Economic freedom, development, and entrepreneurship: the dominance of common law

Economic growth is fueled by the presence of either the rule of law or rechtsstaat; but it also needs a culture that encourages entrepreneurship in order to be lasting and lead to widespread improvements in quality of life. Economists Hayek, de Soto, and Pejovic have analyzed why and how common law jurisdictions’ economic growth and entrepreneurship disproportionately continue to outpace those of civilian jurisdictions. This can in part be attributed to the difference in ownership, purpose, and structure of corporations—a topic that is addressed in Chapter 8. This chapter discusses various indexes of economic freedom and development, and examines why and how it is that countries which share a rule of law heritage remain disproportionately at the top of those indexes. Increased economic freedom and ease of registering property and businesses catalyze the engines of economic development: entrepreneurship, innovation, and the capital needed to support them. While China has experienced massive economic development, it is struggling to facilitate innovation. The bureaucratic state—a danger everywhere—is a drag on economic development and interferes with the rule of law. While income disparity is touted as a cause necessitating the regulatory state, this chapter explains why this is a non-issue in a growing economy. In contrast, the encouragement of small businesses, with their tendency to bring innovation to the marketplace, is of marked importance.