《法律与金融》课程教学资源（阅读文献）Legal Origins, Politics, and Modern Stock Markets

INTRODUCTION I CONSIDERING LEGAL ORIGINS A The Classic Differences B Legal Origins and Financial Progress i Protecting M inority Stockholders via Fiduciary Duties 2 Overregulating Financial M arkets C The Differences Erode D Can Legal Origin Anchor Law as the Primary Cause? II STATE POWER AND LEGAL ORIGIN IN THE TWENTIETH CENTURY A The Rise of the Regulatory State in the Twentieth Century B The Power of the State i A Timeline of State Power in the Twentieth Century 2 Timelines of Government Budgets, Government Transfers, and Financial M arkets 3 Regulating Financial and Labor M arkets 4 Instruments and Power C Which System Regulates Securities M arkets M ore? i Regulatory Budgets 2 T he S E C 4 II REEXAMINING THE DATA: DO POLITICAL ECONOMY DIFFERENCES BETTER EXPLAIN FINANCIAL DIFFERENCES? A Reexamining Legal Origins as Predicting Ownership Separation in the W ealthy W est i Corporate Law, Legal Origin, and Legislative Policy 2 The World W ars 3 Invasions and Military Occupation: The Tw

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LEGAL ORIGINS, POLITICS, AND MODERN STOCK MARKETS Mark J. Roe TABLE OF CONTENTS INTRODUCTION ............................................................................................................................ 462 I. CONSIDERING LEGAL ORIGINS ........................................................................................... 468 A. The Classic Differences ........................................................................................................ 469 B. Legal Origins and Financial Progress ................................................................................ 470 i. Protecting M inority Stockholders via Fiduciary Duties ........................................ 471 2. Overregulating Financial M arkets ................................................................................ 473 C. The Differences Erode ......................................................................................................... 475 D. Can Legal Origin Anchor Law as the Primary Cause? ............................................... 480 II. STATE POWER AND LEGAL ORIGIN IN THE TWENTIETH CENTURY ......................... 482 A. The Rise of the Regulatory State in the Twentieth Century ............................................ 484 B. The Power of the State ........................................................................................................ 485 i. A Timeline of State Power in the Twentieth Century ................................................. 486 2. Timelines of Government Budgets, Government Transfers, and Financial M arkets ......................................................................................................... 487 3. Regulating Financial and Labor M arkets .................................................................... 488 4. Instruments and Power .................................................................................................. 491 C. Which System Regulates Securities M arkets M ore? ........................................................ 491 i. Regulatory Budgets ......................................................................................................... 491 2. T he S E C ........................................................................................................................... 4 93 II. REEXAMINING THE DATA: DO POLITICAL ECONOMY DIFFERENCES BETTER EXPLAIN FINANCIAL DIFFERENCES? ............................................................ 494 A. Reexamining Legal Origins as Predicting Ownership Separation in the W ealthy W est ........................................................................................................................ 495 i. Corporate Law, Legal Origin, and Legislative Policy ................................................. 495 2. The World W ars ............................................................................................................. 498 3. Invasions and Military Occupation: The Twentieth Century's Centers of Institutional Destruction ........................................................................................... 499 4. Fighting Communism After the World Wars; Ignoring Capital Markets ................. 501 B. Politics-Based Theories for the Developed World ............................................................ 502 i. Left-Right Labor Politics ................................................................................................ 502 2. Incumbent Capital Owners ............................................................................................ 505 3. Trade Openness ............................................................................................................... 505 4. M edian V oter ................................................................................................................... 505 5. Core Similarities ..................................................................................................... 5o6 6. Britain and Switzerland ........................................................................................... 508 C. Reexamining Method: Instrumental Variables and Iterative Development .............. 511 460

