Law and Finance: Why is Common Law Superior?

In yesterday's post, I outlined the legal-origin or law-and-finance hypothesis, which argues that economies with a common-law legal origin have better financial development, investor protection laws, etc.. But why is common law better than civil law?

According to the legal-origin school, Civil law is viewed as inferior to common law because it is devised by academics and legal philosophers, whereas common law emerges from the process of judges resolving specific and real business disputes in a pragmatic manner. The infrequent revisions of civil-law codes means that they can quickly go out of date, whereas the common law can easily respond to new business environments and practices. Civil law is also subject to greater interference from politicians than common law.

But why did differences emerge between English common law and French civil law? According to the legal-origin school, there are two possible explanations. One explanation is that during the bloodless Glorious Revolution in England, lawyers were on the winning side, whereas in France, they were on the losing side. As a result, there was no judicial independence in France and government administration was expanded to cope with social problems. The second explanation is that differences between the two legal systems emerged in the medieval era. Whilst England was relatively peaceful in the medieval era, France faced both internal and external threats. As a result, dispute resolution was decentralized in England (with local juries and magistrates), whereas state-employed judges resolved disputes in France.

The Economics of Global Warming

The Berkeley Earth Project , an independent study of global warming, has found that the earth has become a degree warmer over the past half century. However, the statistical uncertainty surrounding pre-1920 estimates makes it very hard to say much about long-term trends - click here for graph . This is one of my concerns with the global warming debate - we simply don't have trustworthy long-run data which looks at temperature changes over the last millennium (or two). My second concern with the global warming debate is that it is very hard to prove any sort of casual link between global warming and human activity. The scientists may be able to show correlation between global warming and our production of carbon dioxides etc., but correlation is not causation. My third concern with the debate is that those who are sceptical or agnostic are stereotyped as flat-earthers or intellectually-challenged crackpots. This only stifles debate and the progress of science itself.

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press .

The Failure of Herstatt Bank

As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of

Finance: Past, Present and Future

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