Law and Economic Growth

By Cross, Frank B. | Texas Law Review, June 2002 | Go to article overview

Law and Economic Growth

Cross, Frank B., Texas Law Review

Legal academics study the law extensively, but the great bulk of this research dwells upon the analysis of particular laws or doctrines as judged by standards of justice, individual liberty, or simple positive formalism. While such research is unquestionably valuable, law professors have fallen far short when it comes to the study of the effect of law and laws on the economic welfare of nations.1 The now-flourishing law and economics movement has stepped into this void, but even much of that movement's research has focused on particularized doctrines and micro-level theoretical analyses of efficiency rather than empirical studies of the structural features that are conducive to growth.2 There remains a relative paucity of academic legal research about the big picture. What particular mix of laws and legal institutions encourage the ultimate overall economic welfare of society?3

Economists have increasingly studied the importance of law to economic growth and made key contributions to our understanding of the issue. Most of these economists, though, are not trained in law and do not test many of the hypotheses that are most important to pragmatic legal and policy determinations.4 Indeed, much of the economic research appears to reflect a fundamental misunderstanding about what is meant by basic terms such as "law" or "rights" or "property rights." The contribution of economists to this study is invaluable, but the field cannot be left to this discipline; law professors must themselves add their understanding to the conversation.5

This Article surveys the field of empirical research on law and economic growth and analyzes its findings. The Article begins with a review of the theoretical and historical evidence associating good legal institutions with economic growth rates. The new institutional economics has used history and theory to make the case that legal institutions are crucial to economic development. While some may argue that such institutions are unnecessary for growth or are ineffective in light of local cultures, these positions contain only a grain of truth. There is ample reason to believe that law and legal institutions are fundamental to a nation's economic development.

Considerable empirical research now informs the economic and other theories about the relationship of law and economic growth. There is substantial evidence that some major legal rules and institutions (such as democracy, property rights, and certain government regulations) have a distinctly positive effect on growth. The findings, though, are too generalized and for the most part do not focus on the features of democracy, property rights, and regulations that are malleable policy positions. Moreover, much of the research has been conducted by economists who may fail to capture relevant legal variables.

The current issue "before policy makers therefore is no longer `do institutions matter?' but `which institutions matter and how does one acquire them?"'6 These are precisely the questions for which input from legal academics is essential. They are trained in the pragmatic operation of laws and legal institutions, unlike many economists. Legal academics should build upon and enhance the existing economic research and help discern the laws and legal institutions that facilitate the economic well-being of nations.

I. The Theoretical Importance of Legal Institutions for Economic Growth

Much research effort has been devoted to ascertaining the determinants of economic growth. Economic well-being cannot be ascribed to such fortuities as the natural resource endowments of nations.8 Factors such as investment and labor productivity are clearly critical to economic growth, and the important research question is how these and other contributors to economic growth may be encouraged. It is now generally recognized that government institutions and the law are relevant to increasing economic growth. This section will review the current understanding of the theory of economic growth. …

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