"Interest is raised by defective enforcement of contracts" — Adam Smith
Once again I'm grateful to the Financial Times for publishing my letter on Adam Smith, interest rates and the performance of contracts. Previously published letters include: "Freedom to trade at odds with despotic ambitions" (21 March 2022), "Perón quip is chilling take on Latin American justice" (9 April 2021), "A sound economy needs judicial independence" (19 November 2019).
Last week's letter was a brief comment on a previously published missive by Pete Vatev regarding the importance of institutions to ensure "strong creditor protection rights". This is one of my particular hobbyhorses. A large part of my blog Contrapesos is devoted to that idea.
In one of my favourite exercises in Quellenforschung, I have traced it all the way back to François Bernier (1, 2, 3), Trenchard and Gordon (1, 2), Montesquieu (1, 2), Ferdinando Galiani (1, 2, 3), Guillaume-Thomas Raynal (1, 2), Adam Smith (1, 2, 3, 4, 5) and Jacques Necker (1, 2).
* * *
Here's the text:
Pete Vatev makes a strong case as he argues that “creditor protection rights contributed to lowering the risk of lending” (“Florentine bankers knew all about the pricing of risk”, Letters, May 29).
It is worthwhile to mention that Adam Smith made exactly this point almost 250 years ago.
In Wealth of Nations we read that “interest is raised by defective enforcement of contracts”. Thus, a “high rate of interest” is to be expected when governments neglect the duty of setting up strong courts of justice.
Smith explained that the premium paid by investors as they buy government-issued securities reflects “the universal confidence in the justice of the state”.
He went a lot further in Book IV, arguing that, more than trade policies, differences in economic prosperity reflect an “equal and impartial”, as opposed to an “irregular and partial”, administration of justice.
Agustin Mackinlay
Barcelona, Spain
______________
No comments:
Post a Comment