Solomon's Knot

Cooter and Schäfer locate the binding constraint on growth in what they call the double trust dilemma of innovation. An inventor has to disclose his idea to the person who might finance it, and the financier has to hand over money to someone who might not deliver; each side can defect, so absent some way of making both promises enforceable the deal is never struck and the innovation is never made. Their conclusion is that development depends less on capital, aid or natural resources than on the legal machinery — contract, property, corporate form, honest courts — that lets strangers combine an idea with money. The title is the biblical judgment: a rule that gets the right answer by making the parties reveal what they know.

Why it’s on the list: It sits in the curriculum’s institutions, property rights and law section, alongside Coase, Alchian, Demsetz and De Soto — the strand of the list arguing that prosperity is a legal achievement rather than a resource endowment.

Where I saw it: Brendan McCord’s Philosopher-Entrepreneur Reading List, in the section on Institutions, Property Rights, and the Law. The full 211-entry transcription is on The Philosopher-Entrepreneur Reading List.

Connections

• Institutions — the book’s explanation for the wealth of nations.
• Poverty — the condition it sets out to explain.
• Economic Development — the field it intervenes in.
• Innovation — the transaction the double trust dilemma blocks.
• The Philosopher-Entrepreneur Reading List — the curriculum this came from.