Law & Prosperity

Lawrence Solum posts a short essay on the meaning of the rule of law, and he asks why the rule of law is important. Here is his answer:

"What values are served by the rule of law? Why is the rule of law important? Those are big questions, but we can at least give some quick and dirty answers. One reason that the rule of law is important has to do with predictability and certainty. When the rule of law is respected, citizens and firms will be able to plan their conduct in conformity with the law. Of course, one can dig deeper and ask why that predictability and certainty are important. Lot's of answers can be given to that question as well. One set of answers is purely instrumental. When the law is predictable and certain it can do a better job of guiding conduct. Another set of answers would look to function of law in protecting rights or enhancing individual autonomy. The predictability and certainty of the law creates a sphere of autonomy within which individuals can act without fear of government interference."

Note that the rule of law means people can "plan their conduct," and that it "creates a sphere of autonomy" for people vis a vis government. The rule of law is the important foundation for Mancur Olson's (Power and Prosperity) "socially contrived exchange." The rule of law is the foundation upon which capital and insurance markets are built, and therefore, the rule of law is the foundation of economic prosperity.