Solomon's Knot

Robert D. Cooter is the Herman F. Selvin Professor of Law at the University of California, Berkeley. His books include The Strategic Constitution (Princeton). Hans-Bernd Schäfer is professor of law and economics at the Bucerius Law School in Hamburg, Germany, and professor emeritus at the University of Hamburg. His books include The Economic Analysis of Civil Law.
Why law is critical to innovation and economic growth

Sustained growth depends on innovation, whether it's cutting-edge software from Silicon Valley, an improved assembly line in Sichuan, or a new export market for Swaziland's leather. Developing a new idea requires money, which poses a problem of trust. The innovator must trust the investor with his idea and the investor must trust the innovator with her money. Robert Cooter and Hans-Bernd Schäfer call this the "double trust dilemma of development." Nowhere is this problem more acute than in poorer nations, where the failure to solve it results in stagnant economies.

In Solomon's Knot, Cooter and Schäfer propose a legal theory of economic growth that details how effective property, contract, and business laws help to unite capital and ideas. They also demonstrate why ineffective private and business laws are the root cause of the poverty of nations in today's world. Without the legal institutions that allow innovation and entrepreneurship to thrive, other attempts to spur economic growth are destined to fail. "Cooter and Schafer apply insights from the field of law and economics to the problem of poverty. They describe how institutions like contracts overcome dilemmas of trust at the heart of economic transactions. Readers interested in understanding the law and economics approach would do well to start with this well-written volume, which develops a model of the legal institutions needed for innovation. . . . [A] significant contribution to the field." "[C]ompelling."---Michael Strong, Barron's "Rich in institutional detail, wisdom and practical advice."---Alex Tabarrok, Marginal Revolution "The authors, Cooter and Schafer, skilfully avoid economics verbiage and complicated legal terms, providing instead a plethora of anecdotes, appropriate examples and studies."---Lisa Kaaki, Arab News "Solomon's Knot remains an entertaining and comprehensive read. It successfully conveys the main theories of law and economics within the context of promoting innovation as a source of sustained growth. Moreover, it proposes clear and simple policy recommendations for developing countries to adopt in pursuit of greater wealth creation and economic development."---Christel Y. Tham, Journal of International Law and Politics "Robert Cooter and Hans-Bernd Schäfer have written a seminal book with great sympathy for the problems posed by "Solomon's Knot,"as well as for the protagonists involved. They explain how good law is essential to economic development, as, conversely, bad law results in poverty. Solomon's Knot gives us a fresh new look at the most fundamental economic problem: why some nations are poor, while others are rich."-George Akerlof, Nobel Laureate in Economics 2012 "Solomon's Knot unites law and economics in cogently explaining how effective legal institutions support innovation-the engine of economic growth in every society."-Curtis Milhaupt, Columbia University "Cooter and Schäfer continuously challenge the reader with thought provoking insights based on solid theory and empirical studies. This book is a major addition to our knowledge on the relationship between the overall quality of the legal order and economic growth."-Roger Van den Bergh, Erasmus University Rotterdam "Growth spurts that catapult a country or region to economic preeminence are fascinating but poorly understood. Cooter and Schäfer show that such spurts tend to track legal changes that facilitate the protection of property, the enforcement of contracts, and, most important, the launching of innovative business ventures. Consistentl