Finance and Politics: A Review Essay Based on Kenneth Dam's Analysis of Legal Traditions in the Law-Growth Nexus
Mark J. Roe
Harvard Law School
Jordan I. Siegel
University of Michigan
September 20, 2009
Journal of Economic Literature, Vol. 43, pp. 781-800, 2009
Harvard Law and Economics Discussion Paper No. 650
Harvard Public Law Working Paper No. 09-48
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, in the Law-Growth Nexus, 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 policymaking, 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 really are effective, or what is really most important to financial development, they will make policy mistakes - potentially serious ones.
Number of Pages in PDF File: 28
Keywords: financial development, investor protection, political instability, debt market development, stock market capitalization, political economy, legal origin
JEL Classification: G18, G3, K11, K22, M16, N20, O16, O43, P16, P51
Date posted: September 21, 2009 ; Last revised: January 13, 2015
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