Legal Systems as Frameworks for Market Exchanges

Abstract

Recent changes in the former communist countries have demonstrated the importance of a legal system for economic progress. A legal system defines property rights, allows for exchange of property rights, and protects property rights. Countries with a rule of law and well established property rights are more prosperous and grow more quickly than countries lacking such a system. An important function of the rule of law is to protect property rights from governments. Rules also facilitate private exchange through contract. There are theoretical arguments for the greater efficiency of a common law system than a code system. These have to do with protection of rights from the government and also with mechanisms for efficient evolution of the law, including mechanisms for competition between court systems. Legal systems that provide greater protection from government seem to be more efficient than others. Arbitration is an efficient alternative to state enforced law. Some issues identified here, such as the role of competing courts, are fruitful areas for further research. The evidence here also indicates that countries should adopt a rule of law, protect property rights from government predation, and rely on court competition and evolutionary forces to obtain efficient law. Of course, these suggestions are difficult to implement because they may be opposed by powerful interests.