Transcript States and finance

Governments,
institutions,
and growth
The experience of early modern Europe
The State
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The main institution since the 14th century : the State.
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Modernity : emergence of the State as dominant institution (to the detriment of
the Church and the nobility)
Nation-State as an early efficient political model invented in England and France
(from 100 years’ war); generalized at high costs in the 19th and 20th centuries.
Today : international organizations (IMF, etc) and NGO may become crucial.
Heart of classic political economy and today’s economics : the proper role(s)
and size of the State.
The traditional « whig » solution is that governments must provide
institutions guaranteeing property rights and allowing for an efficient
functioning of markets (contracting rights). That is: good laws, efficient
judiciary and police enforcing justice decisions. Markets will do the rest if
they are not hindered doing so.
Enforcement of increasingly sophisticated property rights (intellectual
property, complex financial products…) require an increasing share of
modern economy when the production of goods is decreasing or
externalized: finance, accounting, law, parts of management, government,
etc.
Question
What is the impact of governments on growth?
– Predatory ?
– Or provision of public goods necessary for
growth ?
Channel of causality : institutions
Major influence: D. North Institutions, institutional change
and economic performance, Cambridge, 1990
Dominant answer
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North-Weingast (1989) argues that the main change towards adequate
government is the 1688 “Glorious Revolution”
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bringing in parliamentary government, separation of powers and shared control
over public finances ;
And then decreasing the major (previously dominant) risk of government
predation (levying excessive taxes and seigneuriage).
This led to the industrial revolution via a general decrease in interest rates.
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This is part of a large recent literature focusing on public finances as the
crucial element in the development of the State.
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We will discuss this in the following directions:
– Was the Glorious revolution such a Pareto improving change ? Did it aim at
economic institutions improvement ? If not, how did it reach it ?
– Was the impact on the economy so important ?
– Were English institutional innovations truly innovative compared to other
countries ? In what sense ?
Plan of this lecture
• The English « Glorious revolution »
– Obtaining credibility
– More on political institutions and credibility
– Neglected issues in the Glorious Revolution
• England in international perspective
• The Netherlands as true pioneers ?
• The French Revolution
The English financial revolution
• Three major steps (Dickson, 1967):
– Debt consolidation
– Centralization of taxation and spending power
• Institutional basis for this (North-Weingast 1989):
• Parliamentary regime resulting from 1688 Revolution is the
political homologue (and condition) of perfect financial markets:
unified and homogenous debt allows for a liquid market, which
protects equally all participants.
• Parliament makes debt credible.
• Independent Bank of England makes inflation almost impossible
(Britain came back to convertibility after all suspensions up to
1931) and guarantees interest payments.
• But : « post hoc ergo propter hoc » ?
Arguments
• Contemporaries testimonies. Necker 1781: England’s credit comes
from « la nature de son gouvernement » and « la notoriété publique
à laquelle est soumis l’état de ses finances ».
• Principal-agent theory: the State is able to borrow when the property
rights of the lenders are protected enough. Parliament and
independent judiciary as protections. Reinforced by the fact that the
Parliament mostly represented property or public-debt owners.
• An historical innovation: frequent debt repudiation in medieval
England: Jews’ fortunes confiscated in late 13th c (idem Templars in
France), especially when Italian merchants (Lombards) can
substitute for them (before suffering the same fate), or on the eve of
war.
More detailed argument :
• Stuarts’ abuses.
– Conflict with Parliament on tax increases leads the
government to use other sources of funding:
• Budget deficit covered by land sales
• Tariffs on imports, forced loans, sales of monopolies, of
patents, of titles (=expropriation of all quasi-rents)
– « Prerogative courts » and « Star Chamber » allow
the king to govern against Parliament and ordinary
courts.
• Result in 1640 Revolution and civil war.
• Restauration in 1660. Little progress.
• Glorious revolution (1688):
– Restraint on the crown’s power and new powers to Parliament
(taxes and expenses) and courts (independence).
– Revolutionary threat now credible, makes the crown
compromise.
