Judge Posner Asks Where Are the Law Professors

in helping to find our way through the economic crisis? The economists are evident, even if in some kind of professional and ideological disarray and angst. But where are the law professors? And what expertise do they - should we - bring to the table of policy, law, action, and reform? As Judge Posner says, the whole affair bristles with legal questions. But they are ones requiring not just lawyers as particularly clever scribes but, instead, legally trained academics who are able to bring the skills of legal training together with economic policy ... well, where are the legal academics? As he says, writing in July at his Atlantic blog, the training and orientation of academic lawyers suffers from limitations in assisting in the practical and policy work of reform:

[R]ecruitment of academics from practice has declined, as academic law has become progressively "academified" and specialized. Increasingly, in imitation of more conventional academic disciplines, legal academics are expected to focus the research component of their work (and this inevitably influences the teaching component) on specialized research the results of which are publishable in academic journals read mainly by other academics in the author's specialized subfield. The preparatiion and publication of such research are time-consuming endeavors and therefore are ill adapted to responding constructively to rapidly evolving current issues, especially ones that cross disciplinary and subdisciplinary boundaries.

As a result, with a few notable exceptions, such as Lucian Bebchuk, Edward Morrison, and Steven Schwarcz, academic lawyers (and Bebchuk and Morrison have Ph.Ds in economics, as well as law degrees) have not made a contribution to the understanding and resolution of the current economic crisis, even though it bristles with legal questions. And I don't mean only or primarily legal questions that can be readily answered on the basis of orthodox legal materials; for those questions can be answered adequately by the large, sophisticated law firms engaged in a commercial or corporate practice. I mean rather legal issues that cannot be resolved intelligently without consideration of issues of policy--in the present instance issues of economic, including macroeconomic, policy. And not only legal issues, but issues of economic policy to which legal knowledge is relevant, even if the issue itself is, for example, legislative in character, rather than requiring the application of existing law.

I think there actually are a lot of legal academics doing this kind of policy work, and not merely as a new academic subspeciality (what would we call it? A new Bepress journal, perhaps, Studies in Armaggeddon?). Hal Scott, Todd Zywicki, Elizabeth Warren, my new WCL colleague Anna Gelpern, Bill Bratton, Joe McCahery - I take Dick's point, but think that there are more than meet the eye, particularly in DC. HIs post then goes on to raise a number of specifically legal issues, such as the authority of the Fed in its lending programs, and whether it is genuinely authorized by its statute, etc. But it seems to me that these examples take too narrow an approach. Both the roles of the professors Dick names, and the role of the legal academy, should be different. It is not simply answering a question as to whether the law covers something or doesn't cover something, or should or should not, and how you would draft it.

Rather, what legal academics presumably bring to the policy table is a particular expertise in certain forms of institutional behavior under incentives, an understanding of how regulatory and legal structures actually, as distinguished from theoretically, structure risk taking and risk shifting, particularly in institutional settings that participate in broader markets. This differs, partly in principle but partly in just general acculturation in my experience, from the economist's expertise. In my experience, at least, academic lawyers, particularly if they do have some practical experience, tend to be far more attuned to the nuances of institutions, their internal incentives, disincentives, actual behaviors, etc., than the economists tend to be. The economists in my experience, for what it's worth, tend to be better at understanding financial markets as systems - but it leads them to make many simplifying assumptions about the internal behavior of institutions, including the behaviors of agents in compensation arrangements, etc.

I think that legal academics will have much to contribute in the reform of finance in the remaking of institutions and markets with fewer panglossian assumptions about how they will find optimal solutions on their own, and with fewer panglossian assumptions that they will do so as a matter of natural necessity. But I also think, even more strongly, and will raise it in some subsequent posts, that lawyers will bring to the table an understanding of the unquantified risks and uncertainties that are written into financial contracts - derivatives, securitizations, etc. - that financial analysts, economists, many other non-lawyer actors, took for granted as not having any effect. Covenants and conditions with particular wording - how do you quantify those contingencies? Behold the fat tail, it exists after all, and bears gifts, sort of, if you count as a gift the arrival of Shiva, dancing on the back of the world.

Put another way, a certain fluidity in the analysis, and risk pricing, across instruments in the financial markets depended upon an easy assumption that certain instruments were economically or financially 'equivalent' to other instruments. And so to facilitate pricing ... these preferred stock instruments are functionally equivalent to certain kinds of debt instruments and so we can use them just as if they were, or price other instruments as though they were, etc. But from a strictly legal, doctrinal standpoint they might not be equivalent, should it ever come to a legal fight over the terms, at all. Or at least it raises a level of uncertainty that is not part of the "equivalence" analysis.

