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51 Am. J. Comp. L. 89 (2003)
Economic Development and the Rights Hypothesis: The China Problem

handle is hein.journals/amcomp51 and id is 101 raw text is: DONALD C. CLARKE

Economic Development and the Rights Hypothesis:
The China Problem
An important school of thought in institutional economics holds
that economic growth requires a legal order offering stable and pre-
dictable rights of property and contract because the absence of such
rights discourages investment and specialization. In general, the le-
gal order described by this school is something along the lines of the
legal systems of the developed countries of the West (excluding Ja-
pan, which is rarely discussed). I will call this proposition the Rights
Hypothesis. Without the security of expectations offered by such a
legal order, according to the Rights Hypothesis, the risks of a great
number of otherwise beneficial transactions far outweigh their ex-
pected return, and as a result such transactions simply do not occur.
Society is mired in an economy of short-term deals between actors
bound by non-legal ties such as family solidarity which by their na-
ture cannot bind large numbers of strangers.'
The best known discussion of the relationship between legal in-
stitutions and the economy is, of course, Max Weber's.2 A classic
Weberian formulation of the role of legal institutions in the economy
states: The universal predominance of the market consociation re-
quires . . . a legal system the functioning of which is calculable in
accordance with rational rules.'3 (As will be shown later, this is not
exactly the Rights Hypothesis in its most ambitious form.) The law
and development movement in the 1960s produced a great deal of
literature advancing the view that through institutions such as con-
tract and private property rights, modern law promotes the develop-
DONALD C. CLARKE is Professor of Law at the University of Washington School of
1. See Knack & Keefer, Institutions and Economic Performance: Cross-Country
Tests Using Alternative Institutional Measures, 7 Econ. & Pol. 207, 210-11 (1995).
2. See generally, Max Weber on Law in Economy and Society (Max Rheinstein
ed., 1954); Trubek, Max Weber on Law and the Rise of Capitalism, 1972 Wisc. L.
Rev. 720 (1972).
3. Max Weber on Law in Economy and Society, supra n. 2 (emphasis in original).
See also Max Weber, The Protestant Ethic and the Spirit of Capitalism 25 (Talcott
Parsons trans., 1958) ([Mlodern rational capitalism has need, not only of the techni-
cal means of production, but of a calculable legal system and of administration in
terms of formal rules.).

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