Success
• Increase in budget and taxes accepted; balanced budget
(except for renewed war).
• No abuse from Parliament : diversity of opinion within it;
balance of powers;
• Increase in borrowing power : table. Debt reaches 100%
of GDP in 1720.
• Decrease in interest rates (table) proves credibility. No
inflation.
• 1694: Bank of England as coalition of lenders, improves
credibility.
• Around half the debt owed to the privileged companies
(old and new East India Cies, Bank, South Sea Cy),
which reinforce the lenders’ coalition.
Are these new institutions sufficient ?
• The balance of powers between parliament / government / judiciary
– Balance of powers usually defined by the fact each has a veto power.
Here protection of lenders supposes they control a veto power.
– If they are in minority (the usual case after a political crisis : most people
have gone away from risky assets), their protection relies
• Either on parliamentary practice and alliances (a guaranteed
position within a governing party);
• Or their over-representation (censal vote).
– This is not enough. Most important is the reversion point : the situation
which applies in case all powers use their veto on the others’ preferred
actions. Inflation is frequently the remaining solution at reversion point,
when the government controls the printing press.
• The Bank of England
– The importance of the delegation of power (e.g. to the Bank of
England), although it can always be taken back, is that is it modifies the
reversion point, making inflation unlikely.
– The Bank’s privilege can be suppressed (or its issuing monopoly), but
only with the Parliament’s agreement.
• Hence, the new constitution is indeed a substantial change.
BUT historical research qualifies this result :
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Parliament control of taxes is not a major aspect of the Revolution :
– The reform of the tax system had been made by the Stuarts up to the 1670s, and
sometimes opposed by the Whigs.
– Some predation (e.g. delays in payments on debt) remain after the Revolution;
sometimes the Parliament is responsible for it.
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What about the role of Whig supremacy ? (Stasavage)
– No stable party supremacy in Parliament before 1715. So Whigs have influence
mostly through control of debt.
– Correlation between Whig supremacy and the level and volatility of the cost of
government borrowing; also with Bank of England share prices. (Graph)
– So credibility depends on who controls the government and the Bank.
– Attempt by the Tories to establish a rival company (the South sea Cy) ends in
failure (1720).
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Then partisanship is important (or is it stability?), with potential redistributive
results:
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The power of rich lenders leads to regressive taxes.
The power of merchant lenders leads to land taxes.
Bank of England lends at high rates : not a neutral institution but a profitable one.
Shares in East India Cy not freely traded but exclusively among party members
(Carruthers), suggesting an instrument for the control of power, not a normal firm
maximising economic profit.
Other issues : religion and politics
• Another potential explanation : stabilization of the
external position : the 1715 break is correlated with
– the end of the war (1713)
– and the end of the uncertainty on the royal family (George II,
Hanover, 1714).
• Conflict between Whigs and Tories does not centre on property
rights, but mostly on
– Religion : three conflicting groups 1/ Calvinists (many Whigs), 2/
Anglicans (the national semi-protestant religion, tory dominated),
3/ and Catholics (James II is a catholic, so are many Tories).
Anglicanism as a mid-term solution.
– International politics (France vs Netherlands);
• 1688 = takeover by Netherlands over a France-oriented king;
• 1714 : autonomy after wars against both.
• International affairs and religion used in order to
reinforce the merchant elite's internal power and their
control of international trade ?
– wars
• Create national cohesion
• Benefit merchants (war against competitors, protectionism)
• Require debt, making the big companies indispensable, and
raising interest rates, benefiting lenders if they can avoid
bankruptcy.
– Religion interact with international affairs:
• Abolition of the Edict of Nantes in the dominant power
(France, 1685) recreates an international threat against
Protestants, and provides Protestant countries (England,
United provinces, German states) with migrant Huguenots
hostile to France.
• France supports the Stuarts in England, and the
independence of Ireland and Scotland...
Long term economic impact of new
English institutions ?
• North and Weingast mostly show the impact on nominal
interest rates of new government loans;
– impact on actual rates delayed to about 1715 (see above).
