Chicago John M. Olin Law and Economics Working Paper No. 271, 2006
This paper looks at how government and law evolved to support economic growth.
In the West, the rule of law developed slowly and is related to separation of executive, legislative, and judicial powers, and will be hard to replicate in other cultures.
In the Middle Ages, trade over long distances was risky, because local merchants did not know when they could trust a foreign agent with goods or credit.
Solutions included guild boycotts of cities that treated outsiders unfairly, and the Law Merchant, which established merchant courts to rule on disputes and reported on uncooperative merchants.
The rise of monarchy solved the problem of enforcing property and contract law within countries. But if a ruler was too powerful, he could take subjects’ property himself.
Today’s developed economies have largely solved both problems. But this happened over many centuries.
The solution is separation of powers, that is, a balance between legislative and executive powers, and an independent judiciary; economic growth also requires well-developed property and contract law.
The example of the French Revolution shows that old legal regimes that impede markets or support feudalism must be uprooted as well.