Academic scribblers and defunct economists

Three broad theoretical approaches characterize the history of development economics: state-led growth, which dominated from the 1930s until roughly 1980; liberalization theory (the 'Washington Consensus'), which dominated in the 1980s; and institutionalism, which dominated subsequently. After 2000, development scholars increasingly focused on the legal institutions that support markets: property, contracts, and business law. This essay focuses on legal institutions that support economic innovation, which causes sustained growth. Developing countries mostly innovate by discovering new markets and adapting organizations, which is risky. A risky venture that unites capital and new ideas poses a problem of trust: the investor must trust the innovator not to steal his money, and the innovator must trust the investor not to steal his ideas. If institutions supply the means for entrepreneurs to solve the double trust dilemma, the economy strides ahead through innovation. Conversely, if institutions fail to supply the means for entrepreneurs to solve the double trust dilemma, the economy hobbles along without improvement. The origin of a nation's laws - whether common or civil law - is not so important as the ability to adapt law to business innovations.