A "Law & Personal Finance" View of Legal Origins Theory

By Okamoto, Karl S. | Brigham Young University Law Review, November 1, 2009 | Go to article overview

A "Law & Personal Finance" View of Legal Origins Theory


Okamoto, Karl S., Brigham Young University Law Review


In two seminal papers,1 Rafael La Porta, Florencio Lopez-deSilanes, Andrei Shleifer, and Robert Vishny (LLSV) spell out a theory for the interrelationship between law and economic development now commonly referred to as "Legal Origins Theory." Legal Origins Theory makes the following claims:

(1) There exist "legal families" that form separate and distinct sets of legal systems that are made up of groups of countries, viz., Common Law countries (primarily Anglo-Saxon nations), Germanic Civil Law countries (e.g., Germany and Japan), and French Civil Law countries (e.g., France and most of continental Europe).2

(2) There is a significant correlation between a country's "legal origin," which group it belongs to, and the character of certain legal rules or procedures we find operating within that jurisdiction (e.g., judicial independence and contract enforcement, property right protection, minority shareholder protection, market vs. interventionist financial regulation, labor regulation, etc.).3

(3) These rules operate to advance certain economic ends, with rules/procedures that tend to favor market-based, individual contracting versus statist regulatory regimes which yield superior outcomes based on certain measures, such as market capitalization to GDP, income per capita, and others.4

(4) Membership in a legal family is exogenously determined (largely by the process of colonization and the assimilation/perpetuation of legal cultures by colonized jurisdictions). The distinct character of the broad legal families is a feature of history beginning as early as the middle ages and extending through the revolutionary era. Despite growing global convergence, these distinct characters persist and are significant; and these distinct characters are a significant antecedent cause of the types of legal rules/procedures found in a given country and, therefore, of the resulting economic consequences.5

What makes Legal Origins Theory so interesting is its claim to be more than simply a set of results. It claims to offer prescriptive value for policy development.6 Beyond simply offering a descriptive narrative of what legal choices in the past have led to the economic consequences of today, it purports to offer ex ante a narrative on what economic consequences will arise tomorrow from legal conditions today. Put crudely, if we were to form a new country today, we would see future outcomes determined by which legal family our new country belongs. These outcomes would be consistent with what we have seen in the past. Or so the Theory holds.7

This claim of inevitability may overstate, to some extent, the claims of the primary proponents of the Theory. Some have dubbed it the "strong form."8 However, without some assertion of predictive value, the Theory becomes substantially less interesting. To say that certain good economic outcomes have come out of certain legal policies is, of course old beer. To be something more than another in a long line of law and economics papers, "law 8c finance," as some have labeled LLSVs work, needs to find a "big truth." And like any assertion of discovery of a big truth, no matter how modestly stated, the assertions of Legal Origins Theory have attracted critics.9 I would join their ranks.

There are two aspects to Legal Origins Theory that I find the most difficult to accept. Professors Aguilera and Williams' paper10 highlights one, Professor Fairfax's,11 the other.

The first feature I struggle with is the notion in the Theory that because we have found a causal channel that is significant ex post, we therefore have a predictive tool that allows us to set policy ex ante. LLSV revisited their theory in conjunction with the tenth anniversary of the publication of their first papers.12 In their tour of the empire they had built, they purport to offer some humility regarding the predictive power of their work. Nevertheless, they conclude that legal origins have significant consequences for economic outcomes, and that the outcomes associated with the common law "family" are superior. …

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