• Limited impact of Glorious Revolution on:
– Interest rate on private rent contracts (Clark): suggests property
rights on private assets were established long before the
Revolution.
– Growth (Clark): suggests government’s debt problems had little
overall impact.
• Impact on financial development ? (the early causal link)
– Trade on the shares of the privileged companies develop (but
political dimension in their ownership may have delayed rather
than favored that development);
– Trade on government bonds developed later (1740s);
– So impact on financial development not so clear.
Conclusions on the English
« Glorious Revolution »
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It reinforced the State borrowing capacity
Partly by giving Parliament a veto power on taxes and debts
Mostly thanks to the control of Parliament by the lenders, in a solid
urban protestant pro-war (rather than anti-French) and centralizing
alliance, the whig party (and to the detriment of rural gentry and
peasants, and peripheral regions in the UK),
an alliance which was itself reinforced by the ressources of the Bank
of England and the great corporations (East India Co…).
This process lasted several decades and succeeded developing
State power and colonization abroad (US, India, West Indies,
Canada).
It may have had an impact on growth through financial development
(a market for public bonds) and the enlargement of markets;
but this was much delayed and is not visible either on interest rates
or in growth figures.
Long term European perspective
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States developed when they were able to win wars, which required money.
New taxes were raised and the States borrowed.
But the constituency had to choose between two dangers:
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Loosing the wars and being ransomed by the winners (eg holding the King in
prison);
Winning the war reinforced the power of the State, which allowed it to raise more
taxes permanently (and not only during the war), and may lead it to fight new
wars.
The problem is to develop political institutions with the following
characteristics:
– Stability : stable political systems are required in order for the debtor to be clearly
identified. Hereditary rules as a first solution creating stability (but wars and
revolutions could overthrow governments).
– Credible commitment to repay requires checks to the government (North and
Weingast).
– Capacity to reimburse loans, through the development of efficient tax and debt
management administrations, which existence must be independent from the
person of the ruler (or even from the political regime).
What are early modern States ?
• Key point : Medieval or early modern political entities are
very different from contemporary States:
– Since the development of feodalism in the middle-ages (esp. XIthXIIth c.), local power is stronger than regional, royal or imperial
one (“nation” being non-existent). Concentration process very slow
(reinforced by 100 years’ war in England and France but strongly
opposed : the Fronde or the English civil wars).
– Individuals pertain less to a state than to specific groups or
corporations (on a local or professional basis), which provide them
with « privileges » or « freedoms » (meaning rights to be defended
by the group and judged by the group); no universalist states
(where all individuals are equal).
– No clear hierarchy between these independent groups, which also
overlap each other (e.g. City of Paris and University of Paris,
orders such as the clergy, or any guild or corporation) and then
extensive coordination problems.
• A major goal of pre-modern states is to diminish legal
heterogeneity and judiciary fragmentation which raise
transaction costs.
– One may see markets (where participants are equal) as public
goods based on cooperation, and the states are needed in order
to allow them to work.
– Their capacity at compensating the losers allows the states to
impose coordination and homogeneity; in order to do so, they
need taxes and power.
• Then: maybe coordination problems and prisoners
dilemma (implying a need for a more powerful
government) are more important than principal agent
problems (requiring a less powerful governments).
(Epstein opposed to North and Weingast).
How to test for this ?
- Some historical context
- A measure of political fragmentation in a
European economic perspective
- Case studies:
- Netherlands
- Tax administration: England vs France
- Debt administration: idem
- The French Revolution and its impact
• States differ by their size and their history, which
explains much of their political institutions:
– Up to the Vienna congress (1815), one may oppose territorial
states to city-states (Tilly):
• Territorial states control large pieces of territory and population
under (post) feudal rules (as above).
• Cities rich enough (large ports usually) to buy their independence
organize themselves as “republics” (of merchants, usually
plutocratic/oligarchic); they may even control colonies (Venitian and
Genoese Mediterranean empires…).
