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‹ FEATURED DISCUSSION

May 25, 2006

Final thoughts on lawyer licensing

By Larry Ribstein

This is the final post in the featured discussion. Thanks to Jonathan and the folks at the Manhattan Institute for making it all possible.

In my last post, I listed supposed problems in the legal marketplace that lawyer licensing is supposed to deal with, and summarized why it is at best a flawed response to these problems.

Jonathan persists in his claims that mandatory licensing would work better than the market, but has no support for those claims other than repetition. I can only again point to my lengthy article on the subject cited in early posts and repeat that the absence of mandatory regulation does NOT mean that there would be no mechanisms for dealing with these problems, but only that they would be dealt with through a competitive market rather than by the lawyer’s cartel.

Jonathan asserts in response to my argument that licensing inflates the price of legal services that, in fact, lawyers charge a wide variety of prices, and it’s not clear lawyers are “overpriced;” that legal services “don’t seem to be that expensive;” that “I often see a line at the counter at McDonald’s. I’ve never seen a line outside a lawyer’s office. I would be interested to see alternative data but my experience tells me there is no shortage of legal services in the marketplace and therefore no effective cartel created by lawyer licensing;” and that “I can see no evidence that lawyer licensing is driving up the cost of legal services. Legal services of the kind often purchased by the poor and the middle-class seem to be readily available at more-or-less reasonable prices.”

I would prefer a more scientific approach to the problem. I don't know what the “right” price for lawyers is. We have markets for that. What is the “length of line” test supposed to prove? Those who can’t afford a lawyer are not waiting at the lawyer’s office – they’re doing without the advice.

I do know that reducing the supply of something usually raises the price. Ideally this would invite more supply, unless it’s restricted by a licensing law. The law of supply and demand suggests that the price is higher given licensing than it would be without regulation. I suspect that an unregulated market would look very different at the lower end, maybe not so different at the higher end. The big question is whether the higher prices are worth it, which gets back to the value of licensing.

As for evidence, the best measure of the economic effect of lawyer licensing that I’m aware of is Dean Lueck et al., Market and Regulatory Forces in the Pricing of Legal Services, 7 J. Reg. Econ. 63 (1995). They show no correlation between barriers to entry (e.g., bar passage rates) and the price of legal services, but they do show a correlation between sets of regulatory barriers and lawyer earnings. A detailed analysis of this paper is in my article.

There is a lot of analysis of the discriminatory effects of licensing laws: Milton Friedman, Occupational Licensure, in Capitalism and Freedom 137, 150-51 (1962); S. David Young, The Rule of Experts: Occupational Licensing in America, 75-80 (1987); Richard B. Freeman, The Effect of Occupational Licensure on Black Occupational Attainment, in Occupational Licensure and Regulation 1 (Simon Rottenberg ed., 1980) at 165; Benjamin Hoorn Barton, Why Do We Regulate Lawyers?: An Economic Analysis of the Justifications for Entry and Conduct Regulation, 33 Ariz. St. L.J. 429, 444 (2001); Walter Gellhorn, The Abuse of Occupational Licensing, 44 U. Chi. L. Rev. 6, 18 (1976).

Josh Wright, over at Truth on the Market asks:

"I am curious as to the state of the empirical evidence with respect to lawyer licensing and its impact on consumers. If I recall, the Federal Trade Commission has recently been involved in some advocacy efforts in favor of limiting the scope of unauthorized practice of law statutes. My sense is that a number of states must have relaxed unauthorized practice of law restrictions (I think Arizona is one), or similarly relaxed restrictions on lawyer licensing, such that one could directly test the impact of these restrictions on consumers in terms of prices and quality of service. There must be work on this somewhere. My quick Google search did not return anything right away, but does anybody know of empirical work in this area?”

Good questions. Joyce Palomar, The War Between Attorneys and Lay Conveyancers—Empirical Evidence Says “Cease Fire!”, 31 Conn. L. Rev. 423 (1999) found little evidence of risk to the public from lay providers of real estate settlement services. But there’s obviously a lot more work to be done. Fred. S. McChesney & Timothy I. Muris, The Effect of Advertising on the Quality of Legal Services, 65 A.B.A. J. 1503 (1979) and Advertising and the Price and Quality of Legal Services: The Case for Legal Clinics, 1979 Am. B. Found. Res. J. 179 found that a legal clinic using advertising in high-volume practice reduced costs without compromising quality.

There’s obviously a lot more empirical work to be done.

This gets to Jonathan’s question about “transition” to a market regime. Actually, it would be a fairly simple matter for states to simply decide to allow people to do what they previously couldn’t do. Most of the adjustment would be for the previously protected class of lawyers.

But that doesn’t mean we shouldn’t proceed carefully, and our federal system allows us to do just that. Jonathan decries the fact that “With 50 separate state regimes to manage, policy-makers would either have to endure a decades-long transition in which some states deregulated and others didn’t or there would have to be some kind of nationwide, federally-mandated deregulation that trumped state law. How would that work? How could it work?”

In fact, these separate regimes are a blessing, not a curse. With 50 (actually, 51) different regulators we have an opportunity to test how reforms actually work, as Josh Wright suggests. This sort of test doesn’t have to wait – and indeed shouldn’t wait – for some “blue ribbon commission” to complete its work. I don’t see a problem with such a commission, as I said before, but the best possible commission is the formidable laboratory enabled by our federal system. The time to start is now.

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