Mixing-and-Matching Across (Legal) Family Lines

ABSTRACT "Legal origins" scholars explain economic performance by a country's membership in a given "legal family." To demonstrate the proposition, they regress various indices of performance on, inter alia, that membership. These regressions are properly specified only if (a) countries cannot switch families, and (b) family membership seriously constrains legal change. If countries can switch, then family membership is endogenous to economic performance-since a country will decide whether to stay in a family with an eye to its expected economic effect. If countries can readily borrow across legal family lines, then membership does not bind-and necessarily can have no effect on performance. Unfortunately, neither of these propositions is true. Countries can indeed switch and borrow-easily. That one does not observe much cross-family switching or borrowing in practice merely reflects the fact-nicely demonstrated by Spamann-that countries find it easier to borrow from other countries that use the same language, and that legal families tend to correlate with linguistic families. Given that statutory options within any one legal family usually offer countries all the options they need, countries have little reason to move outside those linguistic groups. I illustrate the possibility of cross-family switching and borrowing with the example of pre-war Japan. I. THE CAUSES OF GROWTH Economies thrive (or not) for a variety of reasons. They thrive when governments keep trading markets operational, and define and enforce rights to scarce resources. But they also thrive when workers bring a basic education to their jobs, when firms can exploit a welldeveloped transportation network, and when entrepreneurs with good projects have ready access to capital. Some of these "causes" of economic performance are also its "result." Put otherwise, many of the causes are endogenous to the performance itself. Economies may grow faster when workers bring a basic education, but rich societies choose to invest more heavily in education than poor. They may grow faster where firms can rent sophisticated transportation services, but rich societies choose to build more elaborate transportation networks than poor. They may grow faster when entrepreneurs can tap capital readily, but rich societies offer more elaborate financial services than poor. Unfortunately for scholars, this two-way causation stymies academic proof. Traditionally, we have explored whether factors A1 and A2 (the independent variables) cause outcome B (the dependent variable) by regressing B on A1 and A2 through ordinary least squares. We can properly do so, though, only when A1 and A2 are not endogenous to the purported effect B. If B also causes A1 and A2, we cannot tell by running ordinary least squares. Education may contribute to economic performance, but we cannot test the proposition by regressing performance on education. Transportation and financial services may enhance performance, too, but we cannot regress economic performance on either. At times, scholars can find econometric ways around this endogeneity. If we can identify a third variable that causes A1 but is not itself a function of B, we can run the regression with "instrumental variables." Yet good instruments are hard to find. Fame may go to scholars who can demonstrate causation unambiguously. But in the field of economic growth, that demonstration has proven maddeningly elusive. II. LEGAL ORIGINS AND THE STRUCTURAL THEORY Enter the "legal origins" team, a shifting coalition of Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishney, with occasional appearances from others.1 Countries picked their legal systems decades ago, they reason, sometimes centuries ago. For the most part, the countries did not pick their systems with an eye toward their effect on economic performance. Instead, most found the family thrust upon them by their colonizer. …