Solomon’s Knot: How Law can End the Poverty of Nations, Robert D Cooter and Hans-Bernd Schafer, Princeton University Press, Pp 325, £ 24.95
A developing country which is blessed with enterprising entrepreneurs witnesses a cascade of innovations in markets and organisations, leading to rise in productivity, wages and profits. These innovations combine ideas and capital in bold ventures with big risk and opportunities involved.
The theme of this book is that sustained growth in developing countries occurs through innovations in markets and organisations by entrepreneurs; developing innovations poses a problem of trust between innovators with ideas and investors with capital where the best solutions require law. Sustained growth occurs through business ventures that innovate. Launching a venture becomes an issue of trust between innovators of new ideas and financiers with capital. To create trust, an effective legal framework ensures that the creators of wealth can keep much of it, that the people can commit to keeping their promises and entrepreneurs can enter most lines of business and choose their firm’s organisation from a menu of legal templates. Property, contracts and corporate law provide the legal framework to overcome the distrust and launch innovative business ventures.
In developing countries, what happens is that the state tends to feel that deregulations will lead to disarray and violence, but this is not so. Economic freedom based on a legal framework for markets by creating effective property, contract and corporate law and repealing of unnecessary regulations help to release the energy of entrepreneurs and allowing innovations to take its creative path. Each innovation creates business secrets and private information brings profits to the innovator and the “innovator’s profits return to ordinary.” In the end, when the innovation disseminates, the nation is more productive and wealthy and the stage is set for the next innovation. Here the state has to play a proactive role by supplying security, infrastructure and town planning involving roads, electricity, education, research facilities, environmental protection and removal of unemployment, diseases, etc. The increase in tax returns due to economic growth should be diverted for the uplift of the poor who lag behind.
Wealth becomes a means and not an end, that is, for securing happiness, beauty, love, knowledge, self-fulfilment, etc. The ends are education, recreation, self-growth, health through wealth. Many people use wealth on resources that defeat their own ends, like they buy gold or too much of one thing which gives only transient satisfaction; craving for more soon arises.
This book stresses the importance of the division of intellectual labour between making wealth and spending it. It deals with how a nation can get wealthy; not the uses it should make of its wealth.
Can democracy lead to economic growth? Not necessarily, because democracy can cause political instability, disrupt the economy by weakening private and business law. In such circumstances any dictator can increase economic growth through increase in political stability, as happened in Chile after 1973 when General Pinochet overthrew the democratically elected socialist President, Allende. Even South Korea and Taiwan showed high rates of growth under dictatorship. This growth tends to extend even if the country undergoes transition to democracy.
The author is of the view that if most people appreciated that 2 per cent growth for a country increases wealth seven times and 10 per cent increases wealth by about 14,000 times, “their desire to make laws for growth would be irresistible.”
The book provides adequate food for thought for economists and planners.
(Princeton University Press, 41, William Street, Princeton, New Jersey, 08540; press.princeton.edu)