Coase Lecture Applies Law and Economics Principles to International Development

Professor Adam Chilton makes a point as he speaks in the Law School courtroom

How do we raise 6.7 billion people out of poverty? Solving that problem “is the policy question of our time,” according to Adam Chilton, who delivered the 2023 Coase Lecture in Law and Economics in February.

Some of the solutions to this question, Chilton, Professor of Law and Walter Mander Research Scholar, posited, are found in foundational law and economics theories developed decades ago by University of Chicago faculty like Professors Richard A. Posner, Aaron Director, Ronald H. Coase, and Frank H. Easterbrook.

Chilton said of his education, “law and economics was the field where suddenly it seemed like people had answers to these questions [of how to address global poverty], to diagnose the problems that were causing some of the world’s biggest social problems and prescriptions and solutions to start help addressing this.”

“You might think that we care about not just how rich people are, but how long they live, or how likely they are to go to school, or what their various rights are,” Chilton said, “but those things end up being predicted by how rich they are with huge amounts of accuracy.”

For instance, recent research is consistent with a claim Judge Posner, retired Senior Lecturer in Law, wrote in 1980, which Chilton summarized, “if you get the growth right, if you get your economy big, it’s tough to go wrong on anything else. But if you don't get the growth right, if you don’t grow the size of your economy, it is very easy to go wrong on everything else.”

Using open datasets, Chilton demonstrated how strongly GDP per capita correlated with measures of life satisfaction, life expectancy, global hunger, child mortality, years of schooling, and literacy rates in every country. GDP measures the economic output of a given country; GDP per capita divides that number by a country’s population.

Another law and economics principle Chilton found the data support is a law posited by the late Director, credited in part with developing the Chicago school of economics, that claims redistribution cannot make up for growth.

“I’m always at a disconnect, because [law and economics] seems like the guidebook to thinking about solving these problems,” he said. “I think the answer to this [disconnect], in part at least, is that you’re all too rich,” he added, to light, slightly nervous laughter from the audience.

US GDP accounts for nearly a quarter of global GDP, while the country’s population accounts for 4.2 percent of the global population. The post-tax income of the median worker in the US stands shy of USD 40,000 annually. That is nearly 14 times the global median income and makes the median US worker richer than 97 percent of the world. Meanwhile, the median starting salary for a Law School graduate puts them in the 99th percentile.

USD 30 per day is the poverty line for OECD and developed countries. Until every person is above this threshold, Chilton said, we have too much poverty. Lant Pritchett, an economist at Harvard University calls this the “Golden Rule,” which is the bare minimum that we would accept for ourselves.

By this measure, 85 percent of the world’s population is poor; 6.7 billion people.

“Even if we can go to every big law partner, every banker, every tech entrepreneur, and say, ‘you only get to make $30 a day,’ and we’re going to perfectly redistribute this, we do not have enough money in the world—there’s not enough economic output to get us to the poverty line. In other words, redistribution as a solution cannot solve our problem under the status quo,” Chilton said.

In fact, he said, a redistribution like this would only get the world less than halfway to its USD 30 per day. And, he added, “redistributing in that way would massively, massively harm growth.”

“You need to do a lot more than double the size of the world’s economic output if we want to lift everybody up. The conservative estimates on this are that the world’s economy needs to grow by over seven times,” he said.

Scholars attribute the emergence of private law theory to a famous article by the late Coase, who taught at the Law School and won the Nobel Memorial Prize in Economic Sciences in 1991. Law and economics emphasizes private law—property rights and contracts—over public law such as constitutional rights.

The data yet again prove this principle correct, Chilton said. His research demonstrated a negative correlation between a country’s human rights score and the number of rights enshrined in its constitution.

“Countries have figured out that we as voters and as citizens are suckers. If you don’t want to reform and you don’t want to make their lives better, you put what they ask for in the constitution, because you know it will not help them. You can get away with expanding rights, signing treaties, and promising to respect human rights, without having to materially change people’s status of living,” he said.

Judge Easterbrook, Senior Lecturer in Law, claimed in 1997, “markets are costly and imperfect, but they beat the political process every time.” And, in fact, free market levers, like free trade, urbanization, and migration, have the greatest effect on decreasing poverty, according to Chilton’s research.

Urbanization makes workers more efficient, as they can earn more money by performing their skills for more people. Urban dwellers’ environmental impact is lower.

“People are radically more productive in cities,” Chilton said.

Development economists, he said, study the rural-urban wage gap, which measures the difference of earnings in an urban area, adjusting for the cost of living. In countries like China and Indonesia, the rural-urban wage gap is 9 to 10 percent. In India it is 45 percent.

“What makes it easier for people to move to cities?” Chilton asked. “Build houses and take a variety of other steps that make it easy for growth to happen within those cities instead of choking off the growth in cities.”

One of the fastest ways to lift people out of poverty is by easing migration restrictions. According to Chilton and other economists, making it easier for people to live and work where they want could grow global gross domestic product (GDP) by 50 to 150 percent.

“The benefits of migration on economic growth is 40 times higher than the next best solutions that people have found,” Chilton said.

Decades-old law and economics principles continue to hold answers to society’s biggest problems.

“These simple ideas in law and economics have powerful and profound impacts for how we can think about things like international development,” Chilton said.

Some problems persist. For example, Chilton said, economic growth has not yet been decoupled with increased energy consumption. A key problem to solve is to figure out a way to make that energy consumption come from renewable sources.

Additionally, Chilton stressed that development economists must contextualize these general principles to each particular place.

“What’s important to emphasize is the specific legal rules that work in one place don’t work necessarily work in another,” he said.

Chilton acknowledged his area of study does not provide good answers about the politics of how to institute the changes he suggested.

“Economists’ views on what might be politically palatable and likely to work, often aren’t. Instead, we need to be thinking about broad-based ways to find growth-oriented solutions that people can get behind and believe,” Chilton said.