Are lawyers good for an economy?

Related Articles

Should media houses be held responsible for repaying victims of fraud advertised on their platforms?

March 27, 2025

The best ways to support local businesses

March 22, 2025

The possible end of citizenship by investment: US travel bans and their implications

March 19, 2025

Lawyers are essential to the economic fabric of any society, driving trust and innovation through their work. They are instrumental in upholding the rule of law, enforcing contracts, and safeguarding property rights—fundamental pillars that foster trust and encourage investment. However, the true impact of lawyers on an economy extends far beyond these traditional roles.

In this article, we will explore the profound insights of economist Andre Shleifer and explore how the type of legal system, coupled with the roles lawyers assume, can significantly influence economic growth. From facilitating innovation and reducing transaction costs to grappling with rent-seeking behaviours, we analyse the dichotomy between “good lawyers” and “bad lawyers” and their contrasting effects on economic development.

Join us as we unravel the complex relationship between the legal profession and economic prosperity, providing clarity on a question that has sparked considerable debate: Are lawyers good for an economy?

General themes of Andre Shleifer’s work:

Behavioural finance: Shleifer is a pioneer in behavioural finance, a field that blends psychology with financial economics. He argues that investor behaviour is not always rational, and these deviations from rationality can create market inefficiencies and predictable patterns. He challenges the traditional “efficient markets hypothesis” by highlighting the role of psychological biases and cognitive limitations in investment decisions.

Market inefficiencies: A core theme in his work is the identification and explanation of market inefficiencies. He explores how factors like limited arbitrage, sentiment, and noise trading can lead to asset prices deviating from their fundamental values.

Corporate finance: He has significantly contributed to our understanding of corporate finance, including topics like corporate governance, ownership structure, and investor protection. He emphasises the importance of legal and institutional frameworks in shaping financial outcomes.

Political economy and transition: Shleifer has also made substantial contributions to political economy, particularly in his work on the transition of formerly socialist economies to market systems. He analyses the role of institutions, corruption, and legal frameworks in economic development.

Some of his most influential papers and key concepts are:

“The Limits of Arbitrage” (with Robert Vishny, 1997):

Key idea: This paper explores why arbitrage opportunities, even when they exist, are not always fully exploited. They argue that limits to arbitrage, such as risk aversion, funding constraints, and horizon constraints, allow mispricing to persist.

Significance: This paper challenged the efficient market hypothesis by showing that markets can remain inefficient for extended periods, even with sophisticated traders. It highlighted the importance of “noise traders” and sentiment in creating and maintaining these mispricings.

“Investor Protection and Equity Markets” (with Rafael La Porta, Florencio Lopez-de-Silanes, and Robert Vishny, 1997):

Key idea: This paper examined the correlation between legal investor protection and the development of equity markets across different countries. They found that countries with stronger legal protections for minority shareholders tend to have larger and more active stock markets.

Significance: This work demonstrated the critical role of legal institutions in facilitating economic growth through efficient capital allocation. It emphasised the importance of corporate governance and legal rules in attracting investment.

“Noise Trader Risk in Financial Markets” (with J Bradford De Long, Andrei Shleifer, Lawrence H Summers, and Robert J Waldmann, 1990):

Key idea: This paper formalises the concept of noise traders – irrational investors whose trades are based on factors other than fundamental value. They show that noise traders can create risk for arbitrageurs, making arbitrage less effective and leading to market inefficiencies.

Significance: This paper helped legitimise the idea that investor irrationality can play a significant role in financial markets and challenged the traditional assumption of rational expectations.

“A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades” (with Sushil Bikhchandani and David Hirshleifer, 1992):

Key idea: This paper explores how social learning and information cascades can lead to widespread adoption of ideas or behaviours, even if they are not necessarily optimal. They show how people may ignore their private information and mimic the choices of others, leading to fads and fashions.

Significance: This work provides insights into how trends and social phenomena emerge and are propagated, and it has implications for understanding herd behaviour in financial markets.

In summary, Andre Shleifer’s work is highly influential because it has:

• Introduced behavioural insights into mainstream economics.
• Challenged the assumptions of perfect rationality and efficient markets.
• Highlighted the importance of institutions and legal structures in economic development.
• Provided explanations for observed market phenomena, such as bubbles and crashes.

The impact of “good lawyers” vs “bad lawyers” on a society

The impact of lawyers on economic growth is a very interesting and somewhat controversial aspect of Andre Shleifer’s work, and it relates to the relationship between legal systems, regulation, and economic growth.

You’re referring to a line of argument, often presented in his work (along with collaborators like Rafael La Porta, Florencio Lopez-de-Silanes, and Robert Vishny), that suggests a complex and sometimes counterintuitive relationship between the type of legal system, the prevalence of lawyers, and economic development.

The core argument: The “good lawyers” vs “bad lawyers” dichotomy

Shleifer and his colleagues argue that the impact of lawyers on economic growth depends on the type of legal system and the role lawyers play within it. They generally differentiate between:

“Good lawyers”:

Focus: These are lawyers primarily engaged in enforcing contracts, protecting property rights, and facilitating business transactions. They operate within a legal system that promotes the rule of law, fairness, and predictability.

