Financial Markets and Institutions (2-downloads)

Should We Kill All the Lawyers?

Lawyers are often an easy target for would-be comedi-

ans. Countless jokes center on ambulance chasing and

shifty filers of frivolous lawsuits. Hostility to lawyers is

not just a recent phenomenon: in Shakespeare’s

Henry VI, written in the late sixteenth century, Dick the

Butcher recommends, “The first thing we do, let’s kill all

the lawyers.” Is Shakespeare’s Dick the Butcher right?

Most legal work is actually not about ambulance

chasing, criminal law, and frivolous lawsuits. Instead,

it involves the writing and enforcement of contracts,

which is how property rights are established.

Property rights are essential to protect investments. A

good system of laws, by itself, does not provide

incentives to invest, because property rights without

enforcement are meaningless. This is where lawyers

come in. When someone encroaches on your land or

makes use of your property without your permission,

a lawyer can stop him or her. Without lawyers, you

would be unwilling to invest. With zero or limited

investment, there would be little economic growth.

The United States has more lawyers per capita

than any other country in the world. It is also among

the richest countries in the world with a financial sys-

tem that is superb at getting capital to new produc-

tive uses such as the technology sector. Is this just a

coincidence? Or could the U.S. legal system actually

be beneficial to its economy? Recent research sug-

gests the American legal system, which is based on

the Anglo-Saxon legal system, is an advantage of the

U.S. economy.*

*See Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer,

and Robert W. Vishny, “Legal Determinants of External Finance,” 

The

Journal of Finance 52, 3 (July 1997), 1131–1150; and Rafael La

Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W.

Vishny, “Law and Finance,” 

Journal of Political Economy 106, 6

(December 1998), 1113–1155.

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Part 3 Fundamentals of Financial Institutions

Conflicts of Interest

Earlier in this chapter, we saw how financial institutions play an important role in the

financial system. Specifically, their expertise in interpreting signals and collecting

information from their customers gives them a cost advantage in the production of

information. Furthermore, because they are collecting, producing, and distributing

C A S E