The purpose of this paper is to illustrate the relationships between the existing traditions of laws- that is, the common and the civil laws, to economic growth. This paper shares the views that (1) the common law seems to foster the environment necessary for the economic progress that (2) both the civil and the common law undergo evolutions to adjust to the situation of the time and (3) it is through this evolution of the laws that they seek adaptability to the current situation.
To explicate the ideas we shall forward here, there will be a consideration on how the legal traditions affect the financial development, a notion embedded in the so-called Finance Theory. We shall try to illustrate how the nature of legal traditions can either foster enough degree of freedom for economic growth or, on the other hand, limit economic growth. There will also be an attempt to illustrate how the seemingly strong support for private property and rights made available by the common law encourages financial development and thus, spur economic growth.
In the process, we shall attempt to show that financial development is best fostered in a society dedicated to advance the common law. We shall draw heavily from and compare the ideas put forward by Michael Graff and Professor Francisco Cabrillo, in their essays Law and Finance Common Law and Civil Law Countries Compared and Law and Economic Development Common Law versus Civil Law, respectively.
Discussion
Common Law and Civil Law Defined
The common law allows the judiciary to decide independent of the legislative institution. The common law is an enriched tradition of principles inherited from the past, and is not codified by any existing political body. The source of these principles is, importantly, the traditional and historical agreements of the people within the community, carried over by legacy and find its application even in the modern times. The judges decisions, in this sense, enjoy independence from the legislative body. Further to that, the decisions of the judges also become the decision-bases for other courts, and this is not necessarily courts with the same level of power. Furthermore, the judges are guided by a common principle that is not codified. The civil law, on the other hand, is the written rules and regulations instituted by the legislating body. These are codified and are applied, not only in legislature-related matters but extended in its applications even in courts. The source of the civil law can be traced back to the traditions of the Roman Laws. Thus, the differences of the two laws include their form and their nature.
The two differences of the common law and the civil define the striking disparity they have with pertains to how they affect economic growth. What makes the very striking notion here is not the idea that the existing law has an effect to the economy. That idea comes rather obvious for the law is a necessary mechanism of the society that affects how the other aspects of the society, that is, its social, political and economic aspects, would behave. It is, rather, the idea of how the behavior of the law exerts its influence on the economic development that is fascinating to explore. Further to that, it is this question of how the presence of law in general affects the society that brings about the significant differences in the way the civil and the common law affect the economic development.
Arguments
Any economic policy is always defined by a particular set of laws. For instance, the economic policy adopted by the US in the sphere of International Trade is substantially bound within a definite set of tariffs and trade laws. One instance of legal limitation set forth to apply to any US International Economic Policy (US Trade Law, Title 15, Chapter 4, Section 144a) are the Incorporation fee for perpetual existence which states that Any China Trade Act corporation existing on June 25, 1938, may make its existence perpetually only upon application to the Secretary of Commerce to amend its charter in that respect and upon payment of a fee equivalent to the incorporation fee. It is the least undeniable that there is a certain relation between how an economic trade occurs and the definitions and limitations to which it is legally bound. This relation is obvious.
To better understand how the nature of the law will influence the economic behavior of the society, it may be helpful to bring out here the points made by Hayek in his article entitled Economic Policy and the Rule of Law. In that article, Hayek illustrated that a free system necessarily demands a certain amount of legal boundaries, but not to the extent that the legalities will already infringe the development or progress of economic growth. Hayek, in the same article, seems to imply that there are two ways by which the presence of law can affect economic growth. In one sense, the presence of a law can entail the coercive power of the government. According to Hayek, the only thing that the government is entitled to have absolutely is the power of coercion and that the power of coercion has an absolute exclusive entitlement to the government. The government, in its entry with economic endeavors, should be guarded against exercising this coercive power unless the purpose of doing so is necessarily defined by the implementation of an existing law. Otherwise, the government will tend to impose monopoly on the conduct of that particular business, which is contrary to the call of a free system.
The other sense by which the presence of law can have an impact to economic growth is, according to Hayek (1973, its ability to form a reliable and efficient monetary system, and less importantly, the setting of standard and weights and measures the providing of information gathered fro surveying, land registration, statistics, etc, and the support, if not also the organization, of some kind of education. This ability of the government is also due, for the most part, to the monopoly of coercive powers that the government is entitled to. In this case, the government does not infringe economic developments by restricting the amount of possible activities that individuals in the society may do so. Rather, Hayek (1973) maintains that the government provides a favorable framework for individual decisions. Hayek (1973) adds that, the exercise of coercion by the government should be reserved in the enforcement of the power of law, and that alone.