LEGAL ORIGINS, POLITICS, AND MODERN STOCK MARKETS Mark J. Roe* Legal origin - civil vs. common law - is said in much modern economic work to determine the strength of financial markets and the structure of corporate ownership, even in the world's richer nations. The main means are thought to lie in how investor protection and property protection connect to civil and common law legal origin. But, I show here, although stockholder protection, property rights, and their supporting legal institutions are quite important, legal origin is not their foundation. Modern politics is an alternative explanation for divergent ownership structures and the differing depths of securities markets in the world's richer nations. Some legislatures respect property and stock markets, instructing their regulators to promote financial markets; some do not. Brute facts of the twentieth century - the total devastation of many key nations, wrecking many of their prior institutions - predict modern postwar financial markets' strength well and tie closely to postwar divergences in politics and policies in the world's richest nations. Nearly every core civil law nation suffered military invasion and occupation in the twentieth century - the kinds of systemic shocks that destroy even strong institutions - while no core common law nation collapsed under that kind of catastrophe. The interests and ideologies that thereafter dominated in the world's richest nations and those nations' basic economic tasks (such as postwar reconstruction for many) varied over the last half century, and these differences in politics and tasks made one collection of the world's richer nations amenable to stock markets and another indifferent or antagonistic. These political economy ideas are better positioned than legal origin concepts to explain the differing importance of financial markets in the wealthy West. INTRODUCTION Do legal origins - common law vs. civil law - largely determine whether capital markets develop strongly? Many finance economists have concluded, in an explosion of influential articles in the past dec- * David Berg Professor of Law, Harvard Law School. Thanks for comments and, in four cases, research assistance on the data go to Michael Abramowicz, Marcelo Barbosa, Thorsten Beck, Robert Clark, John Coates, Christine Desan, Simeon Djankov, Charles Donahue, Antonio Duarte, Mel Eisenberg, Allen Ferrell, Martin Gelter, Patrick Glenn, Peter Gourevitch, Claudio Haddad, Peter H6gfeldt, Howell Jackson, Rafael La Porta, Karl Lins, Florencio Lopez-de-Silanes, Tamara Lothian, Bertrand du Marais, Dennis Mueller, Richard Pierce, John Pottow, Manoj Ramachandran, Mark Ramseyer, Stefano Rossi, Alvaro Santos, Frederick Schauer, Wendy Sheu, Bryan Shinn, Andrei Shleifer, H61ger Spamann, Lynn Stout, Guhan Subramanian, Marcelo Trindade, Detlev Vagts, Agata Waclawik, Luigi Zingales, and those at workshops at the Columbia, Dalhousie, Duke, George Washington, Georgetown, Harvard, NYU, Pennsylvania, Sao Paulo, and Vanderbilt law schools, at the Amsterdam, Copenhagen, Harvard, IBMEC, and Stockholm business schools, and at the World Bank. Thanks for research support go to Harvard Law School's John M. Olin Center for Law, Economics, and Business

20061 WAR VS.LEGAL ORIGIN 463 ade,that legal origin is indeed central.Common law institutions ef- fectively protect outside shareholders,it is said;civil law ones do not. This differing legal capacity to protect outside shareholders explains why some rich nations'capital markets are strong while others'are weak The developing world and inter natioma aencies are to haransplanting the correct legal cod (i.e.,the common law)will enhance economic development." new legal origins view has in key circles elbowed aside the view that (1)economic function propels stock markets:stock markets develop when technology demands large enterprises and capital must be gath- ered fr any so and th proce works when (2)polic ymaker or private players bu ld the institutions that support stock markets an (3)have enough political support that the polity does not attack fi- nance.The last element-that national politics can confine policy- makers'institution-building-has increasingly found theoretical sup- port and evidence.Here I assess which approach-legal origin or olitical e the better bet for uture research and shov olitical and policy th or the richer natic s tie into nations experienced the turmoil of the early twentieth century. Differences in corporate finance in the wealthy west in the second half of the twentieth century could well be due more to the differing consequences of the earlier World Wars than to subtle differences bet civil and co n la The re's a po owerful normative assessm ent right Many policymakers and some academics see strong financial markets as propelling economic development.3 Thus,if we better understand what makes for strong financial markets,we can better understand how to engineer economic growth,or at least how to provide a neces- sary tool. Important policymakers at international development agen a Fl Andrei shleifer robert w Vishnye.1o6 1.PoL.ECoN.I()and follow-on articles.ombte authors,many other repre sentative sample infra notes 2,4-7.For important con traDnenPijean-Francois Richard,m gality,and the Transplant Efect,47 EUR.ECON.REV. 165,166(2oo3)(summ zing and ERMEDIATION &C 5eea0K055 See,6.g,THE STATE,THE FINANCIAL SYSTEMS AND ECONOMIC MODERNIZATION (Richa 1999i Beneficial? org/papers/wpdf he financial system is like the brain of the ecor ing mechanism that allc tes capital to building factories,hou an roa No work et C IOAN ROBINSON.THE RATE OF INTER- EST AND OTHER ESSAYS 86(1952)("[W]here enterprise leads finance follows.)

