Zen and the Art of Law Firm Maintenance*
A few links will serve to start our discussion and provide the background for the point I want to make.
In the first, the New York Times examines one large law firm that is creating what the firm calls "permanent associate" positions, which pay lower wages. In the second, the UK's Daily Mail reports on how Indian companies are now looking to the U.S. to outsource cheaper work. These two stories aren't unique; there are any number of stories on the Web about these phenomena. The economics of the legal field are changing fast, and unalterably, and law firms (not to put too Maoist a point on it) are on a Long March. To where -- that is what I am getting to shortly, if you will bear with me.
A third link is a classic post at the blog Above the Law, one that I enjoyed so much I've read it about five times since it appeared last year, about what is known as the bimodal distribution of legal salaries for new law school graduates. The figures for the bimodal chart come from the National Association for Legal Placement, or NALP, and although I have not done an exhaustive investigation of the facts that go into putting this chart together, I can say with some confidence it is completely inaccurate in one sense: if you think it is true that more than one-quarter of recent law school graduates are earning $160,000 a year or more, you have been majoring in Advanced Doobage Studies under the tutelage of Prof. Thaddeus Buzz.
This and other NALP charts show a fundamental reality, however: most new lawyers are earning far below the median salary -- which isn't very high in the first place -- if they are lucky enough to have a job at all, which many don't. Now, I don't have time at the moment to go into all the reasons why this has occurred, and will deal with that in future posts. But some of those reasons include the obvious: (a) law schools keep attracting students through false advertising and keep churning out far more graduates than the market can handle, leading to a surplus of talent that drives prices down; and (b) the economy reeks and the business, tax and regulatory environment is uncertain and likely to remain so for years.
Lawyers as a class are among the world's most reactionary people and would rather walk on broken glass than change anything about their daily lives. As a result, many dream of a return to the good old days of a few years ago with low-hanging fruit everywhere, a mythical Return to Normal. But that's like Chiang Kai-Shek sitting in Taiwan talking about going back to Peking. You better put it all behind you, baby, cuz life goes on.
In fact, the model of leverage and profit-making with legions of high priced associates was itself an anomoly, and if you didn't know anything at all about the legal field you still could have predicted the demise of this model. How? Well, for one thing, to everything there is a season. For another, this was addressed in 1937 by Ronald Coase in The Nature of the Firm, a remarkably short analysis that made what was then a startling observation. Firms -- companies -- exist for essentially one reason: by accumulating services and personnel within the firm, transaction costs can be lowered below the price those services could be purchased on the open market.
You see where I'm going now, don't you? OK, then. So before we hit the crescendo, I want to say a few things more about Coase. His influence has been enormous, yet most people have never heard of him. Unlike many big idea men, he was not prolix, and wrote only about a dozen significant papers in a six-decade career. (Update: on re-reading this post, I notice I talk about Coase in the past tense only -- he's still alive, and turned 100 in December ). He was a truly original thinker, so original that it took a long time for everyone else to catch up to him. One of my favorite Coase stories is how a number of University of Chicago faculty were discussing Coase's insight in another article, The Problem of Social Cost, published in 1961, that in the absence of transaction costs it doesn't matter where you initially place a right, because it will find its way into the hands of the person who will put it to its highest value. The faculty strongly objected and didn't believe it. The vote was 20 to 1 against what has come to be called the Coase Theorem. But the "one" was the great Milton Friedman. Over the course of two hours the faculty debated, and according to one of the participants, Friedman did most of the talking and most of the thinking too. At the end of two hours, they voted again, and the vote was 21 to 0 in Coase's favor. Isn't that a great story? Not only for what it says about Coase's originality, but for what it says about how great a teacher Friedman was. YouTube is full of Friedman videos. If you haven't watched him talk about the four ways people spend money, or how to provide incentives for the wrong people to do the right thing, you really should treat yourself.
Now, back to the point.
Recall Coase's point: firms exist for the purpose of reducing transaction costs. Consequently, we can see, when internal transaction costs are not lower than those of the market, but are higher, firms will purchase those services on the market or those firms will cease to exist. That's the heart of the matter. That's why the old model of law firm leverage is dead: the surplus of labor means the internal costs of labor within a firm so greatly exceed the cost of buying services through temporary contracts or alternative hiring arrangements that huge aggregations of employees within law firms cannot be sustained. And, as Glenn Reynolds puts it, what can't go on forever, won't.
* The reference in the title of this post, of course, is to Zen and the Art of Motorcycle Maintenance, which is about neither Zen nor motorcycles, but instead is a work of philosophy that sets out a dialectic between those who hold a romantic view of life and those who examine the facts, master the details and live in the rational world.