Robert Cooter wrote a book about the relationship between laws and economic development titled Solomon’s Knot: How Law Can End the Poverty of Nations. Some highlights of an excerpt posted online with his permission include:

• There is a double trust dilemma in innovation. The innovator must trust the financier not to steal the invention, and the financier must trust the innovator not to steal the money.
• In a way this dilemma has been around for centuries. In the fifth century two Kings exchanged their children as hostages to one another to ensure that they didn’t betray each other.
• Laws can play a role in helping to develop that trust between parties.
• Most economies start off with a relational basis of finance. You trust your family members and they trust you and so you can cooperate.
• However relational finance doesn’t scale for large scale businesses and across large economies.
• This is not to suggest that relationships become irrelevant. Indeed they have become more important than ever through the internet where online reviews of buyers and sellers play a crucial role.

There are other interesting thoughts and reflections scattered throughout the chapter including our favourite:

• Economic and biological evolution differ in an important way. Economic evolution leads to individuals copying the original innovator – it “emulates the most fit through profit detection, whereas biological evolution eliminates the least fit through natural selection.”

You can get the entire book here, and you can check out the entire excerpt to find out more about the links between biology and economics, why establishing trust in modern business is like exchanging hostages, what China’s administrative structure shows us, the role that relationships play in diamond exchanges, and what the industrial revolution demonstrates to us about the evolution of finance.

Source: The American

Via: Marginal Revolution