– Size makes more difficult (but also potentially more rewarding)
the imposition of homogeneity;
• So the easy success of city-states (in Italy, Germany, the
Netherlands), eventually reinforced through coalitions (Hansa,
Netherlands), which blocked the development of some future
nation- states (Italy, Germany),
• and the higher concentration of power, centralization, tax rates and
economic development of smaller states like the Netherlands and
England compared to larger countries having invested in controlling
large territories (Spain, France, Russia).
– Monarchies are far from today’s centralized (or even
federal) powers
• Holy Roman (German) Empire as pure coordination device with little
central power ; also true to some extent for kingdoms such as France
or Spain.
• Absolutism is a rhetoric, an aim, not a reality, mostly in France and
Spain. Taxes cannot be raised on the members of established
corporations except if they accept it in ”Etats généraux” (France),
“Cortes” (Spain), all forms of parliaments representing people by their
status (nobility, clergy,...) or corporation (cities). High judiciary
(Parlement de Paris) had legislative power in France (and was
dominated by hostile Jansenists).
• Crucial role of cities in the development of public debt : 18 main cities
in Spain (Fortea Perez) issue the juros for the king and fund them with
their own taxes; idem in France for rentes sur l’hotel de ville (Lyon,
Paris 1522). Balance of power makes kings weak (absolute power on
persons, limited power on wealth).
• England's peculiarity is that of an early and more centralized country,
where Parliament before 1688 was weaker compared to Cortes or
Etats généraux, and the new Parliament was based on the modern
universalist principle (corrected by censal suffrage) protecting
persons rather than wealth.
– Fragility of most crowns: « foreign » meddling in 50% of
successions in the 16th c, with the complicity of parts of nobility or others:
wars of successions, Fronde, Glorious revolution. Heredity as an
(imperfect) solution to avoid it.
• Observing levels of interest rates in different countries (graph)
suggest political regime was not central: if one takes Italian republics
out, no impact of the political regime after 1550 (graph). England is
an outlier in having late very high borrowing costs.
• This may result from the fact that England was late in building
efficient taxes:
• its isolation after the 100 years’ war limited the need for new taxes
(usually a result of wars); this changed with civil and foreign wars after
1588 (the Spanish armada and the now obvious need for a costly
Navy).
• The absence of cities independent enough to bargain with the crown as
on the continent may have hindered the development of a public debt.
• The late 17th century reforms and revolutions created a more efficient
state, mostly through administrative reforms, and allowed England to
catch up.
Customs and growth (Dincecco)
• Question : was the threat of government more or less important for
growth than the costs of excessive fragmentation ?
– Cf. late medieval Italy: many city governments controlled by merchants,
but integration at larger scale impossible, which blocked growth.
• Measures internal fragmentation within European sovereignties from
1700 to 1815 in terms of domestic customs (as a – good – proxy for
fiscal zones).
– Note England, not U.K. used (when Ireland and Scotland were actually
under English control… and French regions under the direct control of the
King were greater than England and had no customs and centralized
taxation); Portugal/Italy excluded.
– Neglects Empires, crucial to the development of cities and “small” states
(Venice and Genoa, Netherlands…).
– 175 cities above 10.000 inhabitants as units of observation : homogeneous
unit throughout Europe and the period; essential for growth.
– Crucial moment is French Revolution: in 1700, over 30 percent of cities,
but only around 10 percent of countries, were surrounded by a customs
zone of less than 50,000 sq km.
1700 vs 1815, cities vs countries
Economic impact ?
- Integration of wheat markets in Europe accelerates in
the early 19th c. (Federico)
- Correlated with the increase in centralization.
- Exceptions such as England and Netherlands explained
by international trading positions.
Next step: a test of the impact of the custom unit size on
growth.
Case studies:
- The Netherlands
- Tax administrations
- Debt management
The Netherlands : from cities to State ?
• “Old whig” story suggests merchants and economic development
prefer low taxes and develop city-states in order to lower them. Cf
De Long & Shleifer 1993.
• Problem of city states : they represent an easy prey for territorial
monarchies (only partially mitigated by the conscience th later have
of the fragility of that wealth). See the sack of Antwerp (“Spanish
fury”, 1576), the decline of Italian cities in the 16th c. with wars, and
that of German ones with the 30 years war.
