Abstract

Strong financial markets are widely thought to propel economic development, with many in finance seeing legal tradition as fundamental to protecting investors sufficiently for finance to flourish. Kenneth Dam finds that the legal tradition view inaccurately portrays how legal systems work, how laws developed historically, and how government power is allocated in the various legal traditions. Yet, after probing the legal origins' literature for inaccuracies, Dam does not deeply develop an alternative hypothesis to explain the world's differences in financial development. Nor does he challenge the origins core data, which could be origins' trump card. Hence, his analysis will not convince many economists, despite that his legal learning suggests conceptual and factual difficulties for the legal origins explanations. Yet, a dense political economy explanation is already out there and the origins-based data has unexplored weaknesses consistent with Dam's contentions. Knowing if the origins view is truly fundamental, flawed, or secondary is vital for financial development policy making because policymakers who believe it will pick policies that imitate what they think to be the core institutions of the preferred legal tradition. But if they have mistaken views, as Dam indicates they might, as to what the legal traditions' institutions really are and which types of laws are effective, or what is really most important to financial development, they will make policy mistakes—potentially serious ones.

Highlights

  • DiscussionThis paper can be downloaded without charge from: The Harvard John M

  • Kenneth Dam examines the interaction between law and economic development, using much of The Law-Growth Nexus to evaluate an idea prominent in academic finance of the past decade, namely that a nation’s legal origins largely determine its capacity for financial development

  • E.g., La Porta et al (2008: 310-313). This is important and contested, the core political economy idea is more than that: it’s that even if something was going on with legal origin, differing political economy facts, many of which vary both from nation to nation, and over time more powerfully explain differing policy choices such as investor protection

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Summary

Discussion

This paper can be downloaded without charge from: The Harvard John M. Finance and Politics: A Review Essay Based on Kenneth Dam’s Analysis of Legal Traditions in The

INTRODUCTION
DAM’S CASE
THE CASE FOR A POLITICAL ECONOMY CHANNEL
DOES THE DATA BACK DAM UP?
20 Common Law nations French Civil Law nations
Findings
CONSEQUENCES
CONCLUSION
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