Tuesday 9 September 2008

Scots Law and the economy

I'm in the middle of reading The Legal Foundations of Free Markets, which is the latest book from the IEA.

One chapter is by Cento Veljanovski and is titled The Common Law and Wealth.

He concludes:

Some laws are more efficient or more conducive to facilitating economic activity and growth than others. It appears that the common law may do this better than civil law systems, at least in some areas and in some jurisdictions.
Under "Europe" the author lists Cyprus, England, Ireland and Wales as common law jurisdictions. Scotland isn't mentioned and has a mixed system with less use of the common law than elsewhere in these islands.

The question is this: Does Scotland's legal system harm economic growth?

I honestly don't know.


David Farrer said...

Comments made on previous template:

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27 October 2008, 01:44:18 GMT
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I'd like to know why it wasn't mentioned, Scotland.

14 September 2008, 15:05:15 GMT+01:00
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The strange smiley was meant to be an 8 and a close of the brackets!

10 September 2008, 10:42:27 GMT+01:00
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I should also note that the book refers to a number of systems as common law systems ( p 88) - but South AFrica, Sri Lanka, Louisiana in the US, and QUebec are all mixed legal systems like Scotland. Indeed, Scotland has a close kinship with SOuth African law - and South African cases are occasionally referred to in the Scottish courts (and vice versa). There is a big book of comparative Scottish and SOuth African legal research - Mixed legal systems in comparative perspective; and work is currently progressing on an equivalent book with Scots and Louisianan law. 

10 September 2008, 10:41:51 GMT+01:00
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David Farrer said...

Thanks for referring to this. 
THe bulk of law and economics scholarship is in common law systems - and often the conclusions focus primarily on transaction costs and the resultant impact on reform of the law. Many of the English common law rules were established in the eighteenth and nineteenth century (and consequently transported to the commonwealth and the US). The English commercial law rules that developed at these times were largely developed by a Scotsman who was poivotal in commercial actions, and are lifted from civilian sources (the lex mercatoria of the common law - is largely the jus commune (ie the civil law of Europe) - an over-generalisation but useful nonetheless).  
Where English law (and other common law systems) differ from civilian systems today is in their extreme creditor friendly approach in insolvency. THis is not for all creditors though - but favours the strong at the expense of the weak. 
For example, someone who carries out work is but has not been paid for that work (as I understand it) not protected. However, someone who buys from or lends to the party that becomes insolvent - even where the creditor does not complete the formalities of the transaction - is protected. This mechanism then actively encourages those creditors not to complete formalities (because it minimises transaction costs and because in many cases they are protected anyway). The effect is that parties dealing with the debtor have a misleading position, because the rights that impact on the debtor's solvency are not necessarily public.  
Civilian systems operate under a publicity principle (as does Scotland) where security rights affecting properties have to be publicised in some way so as to be objectively ascertainable. It means there are increased transaction costs, but all third parties (prospective purchasers/lenders &c) can ascertain their potential risks in lending, and third party purchasers are aware who owns property (not always apparent in common law systems) and whether that property is encumbered with securities. 
The formalities of civilian systems can appear to make the raising of finance by businesses more difficult (especially in Scotland where, for example, you cannot grant a security interest over receivables or IPR in an effective way without transferring the whole right to the creditor). However, research for the Central Research UNit of the Executive in the early years of the decade indicated that - despite SMEs' perceptions - the decisions on providing finance were not influenced at all by the legal formalities - and the inherent restrictions in these systems. What mattered was the business plan the personnel, and the likelihood of repayment based on income projections. 
The report on the topic is no longer on the Executive website but I have an old URL and found it on the waybackmachine - if that's of interest. Drop me an e-mail and I could get that to you (and explain a little more about the report that I'm not able to on a public forum).

10 September 2008, 10:15:51 GMT+01:00