WAR VS. LEGAL ORIGIN ade, that legal origin is indeed central.' Common law institutions effectively protect outside shareholders, it is said; civil law ones do not. This differing legal capacity to protect outside shareholders explains why some rich nations' capital markets are strong while others' are weak. The stakes aren't just academic. The developing world and international agencies are told that "transplanting the correct legal code (i.e., the common law) will enhance economic development."2 This new legal origins view has in key circles elbowed aside the view that (i) economic function propels stock markets: stock markets develop when technology demands large enterprises and capital must be gathered from many sources, and this process works when (2) policymakers or private players build the institutions that support stock markets and (3) have enough political support that the polity does not attack finance. The last element - that national politics can confine policymakers' institution-building - has increasingly found theoretical support and evidence. Here I assess which approach - legal origin or political economy - is the better bet for future research and show how political and policy theories for the richer nations tie into systematic differences in how those nations experienced the turmoil of the early twentieth century. Differences in corporate finance in the wealthy West in the second half of the twentieth century could well be due more to the differing consequences of the earlier World Wars than to subtle differences between civil and common law. There's a powerful normative reason to get this assessment right. Many policymakers and some academics see strong financial markets as propelling economic development.3 Thus, if we better understand what makes for strong financial markets, we can better understand how to engineer economic growth, or at least how to provide a necessary tool. Important policymakers at international development agen- 1 See, for example, Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer & Robert W. Vishny, Law and Finance, io6 J. POL. ECON. 1113 (1998), and follow-on articles, some by these authors, many by others. I cite a representative sample infra notes 2, 4-7. For important contrary views, see infra section III.B, pp. 502-1 1. 2 Daniel Berkowitz, Katharina Pistor & Jean-Francois Richard, Economic Development, Legality, and the Transplant Effect, 47 EUR. ECON. REV. 165, 166 (2003) (summarizing and criticizing the legal origins theory); see also Ross Levine, Law, Finance, and Economic Growth, 8 J. FIN. INTERMEDIATION 8 (999). 3 See, e.g., THE STATE, THE FINANCIAL SYSTEMS AND ECONOMIC MODERNIZATION (Richard Sylla et al. eds., 1999); Frederic S. Mishkin, Is Financial Globalization Beneficial? 3 (Nat'l Bureau of Econ. Research, Working Paper No. 11891, 2005), available at http://www.nber. org/papers/win8 9 s.pdf ("[T]he financial system is like the brain of the economy: it is a coordinating mechanism that allocates capital to building factories, houses and roads .... No work ethic can compensate for a misallocation of capital."). The contrary idea, that industrial structure calls forth finance, is associated with Joan Robinson. See JOAN ROBINSON, THE RATE OF INTEREST AND OTHER ESSAYS 86 (952) ("[W]here enterprise leads finance follows."). 2006]

464 HARVARD LAW REVIEW [Vol.120:460 cies such as the World Bank-staffed with economists trained under the new thinking about legal origins'centrality-denigrate civil law- style institution-building,such as ulation codification,and public enforcement Yet,by accepting the academic thinking positing th power of traditional common law tools,they may miss other needed tools not traditionally associated with the common law.And if finan- cial markets succeed only where there's a supportive polity,then build- ing the legal structures in the midst of a hostile polity would waste re- arces and risk disappointment Development dollars would be better spent elsewhere This is not to say that focusing on corporate law isn't important.It is.But it is important in the right context.The first-order condition is a polity that supports capital markets.It's only then that law becomes important and getting it wrong becomes costly.Getting corporate law right in the Un ted States important and worth of the attention receives. It is important here because the Ame ican polity supports capital markets.In other nations even wealthy ones like France, Germany,and Italy-the polity did not support capital markets in the immediate postwar decades.When such a polity changes and be. comes to markets,especially capital markets,po can make -frien dly rules fall into ace,and ithe of the two major legal origins s would much impede those rules from being effica- clous. Legal origin doesn't stop a nation from developing the institu- tions,legal and otherwise,that capital markets need.When we see a nation that doesn't do so,it's not that its legal origin bars it.Some- thing else is in play. 者米来浓 Thus,the domain here is the wealthy West,and the problem to ex- plain is why well-developed financial markets prosper in some nations and not in others.The background idea-which I take for granted but some might question is that greater financial possibilities for firms m ake growth easier If businesses c annot raise outside capital,that inability hinders economic development. So we must first understand the legal origins proponents' views How could legal origin affect finance?One way,it's been said,is that common law.by using fiduciary duties.better protects distant inves- tors than civil law does.This common law specialty can.in the hands ba http:/enricapitant.org IMG/pdf/Les_droits_de_tradition_civiliste lthe Worl Bao.p e then

