Deregulating The Law Industry: Pros, Cons & Free Market Economics

Law blogs, like this one, spend a large amount of time pushing for legal service innovation

Creativity, FLEX time, investment capital, reverse auctions, social media–these are all ways by which law firms are told to innovate to provide more efficient services to their clients and to increase profitability among their partners.

But instead of forcing innovation on existing law firms, perhaps innovation should be brought upon the industry via increased competition.

It’s not the first time that the practice of law has been called a monopoly. Clifford Winston, Robert W. Crandall, and Vikram Maheshri of the Brookings Institute argue in their publication, First Thing We Do, Let’s Deregulate All the Lawyers, that entry barriers and restrictions combined with government-induced demand for lawyers drives up the prices for legal services. 

The authors further purport that this economic inefficiency draws significant social costs, hampers innovation, misallocates the nation’s labor resources, and creates socially perverse incentives.

This week, Winston and Crandall contributed an op-ed to the Wall Street Journal calling for the immediate deregulation of the legal industry. They write:

“The reality is that many more people could offer various forms of legal services today at far lower prices if the American Bar Association (ABA) did not artificially restrict the number of lawyers through its accreditation of law schools—most states require individuals to graduate from such a school to take their bar exam—and by inducing states to bar legal services by non-lawyer-owned entities. It would be better to deregulate the provision of legal services. This would lower prices for clients and lead to more jobs.”

Amid countless lawsuits accusing law schools of misrepresenting employment statistics and a boom in online legal services, it’s clear that law school graduates are seeking jobs, and clients are seeking affordable counsel.

To achieve this, both the Cato Institute and OpenMarket.org agree with the WSJ that deregulation is necessary. “People can represent themselves in small-claims courts, which have simplified procedures, but in many states, such courts can hear only the tiniest legal claims, like those seeking less than $5,000,” states OpenMarket.org (via ATL).

“Every other U.S. industry that has been deregulated, from trucking to telephones, has lowered prices for consumers without sacrificing quality,” continue Winston and Crandall.

So, to spur innovation and increase economic efficiency, the legal industry should be deregulated. Or, should it?

There are myriad economic reasons in favor of deregulation, but an equal number that support its continued regulation.

Common law procedures and the protection of Constitutional rights lay at the foundation of American society. At the same time, understanding American civil liberties is complicated, convoluted even.

The 1966 Miranda v. Arizona Supreme Court decision was critical for U.S. laymen. Miranda warnings ensure that individuals are given equal and fair standing under the law, at least as defendants in criminal matters. One particular Miranda warning is the right to an attorney, and the right to have an attorney appointed for you in the event you cannot afford one. It could be inferred, along with this court decision came the economic opinion that legal services are a public good–defined by its nonexcludability and nonrivalrous consumption–not party to typical free competition rules.

Adam Smith is famous for making the observation that certain goods in society would have to be funded by means of general contribution. One of the key characteristics of a public good is its unique regulation via state and non-state actors (institutions not unlike the American Bar Association).

Some might argue that regulating the legal industry is necessary to keep legal services of an equally high-quality and ethical standard, accessible to all. By limiting entrants, regulation is, in fact, preserving the spirit of this public good.

So, which economic theory do you believe? Is law just another business in an free market, or is it a public good to be regulated? Is the legal industry headed toward deregulation or just a revision of old traditions?

-WB

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