Impact: Their work is conducive to economic growth because it fosters trust, encourages investment, and reduces transaction costs. They contribute to a stable and reliable environment where businesses can thrive.

Examples: Lawyers who specialise in commercial law, corporate law, contract enforcement, and property law.

“Bad lawyers”:

Focus: These lawyers are more engaged in exploiting legal loopholes, rent-seeking, and navigating overly complex and burdensome regulations. They operate within legal systems that are less predictable, more prone to corruption, and feature excessive red tape.

Impact: Their work often has a negative impact on economic growth. They can create uncertainty, increase costs for businesses, and hinder innovation by focussing on extracting resources instead of creating value. They often thrive in environments with weak enforcement and complex regulatory frameworks.

Examples: Lawyers who specialise in bureaucratic maneuvering, regulatory arbitrage, and litigation that benefits from ambiguity and inefficiencies.

The key connection to economic growth:

The argument is that countries with legal systems that primarily foster “good lawyers” tend to experience stronger economic growth than countries where “bad lawyers” flourish. This is because:

1. Rule of law and property rights: Strong legal systems that emphasize the rule of law and protect property rights (and allow for easy enforcement) create an environment where businesses feel secure in investing and innovating. “Good lawyers” are critical to making that happen.

2. Transaction costs: When legal systems are clear, efficient, and predictable, transaction costs are lower. Businesses spend less time and money on navigating complex legal hurdles, and more time on productive activities.

3. Corruption and rent-seeking: Legal systems prone to corruption and rent-seeking can create opportunities for “bad lawyers” to extract resources and hinder economic progress.

4. Regulation and bureaucracy: Overly complex and burdensome regulations can create a niche for “bad lawyers” who specialise in navigating (and often exploiting) those complexities. This adds to costs and uncertainty and hinders growth.

Empirical evidence and nuances:

Shleifer and his colleagues have done empirical work to support their claims, looking at cross-country data on legal origins, regulatory quality, the prevalence of lawyers, and economic growth.

Their research often links common law legal systems (which they argue tend to have more “good lawyers”) with stronger economic outcomes than civil law systems (which they argue are more susceptible to generating “bad lawyers”).

However, it’s crucial to acknowledge that this line of argument is not without its nuances and criticisms:

Oversimplification: The “good lawyers” vs “bad lawyers” dichotomy can be seen as an oversimplification of a complex reality. There is a spectrum of legal practice, and not all lawyers neatly fit into these categories.

Endogeneity: It’s hard to establish a clear causal relationship. Does the type of legal system cause the kind of lawyers, or does the type of lawyers shape the legal system? The answer is likely both, creating an endogeneity problem.

Cultural factors: Cultural norms, social capital, and other factors likely play a role in shaping legal systems and economic outcomes, and these aren’t fully captured by a focus solely on lawyers.

Other factors: It’s essential to acknowledge that many factors contribute to economic growth, including human capital, technological innovation, political stability, and trade openness. The type of legal system is just one piece of the puzzle.

Not all civil law is bad: Some civil law countries have developed robust legal and regulatory systems that promote growth.

The core message from Shleifer’s work, in this context, is not simply that “more lawyers = less growth”. Rather, it suggests that the type of legal system and the role lawyers play within that system are crucial determinants of economic performance. Legal systems that promote the rule of law, protect property rights, and minimise opportunities for rent-seeking tend to be more conducive to growth.

Conversely, systems riddled with corruption, excessive regulation, and unclear rules tend to hinder development and create opportunities for “bad lawyers” to thrive at the expense of the overall economy.

It’s a provocative argument that highlights the importance of institutional quality and legal reform for economic progress, and it has sparked considerable debate and further research in the field.

The implicit contrast: Creators vs navigators/extractors

Shleifer’s work doesn’t directly present a “lawyers vs engineers” dichotomy in a formal, paper-like setting. However, his arguments on legal systems, regulation, and economic growth strongly suggest a contrast between these two professions:

Engineers as “creators”:

Focus: Engineers are typically associated with innovation, problem-solving, and the creation of new technologies, infrastructure, and tangible value. They are focussed on building, designing, and improving physical and technical systems.

Impact: In a well-functioning economy, engineers are key drivers of productivity growth and technological progress, leading to new goods, services, and methods of production that enhance societal welfare. They are “creators” of economic value.

Role in growth: Their skills and knowledge contribute directly to economic expansion by improving efficiency, opening up new markets, and enhancing competitiveness.

Lawyers (potentially) as “navigators/extractors”:

Focus (under certain conditions): This is where the distinction between “good” and “bad” lawyers becomes crucial. In a poorly designed or overly regulated system, lawyers can become primarily focussed on navigating complex legal frameworks, exploiting loopholes, and extracting value from the system without directly creating new wealth. They may focus on litigation, regulatory compliance, and rent-seeking behaviours.

Impact (under certain conditions): In these scenarios, lawyers may become a burden on the economy, adding to costs, creating uncertainty, and diverting resources away from productive activities. They become “navigators” and potentially “extractors” of existing wealth rather than creators of new wealth.