HARVARD LAW REVIEW cies such as the World Bank - staffed with economists trained under the new thinking about legal origins' centrality4 - denigrate civil lawstyle institution-building, such as regulation, codification, and public enforcement. Yet, by accepting the academic thinking positing the power of traditional common law tools, they may miss other needed tools not traditionally associated with the common law. And if financial markets succeed only where there's a supportive polity, then building the legal structures in the midst of a hostile polity would waste resources and risk disappointment. Development dollars would be better spent elsewhere. This is not to say that focusing on corporate law isn't important. It is. But it is important in the right context. The first-order condition is a polity that supports capital markets. It's only then that law becomes important and getting it wrong becomes costly. Getting corporate law right in the United States is important and worthy of the attention it receives. It is important here because the American polity supports capital markets. In other nations - even wealthy ones like France, Germany, and Italy - the polity did not support capital markets in the immediate postwar decades. When such a polity changes and becomes receptive to markets, especially capital markets, policymakers can make finance-friendly rules fall into place, and neither of the two major legal origins would much impede those rules from being efficacious. Legal origin doesn't stop a nation from developing the institutions, legal and otherwise, that capital markets need. When we see a nation that doesn't do so, it's not that its legal origin bars it. Something else is in play. Thus, the domain here is the wealthy West, and the problem to explain is why well-developed financial markets prosper in some nations and not in others. The background idea - which I take for granted but some might question - is that greater financial possibilities for firms make economic growth easier. If businesses cannot raise outside capital, that inability hinders economic development. So we must first understand the legal origins proponents' views. How could legal origin affect finance? One way, it's been said, is that common law, by using fiduciary duties, better protects distant investors than civil law does. This common law specialty can, in the hands 4 Cf. AsS'N HENRI CAPITANT DES AMIS DE LA CULTURE JURIDIQUE FRANCAIS, LES DROITS DE TRADITION CIVILISTE EN QUESTION: APROPOS DES RAPPORTS DOING BUSINESS DE LA BANQUE MONDIALE 14-15 (2oo6), available at http://henricapitant.org/ IMG/pdf/Les-droitsdetradition-civiliste-en question.pdf (describing the influence of legal origins thinking, especially in the World Bank). [VOL. 120:46o

20061 WAR VS.LEGAL ORIGIN 465 of savvy judges and juries,be central,early thinking on the means of prote ran Further,later thinking runs,civil law syster s ove regulate the economy and stock markets,thereby stunting both,while common law institutions respect markets and private contracting Getting either legal channel-protecting investors or respecting mar- kets- wrong stymies financial development.The handicap might be mountable but is nearly hardwired into all too many legal system ory rur The rmative i mplic. cation is that dev ing nation should seek those tools that work like marke t-oriented private law. suits decided by judges using common law-style fiduciary duties- to build markets.And they conversely need to avoid those tools that do not work well-like too much rule-based regulation. In other words,the original creation of leg gal systems centuries ago created legal and decisionm continu e toda to fa cilitate or impede aking structures market outcomes The civil law by relying on codes,narrow judicial intervention,high regulation,and market direc- tives instead of market solutions impedes financial markets The common law by relving on adaptive iudges.wide iudicial discre tion,light regulation,and private contracting facilitates financial market A corolla y,often unstated. that th se tendenc es to codify or not,to use a wide-ranging judicial style or not,to regulate intensely or not,and to prefer markets or not do not change easily once a legal system is in place.Some characteristics might change at the edges,the theory might concede,but not enough to make a big financial differ- ence These characteristics of the two major legal systems- seen to persist to this the legal orig s the e strong eno ugh to explain financial differer ces around the world. Equally importantly, the theory views later influences on governmental structure such as modern revolutions,civil wars,new constitutions,and deep social reac- tions to economic and wartime devastation as paling in conse quence to the structural predisposition wired into legal origin Qualitative nalvsis argu is at ory. It's not that odds with the legal origins the fiduciary uties are unimportant but ha common law systems use regulators to protect minority stockholders There are institutional substitutes.And,although American judges in the nineteenth century restrained legislatures on economic matters,the modern era is one not of iudicial restraints on economic regulation.but is instead one of legislative primac We live in an age of statutes,as been Commor ture regulate;civil law nations'legislatures regulate.How legislatures choose to regulate re flects legislative policy decisions,voter preferences,and surely interest group power far more than it results from faded historical channels of legal origins that date back to Rome's Empire,the Middle Ages,and Napoleon's Code Alth n many modern financial outcome eem to correlate with legal origin,we know correlation is not causation.For one thing,the

WAR VS. LEGAL ORIGIN of savvy judges and juries, be central, early thinking on the means of protection ran. Further, later thinking runs, civil law systems overregulate the economy and stock markets, thereby stunting both, while common law institutions respect markets and private contracting. Getting either legal channel - protecting investors or respecting markets - wrong stymies financial development. The handicap might be surmountable but is nearly hardwired into all too many legal systems, the theory runs. The normative implication is that developing nations should seek those tools that work - like market-oriented private lawsuits decided by judges using common law-style fiduciary duties - to build markets. And they conversely need to avoid those tools that do not work well - like too much rule-based regulation. In other words, the original creation of legal systems centuries ago created legal and decisionmaking structures that continue today to facilitate or impede market outcomes. The civil law - by relying on codes, narrow judicial intervention, high regulation, and market directives instead of market solutions - impedes financial markets. The common law - by relying on adaptive judges, wide judicial discretion, light regulation, and private contracting - facilitates financial markets. A corollary, often unstated, is that these tendencies to codify or not, to use a wide-ranging judicial style or not, to regulate intensely or not, and to prefer markets or not do not change easily once a legal system is in place. Some characteristics might change at the edges, the theory might concede, but not enough to make a big financial difference. These characteristics of the two major legal systems - seen to persist to this day in the legal origins theory - are strong enough to explain financial differences around the world. Equally importantly, the theory views later influences on governmental structure - such as modern revolutions, civil wars, new constitutions, and deep social reactions to economic and wartime devastation - as paling in consequence to the structural predisposition wired into legal origin. Qualitative analysis, I argue, is at odds with the legal origins theory. It's not that fiduciary duties are unimportant, but that even common law systems use regulators to protect minority stockholders. There are institutional substitutes. And, although American judges in the nineteenth century restrained legislatures on economic matters, the modern era is one not of judicial restraints on economic regulation, but is instead one of legislative primacy. We live in an age of statutes, as has been said. Common law nations' legislatures regulate; civil law nations' legislatures regulate. How legislatures choose to regulate reflects legislative policy decisions, voter preferences, and surely interest group power far more than it results from faded historical channels of legal origins that date back to Rome's Empire, the Middle Ages, and Napoleon's Code. Although many modern financial outcomes seem to correlate with legal origin, we know correlation is not causation. For one thing, the 2oo6]