From the details mentioned above, we can say the concentration of coercion, which can be reflected through legislated laws, can be more scattered and less concentrated in common law societies. Furthermore, we can also understand Hayek (1973) when he said, in the same article, that the rule of law provides the criterion which enables us to distinguish between those measures which are and those which are not compatible with a free system. Furthermore, Hayek expounded on the so-called notion of expediency. To Hayek (1973), a particular law may only be deemed useful and practical when the government, in its implementation of such law, does not incur costs that will outweigh the benefits it will bring about- this is the viewpoint of expediency.
Several arguments have been put forward supporting the theory that the natural design of the common law allows for better economic progress. Some arguments are very blatant in saying that the common law supports very well the idea of rights and of private property, primarily because the application of the law is quite separate from the legislative law. Otherwise, true in the case of the civil law, the notions of rights and private property get muddled with other notions. These notions are not necessarily directly connected with forwarding the development of rights and private property. In the end, the extent of effects of the legislation is so much so that it impedes already, to a certain degree, the progress of the development of the rights and private property.
Sir Edward Coke (Section 51b), in his book entitled The First Part of the Institutes of the Laws of England, states that The agreement of the parties cannot make that good which the law made void. The truth that cannot be denied behind this pronouncement seems to provide the gateway for understanding how the differences of the common and civil law are reflected in how they impact economic growth.
In the research-paper published by Michael Graff, he stated that the financial development is a very important predecessor for economic growth and that this financial development can stem from the existence of common law on two grounds (1) that the common law provides for the atmosphere conducive to the existence of private property, which then encourages financial investments and that (2) the common law provides the framework for the existence of freedom of contract (2005 p.2). The notion that financial development is necessary for economic growth is made explicit by the Finance Theory. Graff argues that financial development is encouraged in common law societies because these societies have more freedom when it comes to making contracts with other parties and in respecting property rights. Graff argues that only when parties can make contracts without so much infringement and the provision for private property provide more comfortable leeway for property acquisition will investors be willing to invest financially. These financial investments, obviously, will contribute to financial development.
Professor Cabrillo (p.2) tried to undermine these arguments for the common law by saying that not enough evidence can be established to ground for the ideas that (1) freedom of contracts nor the remaining legal institutions that have permitted economic development in the western world are specific characteristics of common law and that (2) more importantly, a common law system does not guarantee a sounder defence of free market principles than civil law. To answer this argument, I maintain that while the characteristics of the common law may be difficult to define in relation to the notions of freedom of contracts and its capacity to foster a free market, there is sufficient grounds to say that the less control exhibited by the government towards any economic endeavor essentially holds true for the ideas mentioned. This less control exhibited by the government is apparent in the sense that there are no national-bound limits that should be applied indiscriminately to any economic situation.
Professor Cabrillo (p.5) also forwards the idea of structuring a national economy wherein a set of national legislation, true in civil law societies, is needed for the objectives to be achieved. I wish to counter-argue this by saying that England and the US, which are well-known common law societies, do have national economy. Thus, even if the society is not a civil law society, apparently, the possibility of structuring a national economy is still possible.
Another important argument comes from Castan (p.7), with respect to the civil law adjusting to meet the demands of private property at the expense of moral and equality. To this I maintain that historical accounts do not illustrate empirical evidences for this claim a much as they do for common law societies. Thus, while Castan may be true with his claim, it may still be argued that the nature of the civil law is much more stricter to be bent by the demands of private property, especially that this notion is a very complex issue that needs to be dealt with on the local level and not necessarily across the board, especially if we are to maximize the encouragement for financial investments. Further to that, it can be said that the adjustments can come rather slower because the changes to be dealt with concern a national legislature, unlike in the common law wherein the judges are simply guided by general principles and the decisions are not necessarily dictated, strictly, by rigid technicalities.
Defense of the Civil Law as More Compatible to a Free System
The rigidity of the civil law necessarily imposes infringement on economic development. Hayek expounded on the notion of freedom of contract in his exposition of economic policy. Hayek (1973) states that the freedom of contract, like freedom in all other fields, really means the permissibility of a particular act depends only on general rules and not on its specific approval by authority. Further to that, Hayek (1973) raises the more difficult question on whether the law should ever provide for obligations arising out of a contract which may be contrary to the intentions of both parties, as, for example, in the case of liability for industrial accidents irrespective of negligence. We can argue, in line of Hayeks arguments, that it would be quite a challenge for the law to lay out the obligations that to contracting parties should have after making a contract.
