Legal institutions: Whose laws do we follow?

Whatever our religion, social background, and personal values, the one system we’re all subject to is “the law”. Not everyone agrees on laws - gun laws, drug laws, and citizenship laws are extremely controversial, to name a few. But, by and large, laws are supposed to be the closest thing to a neutral set of rules for everyone to live by. Economies are shaped by the legal systems they’re in - what can and can’t be traded, what is and isn’t fair, what can and can’t be owned.

One legal institution that’s really key to determining how the economy works is property rights. Without private property, widespread markets couldn’t exist — how would we trade things if we couldn’t own them?

The state has a particularly powerful role to play here in that the state can both enforce property rights, and take them away.² If their legal systems allow it, states can confiscate belongings from the private sector if it thinks they’re not being used in a socially responsible way. Corruption happens when a state (or any other individual actor) abuses its entrusted power for private gain. If legal institutions aren’t strong enough, the state can get away with it.

There’s loads of other examples of legal institutions that shape the economy. Anything from consumer protection laws, regulating what can and can’t be sold, to labour laws, regulating the age at which it is acceptable for a child to work, form the backdrop of how our economies function.

The question is to what extent legal institutions help, or hinder, a well-functioning economy. Development economists sometimes split them into development-enhancing or market-enhancing institutions to try and work this out.³ For example, a law which forbids child labour could be seen as development-enhancing on the grounds that a developed society shouldn’t allow children to work below a certain age. But it’s also market-constraining, because it’s controlling what can and can’t be traded from above.