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On Heaven’s Lathe: State, Rule of Law, and Economic Development

Author

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  • Chen Ding

    () (School of Law, University of Newcastle, Newcastle, UK)

  • Deakin Simon

    () (CBR, University of Cambridge, Judge Business School, Trumpington Street, Cambridge CB1, 3DB, UK)

Abstract

We propose a theoretical framework for understanding the evolution of the rule of law state, which is conceived as the equilibrium of a societal game in which actors accept the legitimacy of publicly enunciated legal rules. A meta-norm of respect for the sovereign legal power of the state is not self-forming on the basis of private conduct, but requires the coevolution of impersonal market exchange with effective state capacity to constitute and regulate markets. A functioning legal system must acquire the means not just to control private power but to constrain other organs of government. The emergence of such a ‘self-limiting state’ is an historical process which, while complementary to a market order, is also contingent and path-dependent, and is not preordained. Illustrating our argument with empirical evidence drawn from the contemporary experience of middle-income countries, with a focus on China, we argue that alternatives to the rule of law state, including interpersonal trust, closed networks and authoritarian political control, can only achieve limited scale and scope effects, and are prone to high deadweight costs arising from corruption and the capture of the public sphere by private interests. We also discuss the potential of transplants of legal rules and institutions to catalyse the transition to impersonal trade based on the rule of law, and present evidence, from time-series econometric analysis, that the diffusion of shareholder protection laws has the potential to support financial development in emerging markets. Evolution towards the rule of law state is, we conclude, one possible developmental path for middle-income countries.

Suggested Citation

  • Chen Ding & Deakin Simon, 2015. "On Heaven’s Lathe: State, Rule of Law, and Economic Development," The Law and Development Review, De Gruyter, vol. 8(1), pages 123-145, June.
  • Handle: RePEc:bpj:lawdev:v:8:y:2015:i:1:p:123-145:n:3
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    References listed on IDEAS

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    1. Barry Eichengreen, 2006. "Introduction to The European Economy since 1945: Coordinated Capitalism and Beyond," Introductory Chapters,in: The European Economy since 1945: Coordinated Capitalism and Beyond Princeton University Press.
    2. Arrighetti, Alessandro & Bachmann, Reinhard & Deakin, Simon, 1997. "Contract Law, Social Norms and Inter-firm Cooperation," Cambridge Journal of Economics, Oxford University Press, vol. 21(2), pages 171-195, March.
    3. Andrianova, Svetlana & Demetriades, Panicos & Shortland, Anja, 2008. "Government ownership of banks, institutions, and financial development," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 218-252, February.
    4. Deakin, S., 2011. "Legal Evolution: Integrating Economic and Systemic Approaches," Working Papers wp424, Centre for Business Research, University of Cambridge.
    5. Rajan, Raghuram G & Zingales, Luigi, 2006. "The Persistence of Underdevelopment: Institutions, Human Capital or Constituencies," CEPR Discussion Papers 5867, C.E.P.R. Discussion Papers.
    6. Deakin, Simon & Wilkinson, Frank, 2005. "The Law of the Labour Market: Industrialization, Employment, and Legal Evolution," OUP Catalogue, Oxford University Press, number 9780198152811.
    7. Deakin Simon, 2011. "Legal Evolution: Integrating Economic and Systemic Approaches," Review of Law & Economics, De Gruyter, vol. 7(3), pages 659-683, December.
    8. Raghuram G. Rajan & Luigi Zingales, 1998. "Which Capitalism? Lessons Form The East Asian Crisis," Journal of Applied Corporate Finance, Morgan Stanley, vol. 11(3), pages 40-48.
    9. Pistor, Katharina, 2013. "A legal theory of finance," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 315-330.
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    Cited by:

    1. Enying Zheng & Simon Deakin, 2016. "State and Knowledge Production: Industrial Relations Scholarship under Chinese Capitalism," Working Papers wp480, Centre for Business Research, University of Cambridge.

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