Corporate Law Book Review 122 Harv. L. Rev. 696

Governance in the Ruins

Fusing an innovative critique of the endowment perspective with a more traditional approach


Why do some countries enjoy vibrant markets and steady growth while others seem to stagnate? What gets an economy up and running after a catastrophic war or a period of oppressive rule? While there are nearly as many answers to these questions as experts, one of the most prominent for the past century has been law. Good laws might not be sufficient by themselves, but they are widely viewed as an essential first step. After World War II, the American occupation brought not just troops, but also American-style law, to Japan. When the Berlin Wall came down in 1989, the watchwords for the newly democratic countries of Eastern Europe were privatization and the rule of law. The development efforts of the World Bank and International Monetary Fund around the world have often centered on legal reform. Put the right laws in place, the reasoning goes, and robust economic development will follow.

The title of Law and Capitalism, a remarkable new book by Curtis Milhaupt and Katharina Pistor, might seem to suggest that Milhaupt and Pistor are adding their voices to the choir. If this is what one were expecting, however, that expectation would quickly be dashed. Nearly every page of Law and Capitalism stands in implicit or explicit dissent from the prevailing view. “In our more cynical moments,” they write, “we caricature the canonical view that has taken hold in the economics literature and policy world with the following simple equation:

good law + good enforcement = good economic outcomes” (p. 5).

This view, which they call the “endowment perspective” (p. 17), “depicts law as a kind of technology that can be inserted in the proper places – and imported from abroad when necessary – to accomplish an important task” (p. 5). Even in the abstract, they suggest, the assumption that a single law will produce the same results in any context is rigid and simplistic. In practice, the endowment perspective cannot explain why some countries have experienced dramatic growth and others have not. Japan and Korea in the 1980s, and China more recently, to give three obvious examples, became economic powerhouses while flouting the traditional playbook. In each of these countries, law seems to have contributed very little to economic growth.

The key to a more plausible account, according to Milhaupt and Pistor, is a more dynamic conception of law. Rather than taking law as a given and assuming it is politically neutral, scholars should consider how and why it is produced and how the relevant parties respond to it. What they will find is that law is part of a “highly iterative process of action and strategic reaction” (p. 6). This insight, which Milhaupt and Pistor call the “rolling relationship between law and markets,” is the guiding theme of Law and Capitalism (id.).

Although the initial analysis is framed in general terms, as an inquiry into law and development, the authors quickly shift to corporate governance, their focus for the rest of the book. As they acknowledge, the emphasis on corporate governance is to some extent simply a reflection of their own expertise: both Milhaupt and Pistor are among the world’s leading comparative corporate law scholars. But they also point out that corporations are “the most important private actors in a market economy,” and that “corporate governance is linked to every facet of a country’s economic, political, and legal structures” (p. 4).

Milhaupt and Pistor’s foil throughout the book is a team of scholars – La Porta et al., as they are affectionately known by the field – who revolutionized the corporate finance literature starting in the mid-1990s. Law and Capitalism abandons the La Porta et al. model in almost every conceivable respect. Gone are the governance variables and anything remotely approximating a regression analysis. Rather than ascribing a single role to law – protecting property rights – Milhaupt and Pistor identify four ways that law influences economic development, the others being coordination of interest group bargaining, signaling, and “credibility enhancement” (p. 7). Rather than large numbers and statistical significance, Milhaupt and Pistor emphasize individual cases. And they concern themselves not with ordinary cases but with the most extraordinary ones: companies that face a crisis so dramatic it may alter the underlying governance system. Theirs is a study of governance in and from the ruins.