Role in growth (under certain conditions): In systems where “bad lawyers” dominate, legal activity can become a drag on economic growth by hindering innovation, increasing transaction costs, and perpetuating inefficient practices.

The underlying logic:

The underlying logic connecting these professions to economic growth stems from Shleifer’s perspective on how resources are allocated in a society:

Resource allocation: Shleifer implicitly argues that if a society’s resources (talent, capital, etc.) are disproportionately channeled into legal activities that do not directly contribute to economic value creation (i.e., navigating complex regulations, engaging in rent-seeking litigation, etc.), then that society will have less resources available for productive activities like research, engineering, and innovation.

The “legal drain”: A system dominated by “bad lawyers” might be seen as a “legal drain” on the economy, attracting talented individuals into activities that are not particularly productive in terms of economic development.

Incentive structures: The key is in the incentive structures that different legal systems create. Systems that encourage “good lawyers” who support productive activity are likely to also provide incentives for people to pursue engineering and other fields that promote wealth creation.

The implicit message:

The implicit message is not that lawyers are inherently bad and engineers are always good. Rather, it suggests that:

1. The relative balance of lawyers and engineers in a society can be an indicator of the health of its legal and regulatory environment. A society that over-produces “bad lawyers” may be suffering from institutional problems that hinder productive activity.

2. The type of legal system plays a crucial role in shaping the roles that these professions play in the economy. A well-designed, efficient legal system can harness the talents of lawyers to support economic activity, while a poorly designed system can create perverse incentives that encourage unproductive behaviour.

3. A society needs a healthy balance between “navigators” and “creators” to flourish. Too much emphasis on unproductive navigation and extraction at the expense of creation can lead to stagnation or decline.

Important considerations and nuances:

Not all legal activity is unproductive. There are many important areas of law (e.g., contract enforcement, intellectual property protection) that are vital for a healthy and growing economy.

The role of government: Government policies play a critical role in influencing the legal environment and the relative attractiveness of different professions.

Social values and norms: Cultural norms and values can also influence the types of professions that are considered desirable and prestigious.

It’s a simplification: The contrast is a simplification and a heuristic. It is not a perfect description of reality, but it’s a useful framework to think about how legal systems and talent allocation affect growth.

In conclusion, the role of lawyers in an economy is both significant and nuanced. As highlighted by Andre Shleifer’s groundbreaking work, the distinction between “good lawyers” and “bad lawyers” is pivotal. Lawyers who uphold the rule of law, protect property rights, and streamline transactions contribute to a stable and thriving economic environment. Conversely, those who exploit legal loopholes or perpetuate inefficiencies can hinder growth and innovation.

For society to maximise the economic benefits of the legal profession, it must prioritise the development of efficient legal systems that emphasise fairness, transparency, and predictability. Resources should be allocated toward nurturing legal frameworks that minimise rent-seeking behaviours and foster trust, encouraging productive activities across all sectors.

By ensuring a balance between “creators”, such as engineers driving technological progress, and “navigators”, like lawyers facilitating governance, societies can establish a foundation for sustainable growth. Ultimately, the interplay of these professions, underpinned by robust legal and institutional structures, is crucial to unlocking a nation’s full economic potential.

Sources:

“The Economic Consequences of Legal Origins”

This paper examines how the historical origins of a country’s legal system influence its economic performance.

https://scholar.harvard.edu/files/shleifer/files/consequences_jel_final.pdf?

“Legal Origins”

Co-authored with Edward L Glaeser, this work discusses the differences between common law and civil law countries and their impact on economic and political outcomes.

https://www.nber.org/system/files/working_papers/w8272/w8272.pdf?

https://academic.oup.com/qje/article-abstract/117/4/1193/1875936

“Legal Determinants of External Finance”

This study explores how legal rules and their enforcement affect the availability of external finance to firms.

https://onlinelibrary.wiley.com/doi/full/10.1111/j.1540-6261.1997.tb02727.x

_________________________________

When you buy something through our retail links, we may earn commission and the retailer may receive certain auditable data for accounting purposes.

Recent Articles

• How to maintain the spirit of Ramadan after Eid – carrying lessons into the year ahead
• Are lawyers good for an economy?
• Day 27 of Lent: How to stay focussed on your Lenten journey as Easter approaches
• Eid ul Fitr: The significance of Eid and how to celebrate with gratitude and joy
• The history and significance of Shouter Baptist Liberation Day in Trinidad and Tobago

You may also like:

What happens if you’re partially responsible for a car accident?

The dangers reckless driving poses to fellow motorists

Traumatic injuries from which survivors of a porch collapse may suffer

Tips to deal with the legal and societal ramifications of a theft charge

Car accident types and injuries one could sustain in Texas

Life after a car accident: The struggles you will face

Cape Girardeau car accident claim: The 5 actions you must avoid

10 reasons why you should buy a dashcam

5 Tips that can help you avoid truck accidents

Striking the balance: Navigating lawyer advertising in Trinidad and Tobago

What is an intellectual property lawyer? Everything you need to know

Fighting Klumpke’s Palsy: The compensation available for those who take the legal route