Conclusions
I wish to argue that the characteristics of the common law and the civil law are very hard to define on the grounds that these two are rather exclusive concepts. It appears that the two lack well-defined borderlines that wholly separate them from each other. For one, as we have seen, there are significant historical incidents that can readily invalidate arguments for the superiority of the civil law based on the grounds that that the civil law and the common law societies are 100 different entities. John Hicks (1969, p.162) pointed out, in his book A Theory of Economic History, that in the course of British history we have witnessed how the legislative government interfered with Britains economic circumstances in 1900s, specifically the social welfare intervention by the government of Bismarck.
Furthermore, Hicks 1969, p.162) made obvious the idea that after the First World War, in the US, the government took control over the running of the railroad system. Additionally, Cabrillo (p.7) pointed out that history has also played witness in the application of negligence rule in both civil and common law societies. I believe that these seemingly historical insertions amount to complexities that dispose a certain sense of difficulty in drawing out conclusions about economic growth as it is impacted either by civil or common law.
It seems that more than focusing on the traits of the two laws, it is more important to consider the side-implications of the essential nature of these two laws in the area of economic behavior. With this, it means that careful attention must be given to the behavior of the law or how the law responds and realigns with the current situation of the society rather than defining its traits. Apparently, the law evolves to adjust to the urgent and more time-appropriate needs of the society and this is an idea that I share with Holmes (1897, p.4). The evolution of the law may not be very apparent when one looks at the law structure, but rather on the principles that are governing the law and its provisions.
Perhaps, the most obvious evidence for this evolution of legal principles would be the apparent changes on judicial decisions. For instance, some judicial principles that might have been appropriate a century ago may cease to be appropriate now, especially with the introduction of the globalization era where a lot of changes have happened in different societies.
In my view, apparently, there are obvious connections between financial development and economic growth, yet, it seems rather hasty to say that the traits of the common law well provides the grounds for these two factors. The arguments forwarded by Graff seemed to be countered when we turn our attention to the essay written by Professor Cabrillo entitled Law and Economic Development Common Law versus Civil Law. In that essay, Professor Cabrillo (p.7) cited the drafting of the French civil code of 1804 has been based on the pursuit of market-related objectives that all point out to support the market growth. As we can see here, the market itself is exerting impacts on the very process of codification of the law. Thus, instead of the law exerting influences the economic behavior of the French society at that particular time it was the market that exerted the influence on the codification. These are counter-argument points that were made explicit by Professor Cabrillo in his essay. In my view, however, this is not sufficient as we can readily point out that the influence of the market on the codification has nothing to say regarding the traits of common law, nor the civil law and their traits relation to economic growth. Any objective to code a law based on market perceptions are not necessarily a feature that weakens the argued characteristics of the common law in Graffs arguments. A coded law can take into consideration the market, yet it may still suffer inadequacies to pursue market goals due to its inherent characteristics or the implications of its characteristics.
Furthermore, these illustrations of historical facts seem to provide the grounds for the undermining of the superiority of the common law over the civil law, a far as economic impact is concerned. However, we are not ready to give up yet the position that the implications exhibited by the traits of the common law fosters an economic growth better than the implicated traits of the civil law do.
I maintain that the underlying conclusions that have been advanced by several great economists and theorists of the law seem to be adequate in proving that (1) it is indeed the ability of the common law to foster an environment conducive for the existence of the freedom of contracts, to which the more advanced economic growth is due to and that (2) the characteristics of the common law allow for the existence of a free market.
At this point, it may be helpful to go back to Lockes notion of private property. John Locke 1690), in his essay On the Second Treatise of Government, says that private property is one oft e consequence of individual labor. Locke (1690, Section 36) states that The measure of property nature has well set by the extent of mens labour and the conveniencies of life no mans labour could subdue, or appropriate all nor could his enjoyment consume more than a small part so that it was impossible for any man, this way, to intrench upon the right of another, or acquire to himself a property, to the prejudice of his neighbour, who would still have room for as good, and as large a possession (after the other had taken out his) as before it was appropriated. With regards to the data that indicate a higher percentage of GDP for common law countries, perhaps, the most plausible explanation for that is the conjecture that the design of the common law allows for a better space of freedom to be exercised when it comes to decisions in creating financial contracts. Like what Hayek pointed out in his essay, contracting decisions need to consider local factors, which may be neglected if we were to be bound by a national legislation, just like what happens in a civil society.
Apparently, even within a particular society, there is heterogeneity of cultures, demographic factors, and other aspects of differences. Even if the civil government will exert efforts in spurring the economy towards a national growth, and thereby would take into considerations all these sub-local differences, it is still difficult to draw conclusions that the amount of consideration the national legislature will put would be sufficient and enough, and can be taken as at par with the considerations the common law dictates.
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