466 HARVARD LAW REVIEW [Vol.120:460 causative links offered thus far in legal origins theory are weak.For another,legal origin in the wealthy West also correlates with other his- torical characteristics,such as how Western nations experienced the early twentieth century's wars and disruptions t mo odern history had powerful political economy nsequence that deeply affecte markets,financial and otherwise.To buttress this alternative explana- tion,I use the proponents'method of quantifying national differences to show that twentieth-century history and politics explain financial differences as well as legal origin does and qualitatively link more strongly to oute comes thap do or gin In ons where legal origir originated,policy varia the domain of eg slatures and regula tors -strongly predict basic financial institutional facts. Those policy differences seem more attuned to differences in postwar politics than to distant differences in legal origin.For example,a risk-averse polity or one preoccupied with left-right conflict would not rebuild strong fi. with alac rity And re mbe that for the first deca after World War II,fighting communism was central to the political agenda in much of Western Europe and East Asia.This anti communist agenda alone strongly affected Western European and East Asian nations'policies toward capital markets through the 198os. n fact,the differential impact of the World Wars and civil wars of the ugly early en tieth century generally pa cks a much planator power as legal origins in predicting the depth of late-twentieth-century financial markets in the wealthy West. I describe in Part I the theories that link legal origin to financial re sults and bring to bear r the legal acad my iews of the classical dif ferences between civil and common law. First,common law systems simply regulate less,it's said;they prefer market solutions and private contracting to centralized,statist regulation.Second,the common law judge better protects outside financiers,especially minority stockhold- ere with common law-based fiduciary duties.The civil law judge is in contrast hamstrung by rigid code because leg gal c 1 preceded modern financial outcomes,markets could not have deter mined origin.Because common law nations protect investors better than civil law nations,origin seems in the theory to cause deep finan- cial markets.But the correlation here seems more coincidental than causal.The qualitative links between origins and investor protection seem weak,and witho ut those link linchpin in the e theory is re moved,suggesting that a strong causal connection vil law and weak financial markets just may not exist Many in the legal academy see the classical differences between civil and common law as not very important in modern economies,whose policy needs induce nations everywhere to regulate and codify. Moreover.while common

HARVARD LAW REVIEW causative links offered thus far in legal origins theory are weak. For another, legal origin in the wealthy West also correlates with other historical characteristics, such as how Western nations experienced the early twentieth century's wars and disruptions. That modern history had powerful political economy consequences that deeply affected markets, financial and otherwise. To buttress this alternative explanation, I use the proponents' method of quantifying national differences to show that twentieth-century history and politics explain financial differences as well as legal origin does and qualitatively link more strongly to outcomes than do origins. In nations where legal origin originated, policy variables - the domain of legislatures and regulators - strongly predict basic financial institutional facts. Those policy differences seem more attuned to differences in postwar politics than to distant differences in legal origin. For example, a risk-averse polity or one preoccupied with left-right conflict would not rebuild strong financial markets with alacrity. And remember that for the first decades after World War II, fighting communism was central to the domestic political agenda in much of Western Europe and East Asia. This anticommunist agenda alone strongly affected Western European and East Asian nations' policies toward capital markets through the i98os. In fact, the differential impact of the World Wars and civil wars of the ugly early twentieth century generally packs as much explanatory power as legal origins in predicting the depth of late-twentieth-century financial markets in the wealthy West. I describe in Part I the theories that link legal origin to financial results and bring to bear the legal academy's views of the classical differences between civil and common law. First, common law systems simply regulate less, it's said; they prefer market solutions and private contracting to centralized, statist regulation. Second, the common law judge better protects outside financiers, especially minority stockholders, with common law-based fiduciary duties. The civil law judge is in contrast hamstrung by a rigid code. Third, because legal origin long preceded modern financial outcomes, markets could not have determined origin. Because common law nations protect investors better than civil law nations, origin seems in the theory to cause deep financial markets. But the correlation here seems more coincidental than causal. The qualitative links between origins and investor protection seem weak, and without those links a linchpin in the theory is removed, suggesting that a strong causal connection between civil law and weak financial markets just may not exist. Many in the legal academy see the classical differences between civil and common law as not very important in modern economies, whose policy needs induce nations everywhere to regulate and codify. Moreover, while common [VOL. 120:46o

