immediate privatization and other elements of “shock therapy,” Black and Tarassova have made a strong indictment of economic development policies that do not sweat the small stuff. Having been thrust into a new system in which little attention was paid to the essential institutions that govern western capitalism, Russians in the 1990s bitterly joked that “the Communists lied to us about the virtues of communism. The problem is that they told us the truth about capitalism.”

James Buchanan gives a summary of his work in “The Constitutional Way of Thinking.” This is lucid and helpful in explaining how Buchanan’s approach is different from that of other constitutional [*495] thinkers, such as Rawls, Arrow, the legal realists, and law-school constitutionalists. What distinguishes constitutional thinking from other ways of doing policy is the mental device of the “veil of ignorance,” behind which people make constitutional rules without knowing exactly who would benefit from them. (Buchanan is shy of the term, perhaps because Rawls had done so much to revive it, but he concedes that both he and Rawls start from the same premises.) It is distinct from the common technique of economists, who assume constraint-bound maximization by individuals without much inquiry into the nature of the constraints, and from the political idealists, who disparage individualism and so have no need to worry about constitutional constraints.

The only problem with this essay is that Buchanan seems not to want to admit that he actually has had a lot of influence. Most economists who think about political economy nowadays pay attention to the prior rules that need to be in place for a system to prosper. (The advocates of “shock therapy” for Russia are, one hopes, exceptions.) And the statism that used to infect much political science thinking is on the wane. Buchanan isn’t the only scholar to have undermined naïve thinking about political economy – Tullock helped a lot, and so did Rawls – but he comes across in this essay as a shade too modest about his accomplishments.

In “Building Trust: Public Policy, Interpersonal Trust, and Economic Development,” Stephen Knack and Paul Zak extend their previous contributions to the social capital literature with an empirical study involving national indicators of interpersonal trust. The idea is that personal relationships of trust reduce transaction costs and thus promote prosperity. It is not clear whether trust and legal institutions are complements or substitutes—if you trust people you deal with, do you need the law?—but this paper’s presence in this volume is justified by its heroic empirical inquiry. Knack and Zak, who might challenge Box and Cox in the contest for economists most likely to be mistaken for characters in a Gilbert and Sullivan operetta, use worldwide data to examine what types of policies promote trust among citizens. By their multi-stage estimates, schooling, civil liberties, and income redistribution are cost-effective ways to promote trust and hence economic growth.

The other authors in the volume might raise their eyebrows at the last recommendation, but it is fairly well established that more egalitarian societies have more trust and that trust is a low-cost substitute for contract law. What is not clear is whether exogenous recommendations from the World Bank to build more schools, grant more liberties, and take from the rich and give to the poor will actually create more trust. Knack and Zak acknowledge but downplay the complex inter-relationships between trust and their policy variables. It could be that the trusting relationships among the Danes, say, make income redistribution more acceptable in Denmark and thus cause less economic loss. One also has to wonder about the quality of the data on a concept as complex as interpersonal trust. Knack and Zak do use multiple opinion surveys to measure trust, but any survey about trust is problematic. It is not like asking whether you have a job. [*496]

In “Freedom of Contract and the Laws of Entropy,” Francesco Parisi reviews a recently-fashionable topic in property law, the problem of fragmentation of legal entitlements. The problem is best expressed by reciting the nursery rhyme about Humpty Dumpty: Once a unified property is broken up, it is difficult to put it back together again. Parisi reviews and generally approves of the devices that the common law has for retarding inefficient fragmentation into easements and remainders and other sticks of the former bundle. He also shows that the common law can promote reunification of property, though he overlooks the big gun of eminent domain, in which the government does the reunification by forcing the transfers.

What is lacking in Parisi’s essay is a sense of history. If it is so hard to reunify property rights, how did they come together in the first place? There was no naturally unified property to begin with, which is why the “entropy” metaphor does not work well. Feudal tenure, for example, abhorred the creation of the fee simple absolute, since independent owners might resist the military service required of vassals of the king. Was the rise of fee simple an example of disintegration or unification of property?

Jeff Bowen and Susan Rose-Ackerman have a long essay with a long title about Argentina and executive accountability. It is better-written than the Black and Tarassova piece about Russia, but it is a lot more inconclusive. Argentina is the focus because its executive branch is highly resistant to impartial oversight, and its economy has roller-coastered from one crisis to the next. No doubt that lack of accountability accounts for many of Argentina’s problems, but it would still have quite a few even if it adopted U.S.-style judicial oversight or German-style corporatist participation in agency decisions. The German method might not be an improvement. I learned here that Germany’s Environmental Ministry discourages public participation and instead “relies on private norm-setting organizations whose members have strong industry connections” (p.199). No wonder Germany has a powerful Green Party. Students of administrative law might find this essay more informative, but it does not seem to fit well with the overall theme of the volume.

Peter Boettke and Robert Subrick aim at two high-profile targets in “Rule of Law, Development, and Human Capabilities.” Martha Nussbaum and Amartya Sen have separately argued that economic growth is not enough to promote human flourishing. In response, Boettke and Subrick run an econometric test using worldwide data to argue that prosperity does indeed promote the other good things in life, like clean air, low infant death rates, and literacy. I think they are right about that, but it is likely that scholars the stature of Sen and Nussbaum have something more sophisticated in mind. They are set up like straw man and woman and then knocked down with a few regressions. It is not the best way to convince a skeptic.

As volume editor, Todd Zywicki provides a useful introduction to the volume by asking what the rule of law actually means. Predictability and an absence of partiality to a favored group are necessary conditions for the rule of law, but critics have pointed out that a web of bad laws can meet those criteria, too. Zywicki takes this criticism on and argues persuasively that “the rule of law [*497] and a liberal order are inextricably intertwined” (p.6). It is not just laws that are needed; it is good laws, and not so many as to stifle enterprise and human flourishing.

That unexceptionable admonition could use some unpacking, since one would like to know how to distinguish useful from harmful laws, but Zywicki instead enters into a discussion of whether the Supreme Court’s decision in BUSH v. GORE was consistent with the rule of law. He may be right that it is, but picking that particular case is surely leading with your chin. And his position is not helped by his later observation that “democratic elections are far less important than the rule of law in building economic growth” (p.22). I would have thought that democratic elections are an essential part of the liberal order that is tied up with rule of law. At any rate, the spat about voting in Florida would not be something I would commend for study by leaders of developing and post-communist nations.

It may have been inevitable, though, for Zywicki to have disinterred BUSH v. GORE at the 2001 conference. As he indicates, the conference at which these nine essays were presented was motivated by the debate about the rule of law after the 2000 presidential election. Law professors spent a good deal of energy in 2001 debating BUSH v. GORE, and some of the commentary seemed over the top. Bruce Ackerman (2001) urged the Senate to refuse to entertain new Supreme Court nominations until Bush’s term was up.

The most remarkable thing about BUSH v. GORE, though, is that only law professors continued to be worked up about it. Even before 9/11, the country just got on with its business without questioning the legitimacy of the government. People paid their taxes in April; agency rules were more or less obeyed; Supreme Court decisions had the force of law; federal-state relationships went on their bumpy way. Maybe the strongest testimony to the rule of law is that even the Supreme Court cannot dislodge it.

REFERENCES:

Bruce Ackerman, “The Court Packs Itself.” THE AMERICAN PROSPECT, Vol. 12, Issue 3 (February 12, 2001).

CASE REFERENCES:

BUSH v. GORE, 531 U.S. 98 (2000).

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