Solomon's Knot: How Law Can End the Poverty of Nations

Robert D. Cooter, Law School, University of California, Berkeley
Hans-Bernd Schaefer, Bucerius Law School, Hamburg

Article comments

This is a preliminary manuscript. It will be revised and published by Princeton University Press. Publication is scheduled for December of 2011. The manuscript is copyrighted.

Abstract

Sustained growth depends on innovation, whether it’s cutting-edge software from Silicon Valley, an improved assembly line in Sichuan, or a new export market for Swaziland’s leather. Developing a new idea requires money, which poses a problem of trust. The innovator must trust the investor with his idea and the investor must trust the innovator with her money. Robert Cooter and Hans-Bernd Schäfer call this problem the “double trust dilemma of development.” How nations confront it determines whether their economies grow or stagnate. Nowhere is this problem more acute than in poorer nations. Nations are relatively poor in the modern world because they cannot solve this problem and their economies fail to grow.

In Solomon’s Knot, Cooter and Schäfer propose a legal theory of economic growth that details how effective property, contract, and business laws help to unite capital and ideas. They also demonstrate why ineffective private and business laws are the root cause of the poverty of nations in today’s world. Without the legal institutions that allow innovation and entrepreneurship to thrive, other attempts to spur economic growth are destined to fail.