2006 WAR VS.LEGAL ORIGIN 467 law's open-ended fiduciary duties have ex post strengths,civil law struct res can and do they're just not labeled as fidu open-ended,ex post in quires as well duties Common law systems just use them more. And much stockholder protection in common law na tions comes from ex ante regulation(think of the American Securities and Exchange Commission and the massive codification of the securi- ties rules through which the SEC works),which is not at the core of common law's institutional I advanta Again,the idea isn't that law is unimportant but that once the e firs order condition of politi al sup port for capital markets is reached,either origin can create the legal institutions that financial markets need. In Part II,I describe the twentieth-century shift in institutions around the world.Regulation is everywhere;the legislature is su- preme. The c law judge's import in economic faded relative t that of the e regulato It's not United States use both securities regulators and fiduciary duties bu that we regulate financial markets more intensely than our civil law cousins do,as measured by regulatory budgets,personnel,and so on And we often build up market-protecting devices via regulation:the American securities code is dense specific,and detailed. The function sought prot cting outside investo thus multiple means,n K g the question not prima ly one o】 but of political will.The small legal structural differences that persist could readily be overcome by a determined polity. In Part III,I examine data.While legal origin predicts securities merke ength a simple emblematic legislative policy docs so just as ne should be skep otical of many nati on-by-nation re sion because here aren't enough relevan countri s to run a sophist cated statistical analysis,I nevertheless first examine the same set of twenty-seven nations whose financial differences proponents have said are driven by legal origin (and I then examine a larger set of coun tries).I show that the financial contrasts can be just as well explained by the relative destruction of the richer eco omies in the first half of the twentieth centur re de oye S0 ne survived A few prospered Those that suffered the most had weaker financia markets than the others in the ensuing decades,even after they had otherwise recovered economically from the earlier destruction. This correlation could be the basis for more compelling theories than distant legal origin,theories tied to modern political economy. rt IV,I mine alternative the ting fror odern politics. The pol approach looks at how political tions interact with preferences to create policy outcomes. In the wealthy West,some legislatures haven't wanted vibrant securities markets because their polities just would not support pro-market poli- cies.Post-World War II political issues -left-right labor politics trade barriers, the median voter in nations whose capital stock had

WAR VS. LEGAL ORIGIN law's open-ended fiduciary duties have ex post strengths, civil law structures can, and do, use open-ended, ex post inquires as well; they're just not labeled as fiduciary duties. Common law systems just use them more. And much stockholder protection in common law nations comes from ex ante regulation (think of the American Securities and Exchange Commission and the massive codification of the securities rules through which the SEC works), which is not at the core of common law's institutional advantage. Again, the idea isn't that law is unimportant but that once the first-order condition of political support for capital markets is reached, either origin can create the legal institutions that financial markets need. In Part II, I describe the twentieth-century shift in institutions around the world. Regulation is everywhere; the legislature is supreme. The common law judge's import in economic policymaking has faded relative to that of the regulator. It's not just that we in the United States use both securities regulators and fiduciary duties but that we regulate financial markets more intensely than our civil law cousins do, as measured by regulatory budgets, personnel, and so on. And we often build up market-protecting devices via regulation: the American securities code is dense, specific, and detailed. The function sought - protecting outside investors - thus can be achieved through multiple means, making the question not primarily one of legal tools but of political will. The small legal structural differences that persist could readily be overcome by a determined polity. In Part III, I examine data. While legal origin predicts securities market strength, a simple emblematic legislative policy does so just as well. While one should be skeptical of many nation-by-nation regressions because there aren't enough relevant countries to run a sophisticated statistical analysis, I nevertheless first examine the same set of twenty-seven nations whose financial differences proponents have said are driven by legal origin (and I then examine a larger set of countries). I show that the financial contrasts can be just as well explained by the relative destruction of the richer economies in the first half of the twentieth century. Some nations were destroyed; some survived. A few prospered. Those that suffered the most had weaker financial markets than the others in the ensuing decades, even after they had otherwise recovered economically from the earlier destruction. This correlation could be the basis for more compelling theories than distant legal origin, theories tied to modern political economy. In Part IV, I examine alternative theories emanating from modern politics. The political economy approach looks at how political institutions interact with preferences to create policy outcomes. In the wealthy West, some legislatures haven't wanted vibrant securities markets because their polities just would not support pro-market policies. Post-World War II political issues - left-right labor politics, trade barriers, the median voter in nations whose capital stock had 2oo6]