• Dutch solution : city states building an alliance and increasing taxes
in order to resist. Necessary when facing increasing war costs (the
« military revolution »).
• Origin : external threat from Spain which produces an alliance (1572
revolt of Holland; 1579 Union of Utrecht among the 7 Provinces);
independence (excluding today’s Belgium) recognized by France in
1596, Spain in 1648).
• « New whig » solution (as in North-Weingast) : taxes
may be increased at low cost (both in political and
economic terms) if controlled by a parliamentary regime.
• In the Netherlands: almost universal urban citizenship
(and most population is urban), and some (varying)
« democratic » control over taxes (Van Zanden-Prak)
• What makes the solution work ?
– Alliance always dominated by Holland, the most populated and
urban province; and Holland by Amsterdam (200,000 population
in a total of 0.8M for Holland, 2M for the Netherlands in 1780).
– Rich Holland pays for the coalition : from 1616, pays for 58% of
the federal budget, but nominates only 38% of deputies to the
General Estates, and 3 « State council » (government) members
in a total of 12.
– Balance between urban economic power and the military power
of the nobility dominated by Stadtholder William of Orange.
• But part of the autonomy of the cities disappeared (tax
heterogeneity reduced, and centralization increased).
Dutch (Amsterdam) financial innovations
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Come clearly before those in England but after political changes in the
Netherlands:
– Consolidation of public debt : 1644
– VOC: 1602; much bigger than English East India Cy (1599).
– Bank of Amsterdam : 1610
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But with different functions:
– Bank is no lender to the State, but aims at improving the quality of money and
lowering exchange risk. From 1659 at least, guilder banco (florin) dominant unit
of account for all foreign transactions.
– VOC no lender to the State either. More influenced by the government than in
England, but as a tool in the hands of Amsterdam merchants in order to develop
an overseas Empire (taken from the Portuguese) and make monopoly profits
through trade.
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Dominance not maintained
– Economic and colonial success dates mostly from late 16th-early 17th
– Later on, the United Provinces remain a high income economy with high public
debt, and a net international creditor
– But partly overtaken by the English Empire and traders.
– And overtaken by the French and disappear for a while: 1793-1813
Then:
- England to a large extent the adaptation of
Dutch political and financial innovations.
- Reinforcing, centralizing and unifying the
government clearly central part of the
Dutch economic success.
Taxing : England vs France
• England as homogeneous country,
– centralized tax decision, partly local tax distribution, mostly
centralized expenses.
– Political disputes concentrate in Parliament (and then well
known)
• France more heterogeneous :
– various parliaments ; « pays d’élection » (= where direct
administration) vs « pays d’états » (where local « états
généraux » decide on tax level and allocation). Price of France
competitive territorial expansion (not so in Britain : ask the Irish).
– Fronde (1648ss) as quasi destruction of central power.
– No central place for political debate at the national level before
the Revolution, then bargains difficult to make (and information
difficult to find for the historian).
Tax systems
• British taxes:
– Medieval tradition (King major landowner): crown pays on its
feudal revenues for justice and the army.
– Ordinary taxes are indirect (tariffs, excise, « hearth and stove »)
– extraordinary taxes (requiring Parliament consent) are direct (in
war periods): « subsidy » (on income) and « assessment » (on
land).
– Post-revolution innovation : new land tax (1693) becomes a
major resource (= sign of merchants’ rise to power). But in the
long run indirect taxes grow more.
• French taxes:
– Both direct (taille, on land, adjusted for income) and indirect
taxes (gabelle) as ordinary incomes. Any rate increase requires
the consent of the Etats généraux.
– Sale of privileges and offices as extraordinary incomes.
Tax administration
• Some offices (private firms) as tax collection positions in
many countries (including France and England);
• Farming of taxes as a way :
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Not to create an administration (costly to control)
Smooth government revenues
To borrow providing a guarantee
Protect lenders by building coalitions (Johnson).
