Lawyers and Economists: Division of Labor
posted by Neil Buchanan
Early last month, in my first guest post on Concurring Opinions, I posted some comments about the differences between the ways economists and lawyers think about problems. Today, in my last guest post, I return to the subject of lawyers and economists.
While any observation about the mindsets of lawyers and economists (or anyone else, for that matter) surely oversimplifies, I noted in my earlier post that — based on my experiences both as an economics professor and as a law professor — each profession seems to instill certain tendencies in its practitioners. While lawyers seem to take an all-or-nothing approach to problems (leading them too often to reject useful partial solutions because “that won’t solve the problem”), economists come to believe their models just a bit too much. On the latter point, Alan Greenspan’s recent testimony before Congress to the effect that he has been in “shocked disbelief” at the failure of his long-held model of how the economy works (unregulated markets will lead to good results) has shown the potentially enormous negative consequences of the economist’s default mindset.
Beyond the tendencies that are drilled into members of the two professions (or which, perhaps, lead to self-selection into the two professions), a more interesting question is what lawyers and economists actually do. More precisely, when we have a public policy problem, how do the skill sets of lawyers and economists determine their respective usefulness in dealing with the problem? Again, I make no claim that
my answer is anything beyond a broad-brush summary and that individual cases will vary. Still, recent events suggest that, on big issues, economists’ contributions are essential but can be either helpful or useless depending on what the lawyers do. Examining the current crisis and the policy responses to it will, I hope, clarify my meaning.
Regarding the ongoing financial crisis, it really does take some training in monetary economics and finance to understand the causes and consequences of the panic in the financial markets. It is especially helpful to understand the nature of financial contagions to understand why the current crisis is not merely a “too big to fail” phenomenon but rather a matter of the unique fragility of the psychology of financial markets. Economists who would never support the nationalization of, say, Wal-Mart (even if it were failing) understand that the failure of even much smaller financial firms threatens to lead to much more profound problems for the entire economy. As far as it goes, the insight from economics is that the bailout/rescue is both important and unique, and that partial and temporary nationalization of the banking system is currently called for in ways that need not set a precedent for bailouts of non-financial markets. (There are, to be sure, respectable economists who disagree about the wisdom of the financial rescue. The vast majority of economists, though, agreed that the rescue was unfortunately necessary.)
What do lawyers do? They make it work (or not). Earlier this month, the economist Alan Blinder wrote an article in the New York Times, “Got $700 Billion? Sweat the Details,” in which he described all of the things that need to be done well in order to make sure that the rescue plan succeeds. Blinder tells us in so many words that the legal work is now what matters. Among the issues he raises is that the rescue plan can be disastrously derailed by conflicts of interest. Without adequate legal rules and procedures that will rein in individual self-interest among the recipients of government assistance, the plan could do more harm than good. Similarly, he describes the difficulty in setting prices for assets for which there is no market. When there is no reliable market indicator for determining the fair market value of assets, it becomes essential to write complicated laws and contracts that allow the government to include contingencies in their dealings with private actors. In principle, this is easy. “If X happens, then the parties’ respective rights and responsibilities change.” Anyone who has studied legislative drafting or contract law knows just how simple this is not.
It is tempting to think of this as a physicists-versus-engineers split. The economists are the theorists, and the lawyers actually implement the theory. That analogy, however, does not quite get at the nature of the problem. Economists still have things to say about, for example, the likely incentive effects of provisions to curb conflicts of interest; but their theories on the smaller-bore issues leave open much more room for uncertainty. That uncertainty must be filled in by the lawyers. The better they do their job, the more likely it is that the economists’ policy prescriptions will actually work. As always, a neutral legal framework cannot be assumed into existence.
P.S. It has been a pleasure visiting at Concurring Opinions for the last two months. Thanks to Dan Solove for inviting me to join in the fun. I now return exclusively to my regular gig at Dorf on Law. Perhaps I’ll run into some of you there.
October 31, 2008 at 1:19 pm
Posted in: Uncategorized
Print This Post
Responses (3)
Frank - October 31, 2008 at 5:27 pm
Very insightful post. As you pursue these ideas, I think that your work might be a great successor to legal realists’ insights about the degree to which the “market” and the “state” are interconnected and intertwined. The crisis reveals just how dependent markets are on the rule of law, and on the types of governmental backstops described in Moss’s book “When All Else Fails: Government as the Ultimate Risk Manager.”
I get some of legal realist Robert Hale’s thought on the table in this post:
http://www.concurringopinions.com/archives/2007/09/the_price_of_a.html
I hope to be running an informal reading group on his work at Yale this Spring.
Mike Zimmer - October 31, 2008 at 5:47 pm
At the deepest level, the credit default swaps that are not connected to a particular bundle of securitized assets cannot be priced at all. They are simply gambles on what the payout will be on those assets, but with no connection to them. If credit default swaps were called insurance, there would be no insurable interest at stake and the contracts would be unenforcible. As contracts for gambling debts, they are also unenforcible. How can an unenforceable contract be priced? I have heard that there are over $50 trillion of these credit default swap gambles.
If somehow these gambling debts get priced and bought by the government, I want the government to pay me the bet I lost on the Chicago Cubs winning the World Series.
A.J. Sutter - November 3, 2008 at 12:13 pm
1. “While lawyers seem to take an all-or-nothing approach to problems (leading them too often to reject useful partial solutions because ‘that won’t solve the problem’)”: to pick up on your trope of returning to the theme of your first post in your last, may I note that this characterization, too, ignores what transactional practitioners do. Partial solutions are our bread and butter, because we know that in most situations, that’s all there can be. A contract is ever only a partial solution, for example.
2. The physicist-engineer analogy is misplaced for another reason beyond the one you cite. Most physicists aren’t theorists. They run experiments, and observe phenomena. In condensed matter, materials science, and even particles, to name just a few fields, there are plenty of experimentalists. Moreover, there is even an applied physics, and it’s different from engineering. When it comes to dealing with people, and accomodating their needs, preferences and foibles into the deal, a lot of what a practitioner does is more like one of these types physics than engineering. If you want to analogize economists to string theorists, then I don’t have any complaint.
Leave a Reply