Monday, January 23, 2006

DR. JONES: Acemoglu and Robinson: Property Rights matter more than Legal Systems

So, lots of economists want to believe that property rights matter--they give people incentives to plan for the future, to invest, to save. The Friedmanian free-marketers are in this camp.

And lots of economists want to believe that having a British legal system (i.e., case law, judge-driven) is better than having a French legal system (i.e., civil law, legislatively-driven). The Hayekian, spontaneous-order types are in that camp.

This really comes down to an in-house debate within libertarianism--and clearly, there's a lot of overlap between the camps. Lots of market-oriented folks would agree with the cliche that "both are important."

But are they equally important? Or is one of them 10 times or 100 times more important than the other one? Because if you're a government official, or if you're trying to influence government officials, you want to pick the low-hanging fruit first, you want to go for the policy change that gets you the most bang for your buck.

Well, MIT's Acemoglu and Robinson have given a pretty impressive answer to that question in the October '05 Journal of Political Economy. They found that once you controlled for property rights (in their preferred way), the type of legal system didn't matter for long-term economic performance. So British and French systems seem to do about equally well, once you control for property rights.

A&R want to interpret their result this way: If you're a private party and you've got a dispute with another private party over who owns what, then even if you have a bad legal system, you can probably find a halfway decent (private) work-around.

But if instead you're a private party and you've got a dispute with your government, well, the government's always going to win. That's cataclysmically bad for long-term incentives.

The short version: An entrepreneur can work around a bad legal (or financial) system, but she can't work around a predatory government. So fighting for policies that will protect private property rights from government abuse seems to be the best use of our scarce (political reform) resources.

Nice story--I like it. Here's hoping it gets more attention.

ORIGINALLY Posted by Garett Jones at 12/05/2005 12:15:00 AM


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