468 HARVARD LAW REVIEW [Vol.120:460 been destroyed-are more promising roads than legal origin for re- search seeking to explain financial outcomes. For example,nations fighting communism internally and externally and recall that this was the central agenda in Western Europe and East Asia in the dec- ades after World War II-had reason to protect labor markets tightly and to did so often regardles h governmen of-ce nter or right of-center ideology.A political economy approach is both simple be- cause politics is more vital than legal origin,and complex because tracing which political theory works best overall will not be easy. I then conclude,summarizing the four new issues I here bring to the table.First,a sustained analysis of the law-based literat ure gal origir comm n and civil law nations increa ngly us ing regulatory tools during the twentieth century. Second.the avail ability of the classical tools associated with each legal origin is less important than whether a nation wants to build up capital markets Third,political theories explain the differences in willingness to build up capital markets,with th olitical the ng to variat ion experienced the rs of the twentieth century.And the development agencies'reliance on common law's core tools may thus be misguided. L CONSIDERING LEGAL ORIGINS That an important intellectual movement attributes much to legal origin is not in doubt Even the titles of articles assert legal origins centrality:Why Does Legal Origin Matter?s Or just:Legal Origins. But could origin,which to many legal academics seems just to be a technical aspect of judicial style,determine the strength of securities markets? With so many authors contributing to this literature,it's hard and potentially unfair to summarize it. Early movers'views have evolved,emphasizing different institutional features than they did originally.Not all players sign onto every idea others espouse. But the idea that legal origin hardwires a national system in ways that are hard to overcome is out there and influential.Here I sur marize its major eleme 5 Thorsten Beck et al.,Law and Finance:Why Does Legal Origin Matter?,31 J.COMP. This is c f the 7 As said in an excellent r N.1193200 and Property Rights 3(Nat'l Bureau of Ecor orki "La Po de-Siper No rg/papers/.pd

HARVARD LAW REVIEW been destroyed - are more promising roads than legal origin for research seeking to explain financial outcomes. For example, nations fighting communism internally and externally - and recall that this was the central agenda in Western Europe and East Asia in the decades after World War II - had reason to protect labor markets tightly and to ignore their capital markets. They did so, often regardless of whether the government in power had a locally left-of-center or rightof-center ideology. A political economy approach is both simple because politics is more vital than legal origin, and complex because tracing which political theory works best overall will not be easy. I then conclude, summarizing the four new issues I here bring to the table. First, a sustained analysis of the law-based literature on legal origin shows both common and civil law nations' increasingly using regulatory tools during the twentieth century. Second, the availability of the classical tools associated with each legal origin is less important than whether a nation wants to build up capital markets. Third, political theories explain the differences in willingness to build up capital markets, with the political theories tying to variation in how nations experienced the first half of the twentieth century. And finally, the development agencies' reliance on common law's core tools may thus be misguided. I. CONSIDERING LEGAL ORIGINS That an important intellectual movement attributes much to legal origin is not in doubt. Even the titles of articles assert legal origins' centrality: Why Does Legal Origin Matter?5 Or just: Legal Origins.6 But could origin, which to many legal academics seems just to be a technical aspect of judicial style, determine the strength of securities markets? With so many authors contributing to this literature, it's hard - and potentially unfair - to summarize it. Early movers' views have evolved, emphasizing different institutional features than they did originally. Not all players sign onto every idea others espouse. But the idea that legal origin hardwires a national system in ways that are hard to overcome is out there and influential. Here I summarize its major elements.7 5 Thorsten Beck et al., Law and Finance: Why Does Legal Origin Matter?, 31 J. COMP. ECON. 653 (2003). This is one of the important articles associated with the World Bank. 6 Edward L. Glaeser & Andrei Shleifer, Legal Origins, 117 Q.J. ECON. 1193 (2002). 7 As said in an excellent recapitulation: "[D]ifferences in legal tradition cause differences in property rights." Ross Levine, Law, Endowments, and Property Rights 3 (Nat'l Bureau of Econ. Research, Working Paper No. T1502, 2005), available at http://www.nber.org/papers/wII5o2.pdf. "La Porta, Lopez-de-Silanes, Shleifer, and Vishny... argue that. . . legal origin ... explains crosscountry differences in financial development." Menzie D. Chinn & Hiro Ito, What Matters for [Vol. 120:46o

