Ducks and Economics

There is much debate over the European social model, how well it works, and how desirable it is. What is interesting to me is how it came about. I suggest that part of the reason might lie in the institutional infrastructure of these European countries and is a side effect of poor institutional design.

Let’s start with some intuition about legal regimes. Legal regimes are generally categorized in the literature under the two main strains of common law and civil law regimes. There are variants of each, but the important differences are in how each regime is structured. Common law regimes are based on English common law and works this way: legislatures make laws and judges have wide latitude to interpret these laws in context of specific cases. In this way the majority of the actual law is case law, which we can also call judge-made law. Inherently I think there are two advantages here. The first is that common law regimes are more responsive to exogenous shocks and citizen demands because judges can interpret and apply laws contextually. The second advantage is that one can take broad principles, like freedom of speech, and apply them easily. Civil law regimes are based conceptually on the Justinian code and finds its most prominent expression in France, whose civil law regime was heavily influenced by the Napoleonic code. In civil law regimes, the law, whether principle or rule, is codified by a legislature. In this setup judges have vastly less latitude and adjudicate on a bright-line basis. Case law in this institutional paradigm is vastly less influential where it exists at all. The disadvantage here is that the law is vastly less responsive to exogenous shocks since judges do not have much ability to interpret these laws contextually.

So the next intuition is how policies are formed and wrongs redressed in civil law vs. common law regimes. On a broad, theoretical level, my intuition is that common law regimes are less likely to have legislation redress wrongs because citizens have options in courts. Consider two nations, one with a civil law regime and one one with a common law regime. In the nation with common law, citizens faced with uncertain legal footing due to technological change can obtain rulings to extend and clarify laws like the 4th Amendment, for example. In the civil law regime, the laws are inflexible, and citizens cannot obtain the same rulings in a court of law; their option is to enact new laws. In this second nation, the legislature is thus vastly more important. Laws are inflexible, so they must be changed, and legislators are put more often into the position of forecasting from afar the impacts of the legislation they propose based on singular datapoints.

The more active a legislature is, the more policies it enacts and the more money it spends. Additionally, legislators are often unqualified to actually write and interpret laws, which require sometimes substantial legal education and intellectual sophistication. The claim is that legislators are worse at writing laws to respond to exogenous, far off shocks than judges are at creating case law based on immediate, contextual information. Additionally, independent judges are often circumscribed by what they can do; though they can rule on the legality of specific issues they cannot create entire social programs to respond to systemic issues. But legislators can…and there are lots of legislators, both liberal and conservative, whose first instinct when approached with a problem is to think how a government program might be a solution.

So the claim is that civil law regimes are much more susceptible to policy-making by legislatures, which in Europe particularly has resulted in nations designed to legislate problems rather than adjudicating them. This results in the inevitable growth of social programs as citizens are constrained in their options when seeking responsive and flexible legal relief from the judiciary and are forced to pursue legislative relief.

Let me note here that I know I haven’t presented any data here; the argument I wanted to make here is analytical, not empirical, though I do have data that I’ll present in later posts on the subject.

Hat Tip: I am indebted to many fruitful conversations with Ron Harstad on the subject several years ago as well as conversations with Abhi Sivasailam more recently.