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Law, Growth, and Social Justice March 14, 2008

Posted by davidzweig in economics.
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The World Bank has recently looked at three studies that seek to correlate GDP-per-person and the rule of law. If we suspend any skepticism about the metrics — the validity of GDP and the subjective weighting of “rule of law”– the scatter plot reveals a reasonably high co-efficient of correlation between the two.

Outside of statistics class, that means: “The higher one factor climbs, the higher the other climbs. The lower one gets, the lower the other gets.”

Reporting on this study, The Economist speculated about the correlation between rule of law and a different factor: GDP growth. It cited China (cracking down and cracking skulls in Tibet today) as a troubling example of a less clear correlation. That relationship is indeed a much more interesting question to ponder.

What price growth? Capitalism rests in part upon the bulwark of low-cost production, a corollary to the law of market efficiency. Low cost almost always means low income. In our times, this issue, along with environmental despoilation, has combusted the globalization debate. Meanwhile, the proliferation of mass communication has enlightened hitherto benighted labor forces about the possibility of sharing now in the material spoils of their labor.

In a finite world with only so much wealth, the rule of law has always adjudicated the distribution of the benefits of all that growth under any system–Chinese, American, Danish, or Aboriginal. This is nothing new. As the Industrial Revolution accumulated untold new wealth, and Karl Marx set pen to paper in the British Museum, society had been struggling with these same issues of distribution and growth. Almost any historical anthropologist would agree that in almost all times and cultures, except in rare times of abrupt readjustment (e.g., 1789, 1848, 1917, 1989), the “rule of law” normally upholds the prerogatives of those who regulate the engines of growth.

What may be the implications for the present day and the next generation or two? Transparency, speed, and scarcity are three major trends that will distinguish this new century. Only recently, many millions of Chinese have just begun to swarm to the malls at Christmas time, just as some Americans begin to worry about the sustainability, energy intensivity, and the prodigal waste of the whole gift-giving orgy that underpins at least 5% of our GDP. How quickly these two “consciousnesses” developed! As the planet groans to support 6.6 billion souls, the distribution of the fruits of growth will increase pressure on the rule of law.

The Economist says “The better a government upholds the rule of law, the more likely its people are to be richer.” In 2008 we are actually seeing an economic glacier move before our eyes. As wealth shifts from the U.S. to other nations, we will also witness the latest unfolding of the answer to that same ancient riddle: if the rule of law promotes a broader distribution of wealth, will the person at the median be wealthier?

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