The Economic Demand for Legal Certainty

Institutions provide legal certainty when they protect property rights and cut transaction costs. Property protection lets individuals and firms focus on producing value, not on seizing others’ resources—the very opposite of the law of the jungle. Yet property alone is not enough. Prosperity rests on specialization, and specialization requires exchange. Markets do not only trade goods and services; they also shift consumption over time and spread risk among people with different risk tolerance. Institutions must therefore lower the cost of transacting. And when those costs remain too high, they must impose binding rules to curb externalities and move outcomes closer to the social optimum.

This chapter shows how badly Spanish institutions perform these tasks.