Sunday, June 27, 2004

Kill all the Lawyers?

Jason Soon's been covering William Easterly's The Elusive Quest for Growth, a book I recommended a while back, and in his latest entry he asks - can an economy have too many lawyers?

In Chapter 4 of The Elusive Quest for Growth, William Easterly debunks the idea that more 'human capital investment' (i.e. education spending) alone can be a solution to the problem of economic development in poor countries ... Easterley has an interesting passage in Chapter 4 on the 'human capital fad' that also has implications for developed economies like Australia:
One clue as to why education is worth little more than hula hoops to a society that wants to grow comes from what the educated people are doing with their skills. In an economy with extensive government intervention, the activity with the highest return to skills might be lobbying the government for favours. The government creates profit opportunities by its interventions ...
He then notes that one whimsical piece of evidence supporting this theory is that economies with lots of lawyers grow more slowly than economies with lots of engineers.

The paper cited is by Murphy, Schleifer and Vishny. Here is the abstract:
A country's most talented people typically organize production by others, so they can spread their ability advantage over a larger scale. When the start firms, they innovate and foster growth, but when they become rent seekers, they only redistribute wealth and reduce growth. Occupational choice depends on returns to ability and to scale in each sector, on market size, and on compensation contracts. In most countries, rent seeking rewards talent more than entrepreneurship does, leading to stagnation. Our evidence shows that countries with a higher proportion of engineering college majors grows faster; whereas countries with a higher proportion of law concentrators grows more slowly.
This raises an interesting question. Given the volumes of legislation passed in developed economies like Australia every year, would unrestrained or even partially restrained competition in the legal sector still lead inevitably to an 'arms race' scenario whereby rent-seeking opportunties are created not just in the area of lobbying governments for favours (the traditional focus of Public Choice economists) but also in the area of common law development? ... might there be a second-best case for general restrictions on the legal profession after all?
Thought-provoking stuff, and I expect/hope that it will provoke a forceful responce or two from some of the practitioners of the legal profession out there. It is clear enough from looking at countries in which the rule of law does not obtain that there can be states with too few lawyers; what isn't so clear is whether the opposite extreme might also be the case. Certainly, the evidence on the face of it doesn't seem to speak clearly one way or another on the issue, as by far the wealthiest country of any real size is also by a great distance the most litigious - the United States of America.