20061 WAR VS LEGAL ORIGIN 46g A.The Classic Differences First,what have legal scholars seen to be the classic,core differ- ences between legal origins? The civil law codifies The Emperor Justinian had Roman law compiled and, when the compilation was completed in the year 533 barred future decisionmakers from referring to the work of judges and from citing authorities other than his Code.All law was reflected in his Corpus Juris Civilis,all else extraneous.s Napoleon,seeking to control the judges in post-revolutionary France as the revolutionaries had sought in I7 79r by requiring ju s,if the legislative text was to ask the legislature its mear promulgated Theow the ther hand.r judges decide cases and precedents evolve,without the judges'refer- ring to a central code.A code centralizes authority;common law judges disperse it. Civil law and common law judges read the text of the governing code differently,it is sa d Ci ivil law judge read its plair mea the text is incomplete,it is said,a class ivil law judge doe not fill in gaps where a common law judge would.10 Hence,the civil law judge deters insider corporate schemes ineptly,while the wily common law judge adapts and stops insider thievery.Common law judges follow precedent thereby building a cohesive system of law from the ground up. Civil law judge in contrast,do not follo 0 n deci do not write down their reasoning,and do not tightly tie thei sions to the facts of the case. The civil law tends toward deductive thinking-"to making plans, to regulating things in advance. to drawing up rules and systema- tizing them."In contrast,"[t]he Englishman improvises,never mak- 2 Financial Development?Capital Controls,Instituions,and o Simeon Diankov.Rafael La Porta Florencio Lopez-de-Silanes&Andrei Shleifer,The Regulation f Lab ng th histor try s JOHN HENRY MERRYMAN,THE CIVIL LAW TRADITION 6-7(ad ed.1985) See JOHN P DAWSON.THE ORACLES OF THE LAW 263 (168)M ARY esistan tionary wrath Beck et al.supra note 5,at 655,657-58,660 Napoleon's Code was also The Role of United States Federal Courts in Interpreting the Constitution and Laws,in A MATTER OF INTERPRE- Weir trans.,3d ed.1998)(177)

WAR VS. LEGAL ORIGIN A. The Classic Differences First, what have legal scholars seen to be the classic, core differences between legal origins? The civil law codifies. The Emperor Justinian had Roman law compiled and, when the compilation was completed in the year 533, barred future decisionmakers from referring to the work of judges and from citing authorities other than his Code. All law was reflected in his Corpus Juris Civilis, all else extraneous. 8 Napoleon, seeking to control the judges in post-revolutionary France as the revolutionaries had sought in 1791 - by requiring judges, if the legislative text was ambiguous or silent, to ask the legislature its meaning - promulgated his famous Code. 9 The common law, on the other hand, grows as judges decide cases and precedents evolve, without the judges' referring to a central code. A code centralizes authority; common law judges disperse it. Civil law and common law judges read the text of the governing code differently, it is said. Civil law judges read its plain meaning; if the text is incomplete, it is said, a classic civil law judge does not fill in gaps where a common law judge would.10 Hence, the civil law judge deters insider corporate schemes ineptly, while the wily common law judge adapts and stops insider thievery. Common law judges follow precedent, thereby building a cohesive system of law from the ground up. Civil law judges, in contrast, do not follow prior opinions, often do not write down their reasoning, and do not tightly tie their decisions to the facts of the case. The civil law tends toward deductive thinking - "to making plans, to regulating things in advance, . . . to drawing up rules and systematizing them."'1 In contrast, "[t]he Englishman improvises, never makFinancial Development? Capital Controls, Institutions, and Interactions 2 (Nat'l Bureau of Econ. Research, Working Paper No. 11370, 2005) (emphasis added), available at http:// www.nber.org/papers/wii 3 7 o.pdf; see also Juan C. Botero, Simeon Djankov, Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, The Regulation of Labor, Iig Q.J. ECON. 1339, 1340 (2004) (asserting that more than a country's current politics, "the historical origin of a country's laws shapes its regulation of labor and other markets"). 8 JOHN HENRY MERRYMAN, THE CIVIL LAW TRADITION 6-7 (2d ed. I985). 9 See JOHN P DAWSON, THE ORACLES OF THE LAW 263 (1968); MARY ANN GLENDON ET AL., COMPARATIVE LEGAL TRADITIONS 67 n.i, 375-76, 378-79, 387 (2d ed. 1994) ("[T]he French royal courts['] ... resistance ... to all change ... made them prime targets for revolutionary wrath ... .'; Beck et al., supra note 5, at 655, 657-58, 66o. Napoleon's Code was also designed for nation-building, uniting disparate legal systems throughout France. 10 But cf Antonin Scalia, Common-Law Courts in a Civil Law System: The Role of United States Federal Courts in Interpreting the Constitution and Laws, in A MATTER OF INTERPRETATION 3, 16-17, 23-25, 29-30 (Amy Gutmann ed., 1997) (virtues of textualism). 11 KONRAD ZWEIGERT & HEIN KOTZ, INTRODUCTION TO COMPARATIVE LAW 70 (Tony Weir trans., 3 d ed. 1998) (1977). 2oo6]

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