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Finance and Politics: A Review Essay Based on Kenneth Dam's Analysis of Legal Traditions in the Law-Growth Nexus

28 Pages Posted: 21 Sep 2009 Last revised: 13 Jan 2015

Mark J. Roe

Harvard Law School

Jordan I. Siegel

University of Michigan

Date Written: September 20, 2009

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, 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.

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

Suggested Citation

Roe, Mark J. and Siegel, Jordan I., Finance and Politics: A Review Essay Based on Kenneth Dam's Analysis of Legal Traditions in the Law-Growth Nexus (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. Available at SSRN: https://ssrn.com/abstract=1476043

Mark J. Roe (Contact Author)

Harvard Law School ( email )

Griswold 502
Cambridge, MA 02138
United States
617-495-8099 (Phone)
617-495-4299 (Fax)

Jordan I. Siegel

University of Michigan ( email )

Ann Arbor, MI
United States

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