econlife - A Global Look at the Rule of Law by Elaine Schwartz

During the 1790s. Alexander Hamilton told us that our economy needed to recognize the sanctity of a contract. At the time, Revolutionary War bonds had been sold to speculators by the investors who had supported the War. When the bonds appreciated in value, those speculators benefited–not the patriots who initially purchased them. Hamilton told us that legal transfer of ownership had to be respected. Our economic future depended on contractual rights being preserved.

He was right.

Still today, a rule of law that includes contractual rights exists as the foundation of a viable economy. Let’s see where.

The Rule of Law

The World Bank says that its rule of law (ROL) indicator includes property rights and contract enforcement. It also extends to the police, the courts, and the likelihood of crime and violence. It involves the extent to which “agents have confidence in and abide by the rules of society.”

The brighter green countries are the most committed to a rule of law. They include New Zealand, Canada, Australia, Greenland, the Scandinavian countries, Denmark:

Again, for the control of corruption, using the above color scale, you see similar shading:

According to the World Bank, the United States ROL rank has sunk during the past several years:

Our Bottom Line: Incentives

In Why Nations Fail, economists Daron Acemoglu and James Robinson explain why the rule of law matters. Early in the book, they set the scene by comparing Nogales, Sonora and Nogales, Arizona. They tell us why the rule of law made Nogales, Sonora so much less affluent than its Arizona namesake. In Mexico, you can ascend economically by untangling red tape, paying for expensive licenses, and bribing politicians. In Mexico you have an amparo–the right to appeal that a law does not apply to you. On the World Bank map, you can see Mexico is a bright pink, placing it high on the corruption scale.

Somewhat similarly, we can think of China’s lack of intellectual property protection. We also can look at Poland and Hungary where independent judiciaries are in question. With a weaker rule of law, political influence rather than the market can dominate decision-making.

Returning to where we began, Alexander Hamilton’s sanctity of contracts takes us to economic development in the U.S., Mexico, China, and Eastern Europe. But here we have to add one word: incentive. When we have the rule of law, the incentives encourage financial investment, entrepreneurship, and business formation. They form a foundation of legal guarantees that we need for economic development.

My sources and more: Although it is a bit complex to navigate, the World Bank is a superb source of governance data. I also recommend the insight offered by a Harvard scholar in this Marketplace podcast and a BBC lecture from Niall Ferguson. But, if you have lots of time, do read Why Nations Fail and The Narrow Corridor by Daron Acemoglu and James A. Robinson.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

Book Review - Inventing Freedom by Daniel Hannan (Andy Jobson)

Review – Inventing Freedom by Daniel Hannan

I like to think that one advantage of teaching is that it keeps me reading.  Some people, however, just read widely because they love it. My mother-in-law is one of those people, and she often leads me to some wonderful books. Daniel Hannan’s Inventing Freedom is one of those great finds.

Hannan, a member of the European Parliament, provides an overview of the English-speaking world (which he calls the Anglosphere) that in some ways pays homage to Churchill’s History of the English-Speaking People.  Hannan takes one volume to share his insights instead of four (a bonus for busy teachers) and focuses heavily on the reasons that one island, and its offshoots, created what we think of today as Western Civilization. Those who like to denigrate the value of that civilization will probably hate this book, but those who see the importance of principles like the rule of law, private property, personal liberty, and representative government will find much to appreciate here.   

Here’s a small sample:  “(S)mall businessmen have been the drivers of progress through the centuries.  Societies that laud martial valor, nobility, and faith tend to be less pleasant places to live than societies that value freedom, enterprise, and privacy.  The petit bourgeoisie, whom Marx so despised, have contributed more to human happiness than any number of crusaders.  And they have done so, in the main, unhonored, unthanked, and unnoticed.”  (327)

Daniel Hannan

Like Churchill, Hannan looks far back into the Anglo-Saxon period in England to trace the growth of the principles stated above.  He reminds us Americans of the debt we owe to that nation while arguing that the English colonies that eventually declared independence are perhaps the strongest example of these values. As De Tocqueville said in Democracy in America, “The American is the Englishman left to himself.”  

This does not imply that only those Caucasians of Anglo-Saxon heritage are true Americans—I always try to remind my students that our nation’s citizenship is one of the few based not on ethnicity, but on philosophy.  To be American, I would argue, means to think a certain way.  Sadly, I worry that we’re losing that unique identity as we strive to become more like continental Europe. Hannan reminds us of the value of what we’re so casually throwing away. 

An educator of 22 years, Andy Jobson has taught government, economics, and U.S. History. Currently teaching English literature at Riverside Military Academy in Gainesville, GA, he’s also been an administrator, a STAR teacher twice, and taught elementary school with Teach for America.