But
– coalition of tax collectors decrease competition among lenders.
– Farming is a costly solution if profit margin is high. Competitive
bidding in Britain; verification (with heavy sanctions) in France
(problem of political motivations: Fouquet).
• Progressive move from farming to direct administration.
Ferme générale as quasi-administration.
• More efficient but politically criticized (local “privileges” violated,
monopoly without control).
Other majors French problems are:
• controlling the army and navy during wars:
they ask for payments and sign bills without
central control (emergency as a reason);
• Controlling the “payeurs” (those paying
government expenses locally).
• Leads to separation of payeurs from tax receivers,
which is costly (cash transportation to and from
Paris).
Impact on the financial system
- In the short term, the government can borrow from the
financiers (holders of tax offices) (with taxes in
guarantee) or foreign bankers (with long term debt –
guaranteed by stable taxes paid and accepted by the
cities – in guarantee);
- The financiers themselves borrow on the « monetary
market » (short term, commercial paper), an international
market controled by merchants and not by any
government.
- So interdependence between the two: makes the credit
and then the entire economy dependent on public
finances’ stability (see Spanish or French government
« defaults » in 16th and 17th c.) (Chamley-Nogal)
Debt : France vs Britain
• The English standard model:
– Debt consolidated in a single highly liquid asset (3% consols) :
1749. Equality among lenders.
– Default impossible thanks to institutions (Bank of E…); inflation
also impossible thanks to Bank independence and the
convertibility of its notes.
– Balanced budget in normal times; debt issued only in order to
finance wars.
• A French model ?
– No homogeneous consolidated debt quoted on an exchange;
– Segmentation of financial markets, personalization of debts
(administrative and tax offices, annuities, tontines);
– Selective default on politically chosen segments of the market.
– Then high interest rates (expectation of default); maybe not expost rates (forced conversions).
Results
• Much higher debt and taxes in England.
– Debt/GDP up to 2.7 in 1815.
– Enormous redistribution machine or efficient very long term
smoothing ? Maybe both.
• English model won in 1815 (thanks to finance or antihegemonic European alliance ?): even France adopted
it. Also victorious today.
• But French model came back later : unfunded « pay as
you go » pension systems also politically managed with
an enlarged constituency (compared to holders of
financial assets).
• Externalities on growth ?
The French Revolution
The Revolution imposed a lot of major reforms – some of which had been
considered for a long time but never realized because of the weakness of
the central government.
- Administrative and political unification of the territory: same administrative
units everywhere, clearly hierarchized, used for all purposes (tax, police,
judiciary, even religious).
- Single administrative authority under government rule : trésoriers, préfets,
recteurs, even bishops. End of « offices » for sale
- The civil code: unification of law; end of privileges, equality of rights;
- Abolition of guilds
- New systems of weights and measures
Huge redistribution of wealth thanks to the confiscation of the wealth of the
clergy and of part of the nobility (“biens nationaux”) and the hyperinflation of
the assignats.
- Creates a society with lower inequalities (land ownership)
European impact
After 1792 French armies invaded and reformed the institutions of
many European countries. The lessons from this episode are central
to some of the current debates on institutions.
The French imposed on areas they conquered most of their reforms.
Acemoglu & al. use this invasion in order to identify the impact of these
reforms.
Conclusions:
« Areas that were occupied by the French and that underwent radical
institutional reform experienced more rapid urbanization and economic
growth, especially after 1850. There is no evidence of a negative effect of
French invasion. Our interpretation is that the Revolution destroyed (the
institutional underpinnings of) the power of oligarchies and elites opposed to
economic change »
« The evidence does not provide any support for several other views, most
notably, that evolved institutions are inherently superior to those 'designed';
that institutions must be 'appropriate' and cannot be 'transplanted'; and that
the civil code and other French institutions have adverse economic effects.»
Canals
England :
- In the mid-18th c. begins a folly for canals in England
- E.g. the Duke of Bridgewater developed a canal allowing the cheap
transportation of coal from its mines to newly growing cities such as
Manchester. This was the first entirely artificial canal, and engineering
wonder which attracted a lot of enthousiasm and tourism (it included an
aqueduct carrying the canalover a river). It opened in 1761.
