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."—Choice
"[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. Consistently creative, insightful, and entertaining, Solomon's Knot makes a major contribution to the growing literature on the evolution of international differences in wealth."—Timur Kuran, Duke University
"Cooter and Schäfer provide a thorough introduction to growth economics through the lens of law and economics. They do a masterful job of weaving in historical anecdotes from all over the world, detailed discussions of historical transformations, theoretical literature, empirical studies, and numerous clever hypotheticals. Scholars as well as general readers will find this book to be very useful and informative."—Henry N. Butler, George Mason University
"This book distills and presents in a lucid and often even entertaining way the main insights and contributions of law and economics to meeting the challenges of growth for developing countries. Cooter and Schäfer argue that market freedom is the key to growth, but that it needs to be sustained by the appropriate legal rules and institutions."—Robert Howse, coauthor of The Regulation of International Trade
"As in Richard Wagner's operas, deeply insightful motifs are presented and developed along this extremely well written book. Starting with 'The Double Trust Dilemma'—how to establish trust between innovators and financiers—Robert Cooter and Hans-Bernd Schäfer join their efforts to explore and explain how this rather improbable mutual trust can be firmly founded. Their approach focuses on institutions, and shows how they can be molded: relational, private and public remedies are the three most basic tools, but law is the glue that keeps them working together. And then, there is human ingenuity: mastering the art of legal reform, or how to undermine opposition of the vested powers, is not exactly a science easy to be taught, but, precisely, an art to be learned, even though game theory and experience can help a lot. In times of distress, Solomon's Knot offers us an enjoyable book and a fantastic instrument to confront decline. It shows that history is not written, that, as J.R.R Tolkien famously wrote, there is hope while the company is true: trust is achievable."—Pablo Salvador Coderch, Pompeu Fabra University
Solomon's Knot gropes with that essential question for our generation of what law can contribute towards getting people out of poverty. Can it, on its own, end the poverty of nations? . . . Whatever the answer, the book tells its story in simple language, with convincing examples and with a transparent logic that shows how law can provide the framework within which the innovator and the investor can successfully join hands. That, after all, is surely the essential condition for growth. At the same time, on a more technical level, the book also provides an elegant way of making one's first acquaintance with the essential insights law and economics has generated over the past half century into what law is and does, and the good things it can make happen, or prevent from happening, if we fail to understand it properly."—Ejan Mackaay, University of Montreal
"Solomon's Knot builds on the Schumpeterian premise that innovation is the engine of growth. Like Schumpeter, it emphasizes the importance of bringing innovators and financiers together, but goes much further by showing how sound legal institutions can foster the necessary trust between innovators and investors. A broad, insightful book that was a pleasure to read."—Dennis Mueller, University of Vienna
"This book is fun to read and it offers the best balanced rebuttal of the redistribution thesis that is often at the roots of misplaced development policies."—Andras Sajo, Central European University, Budapest
