Libertarianism is defined both by its foundations and by the institutions to which it typically is said to give rise. In this paper it is argued that while a system of economic competition can be defended on consequentialist grounds, such arguments are not available to deontological libertarians. Thus it is concluded that deontological libertarians cannot provide a foundation for the type of economic system they favour.
Volume 92
Contract Theory On and Off the Grid
In The Role of Formal Contract Law and Enforcement in Economic Development, Michael Trebilcock and Jing Leng examine the importance of a formal institution of contract law to economic growth. Trebilcock and Leng find the evidence in support of the hypothesis that a formal contract institution promotes economic growth inconclusive, but they do not reject the hypothesis. Although the role of formal contract law in economic growth can be considered as a purely academic matter, the significance of the topic comes from its connection to the question whether developing countries should adopt or strengthen formal contract institutions to enhance growth.
Even if formal contract law does play an important role in development, however, that might not be sufficient to justify state enforcement of private agreements. The legitimacy of an institution of contract belongs to the domain of contract theory. This Essay considers whether contemporary theories of contract are relevant to legal systems without an established tradition of Western legal institutions. The Essay reviews contract theories of Peter Benson, Melvin Eisenberg, Charles Fried, James Gordley, Thomas Scanlon and Michael Trebilcock. The Essay concludes that even if a formal institution of contract does have the potential to promote growth, these contemporary theories tell us very little about the proper content, desirability, or legitimacy of contract law in societies other than those in which Western private law institutions are already well established.
The Role of Formal Contract Law and Enforcement in Economic Development
The primary inquiry of this Essay is consequentialist: whether the existence of a formal contract law and enforcement regime significantly contributes to economic growth in developing countries. As the Essay elaborates, two different hypotheses emerge from the literature. One takes the view that strong formal contract law and enforcement mechanisms are indispensable to economic development, while the other contends that much economic development is realizable through informal contracting mechanisms. To test the validity of these two hypotheses, we provide a critical review of existing literature, including an investigation of two cases of great contemporary development significance: the so-called “China Enigma” and the “East Asian Miracle.” In both of these cases, high rates of economic growth have been achieved, often in the absence of strong formal contract law and enforcement regimes.
We argue that at low levels of economic development informal contract enforcement mechanisms may be reasonably good substitutes for formal contract enforcement mechanisms, but become increasingly imperfect substitutes at higher levels of economic development involving large, long-lived, highly asset-specific investments or increasingly complex traded goods and services, especially outside repeated exchange relationships. Thus, the mix of mechanisms that are likely to ensure both a fair and efficient domain of contracting in developing countries is a function of highly context-specific factors that defy easy generalizations. We conclude that on one of the central questions in contemporary development debates – do good institutions cause growth, or does growth cause good institutions? – the answer, in the context of contract enforcement mechanisms, is a nuanced one.