- England well connected before the end of the Industrial revolution.
- Decreases transportation costs, integrates the market for goods.
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Strength of the canals revolution in England :
- High demand (coal, but also other goods : in Staffordshire, the
porcelainmaker Wedgwood funded the canal that allowed transporting
its fragile products without accidents).
- Borrowing on the market relatively easy;
- Rich landowners able to develop canals within their lands;
- Acts of parliament relatively easy (if costly) to obtain for them;
Rosenthal on irrigation in Provence
Conclusion
• Political reforms important for the
reinforcement of central government
(which help develop a centralized financial
market);
• Have no direct impact on growth;
• But may participate in the building of a
more integrated market through the
development of unified institutions.
BONUS Law and growth
Set of papers in mid-1990s to today (by La Porta, Lopez de Silanes, Shleifer & Vishny
among others) suggest strong impact of legal origin on growth through property
rights, secure institutions and financial development.
Based on cross countries regressions today.
What is legal origin : pertaining to a “family” of laws as defined by some legal scholars:
- French, German or Scandinavian civil laws
- British common law
Civil laws: codified laws defining precisely what judges must do in particular situations;
Common law : judgment based on precedents; supposedly more flexible and adaptable
to the changing needs of the economy.
Specified in particular regarding business laws: corporation law, contracts law,
bankruptcy law; also efficiency of the judiciary (speed, enforcement…).
Discussion:
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Measurement problems: frequent or systematic ?
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Collection process
Conceptual problems : State interventions have costs and benefits.
Problems for the historian : if legal origin is about historical origin (and which
other could it be?), a test for an earlier date should confirm the results.
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Various authors find the contrary (Bordo, Sgard)
Musacchio 2009:
Improves the data (especially on market caps).
Enlarges the sample.
Finds very different results
- Orders of magnitudes different;
- Impact of legal system diseappears;
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Then : 20th century results only a proxy for State intervention rather than
legal origin ? Then endogeneity problem not solved.
A key question : Civil code or commercial code ?
- « law merchant » (lex mercatoria) supposed to solve conflicts among
merchants in the medieval / early modern periods without State intervention.
Has probably more influence on the French commercial law (Colbert ordinance
1673, Code de commerce, 1807) than British common law (controlled by an
independent and professional judiciary, and dealing with all conflicts or crimes
in a unified manner).
- An important French peculiarity is the existence of commercial courts, early on
under the control of merchants’ corporations, have been integrated in the State
judiciary system with little change except compulsory enforcement: judges are
(elected) merchants; justice is rapid (no appeal for many cases, and simplified
procedures); possible because reserved to relationships among merchants
(“commerce”), actually extended to a large population accepting it (2 million
patentés by 1900). Use of arbitrage, under the auspices of the State.
- French model exported to many countries by the Revolution, but disappear
there frequently before the end of the 19th c (Italy, Germany, Spain). Around
1850, various bills in English Parliament discuss the introduction of similar
courts in England, because they are considered more efficient, less costly and
opened to a wider share of the population than comparable English courts.
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In England and the US: costly court system for business cases leads
to the development of private arbitrage, which the government
recognizes : a different solution.
-
Bankruptcy : bankruptcy treatment is key to the credibility of
contracts. In France, the commercial courts deal with bankruptcy
cases. Despite severe sanctions, they attract a much higher number
of cases than in England until, in the 1860s and 1870s, English law
converges to the French (European) one and the efficiency of the
courts increases.
- Despite this convergence, British law remains much more proliquidation than European ones (in practice). Is this pro-creditors
and then pro-contract credibility ? Not clear.
Conclusion : variety of practices which in many cases
cannot be linked strictly to economic performance.
In the case of commercial justice, France is on the side of a less
integrated and less State-governed institution, allowing for more
flexibility, speed and arbitration (despite unification by the code and
jurisprudence): requires an adaptation of the standard rationale for
the law and growth argument.