The Irrelevance of Legal Thought
I suspect that one of the depressing truths of being a law professor is that much of our thinking on how to solve social problems is irrelevant at best and pernicious at worse.
For example, theorists of private law spend a lot of time thinking about what an optimal system of contract, property, or commercial law might look like. If there is a place where these debates really matter, it seems to me that it is in the realm of development. I count myself as a friendly critic of efficiency analysis in private law, but every time I find myself dismissing this or that argument for a marginal improvement in the efficiency of legal rules, I find myself saying something like, “Sure, it is easy for me as a citizen of a rich and relatively prosperous country to dismiss efficiency gains, but would I feel the same way were I the citizen of a poor and developing country where marginal growth matters much more?”
The truth, however, is that the quality of institutions dwarfs the quality of substantive law in terms of explaining economic outcomes. In other words, as between optimal law enforced by corrupt institutions and suboptimal law enforced by honest institutions, one ought to go with honest institutions every day of the week and twice on Sundays. Marginal improvements in substantive law don’t matter nearly as much as the academic energy lavished upon them would suggest.
I can’t help but think that something like this is going on in the current push to reform financial regulations. Legal intellectuals are largely focused on regulating transactional structures or the governance of financial institutions. In other words, we are looking at the sorts of things that we are trained to think about, namely substantive legal rules. I suspect, however, that the reality is that the main drivers of the financial crisis were not regulatory. Rather they were monetary and fiscal. Another way of putting this is that the repeal of Glass-Steagall or the sloth of the SEC were bit players in the causation of crisis compared to monetary policy and fiscal subsidies. Mucking around with the regulation of mortgage brokers, the terms of home loans, methods of foreclosure, or executive bonuses is rather like dealing with the aftermath of the Titanic’s sinking by calling for marginal refinements in the rudder control of ocean liners.
The perniciousness comes when we engage in cost-benefit analysis about proposed legal changes. If it is true that most of our woes were caused by macro-economic factors like money supply and balance of payments, I suspect that legal reformers are going to systematically over-value of the benefits of their proposed changes to legal rules. We will often assume that what we are thinking about is far more important than it actually is. Hence, we are likely to fall into the trap of saying something like, “Yes, new legal rule X will create costs, but those costs are acceptable in light of the way that rule X will protect us from a repeat of recent nastiness Y.” The problem is that the debate over rule X or rule not-X is frequently a sideshow compared to forces such as fiscal and monetary policy.
It’s both politically and intellectually depressing.