I plan to do some posts here, and eventually perhaps write a short paper, with the title, When Financial Equivalents Are Not Actually Legal Equivalents ... and perhaps I'll be able to persuade Judge Posner to comment, either here or at his Atlantic blog.

Off Kilter (mail):
I was wondering where all the lawyers were when the Chysler/GM bailouts turned bankruptcy law on its head. Surely lawyers have something to say about secured vs unsecured creditors and the obvious repercussions of judges ignoring that distinction.
8.21.2009 2:12am
Houston Lawyer:
Is he speaking of all those great legal theorists who gave us Sarbanes-Oxley after the Enron fiasco?

Posnes suffers from an illusion that there are experts out there who know what to do in all situations. In addition, he seems to be under the delusion that the people who are trying to re-write the regulation of financial institutions would listen to expert advice that runs contrary to their goal of increasing government control.

One of the best ways to determine how laws should be written is to understand the way things work under existing law. Right now, not enough time has elapsed to figure out how our current legal structure will treat all affected parties participating in complex financial instruments. Once we see who wins and who loses in the current structure, we can evaluate what, if any, changes need to be made to current laws and regulations. If we implement changes before we have this data, we should just acknowledge that we have no idea what we are doing.
8.21.2009 9:13am
byomtov (mail):
Given Posner's recent performance, he would do well to stick to legal matters and stay well away from economic issues.
8.21.2009 11:28am
anonymously biking a'loud (mail):
whilst pedaling, the question occurred to me, Should we (American people) be hearing from Rear Admiral Steven K. Galson, M.D., M.P.H. at some point? he's our Acting US Surgeon General. should we first have a standing general before declaring war on health? appears we have many questions with few qualified leaders on the subject of health and wellness.
8.21.2009 11:30am
Just Dropping By (mail):
I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. If you like cheap jordan shoes or you are intersting in buy jordan shoes and supra shoes.welcome to my blog.
wholesale supra shoes, buy cheap jordan shoes for free shipping here.

What is it about the VC that attracts Chinese shoe salesmen?
8.21.2009 11:36am
sk (mail):
"Rather, what legal academics presumably bring to the policy table is a particular expertise in certain forms of institutional behavior under incentives, an understanding of how regulatory and legal structures actually, as distinguished from theoretically, structure risk taking and risk shifting, particularly in institutional settings that participate in broader markets."

Really? If it is true, it is very interesting. In most of academia, it is academics who are masters of theoretical background, and the practitioners who understand how things 'really work.' Business, engineering, political science, etc. Theory is written in the academy, real world understanding in business.

You are saying the exact opposite. Academic lawyers understand regulatory and legal structures 'actually' structure risk taking. Who understands them from a 'theoretical, structural' perspective, and why would those people know theory, while academics know practice, in this one particular area of expertise?

8.21.2009 12:04pm
troll_dc2 (mail):
Are generalizations helpful here? SOME academic lawyers--especially if they had a prior life spent in the real world--may be useful in doing policy work, but not all of them, and even some with the requisite qualifications may not be very good in practice.

I note Houston Lawyer's observation that Posner "seems to be under the delusion that the people who are trying to re-write the regulation of financial institutions would listen to expert advice that runs contrary to their goal of increasing government control." There is a fair amount of truth here, unfortunately.
8.21.2009 12:20pm
Kenneth Anderson:
Sk - well, as compared with the academic economists, I think that's true. Maybe not. But my personal experience for what its worth tends to show that academic economists are much more attuned to systems, including markets as systems, than they are to the "grittiness" and "stickiness" of institutions. Maybe that's not so, it's just my experience.
8.21.2009 12:53pm
The River Temoc (mail):
The answer is that with a couple of exceptions (DOJ, mostly), lawyers who do policymaking work aren't acting as lawyers, any more than a private sector lawyer who moves to investment banking is acting as a lawyer.

Lawyers acting as such advise on the *legality* of a given policy move, and not so much on its merits. (This is what John Yoo's critics fail to appreciate, for instance.)

Yes, there may be some legal skills that are transferable to the policymaking arena, such as negotiation, but the ultimate litmus test is this: does a policymaking job require bar membership? Nearly always the answer is no, and it could be held by a non-lawyer.

Take Elizabeth Warren, for instance. She may be a law professor, but her research, at least as presented at DC think tanks, is economics (or at least law and economics) through and through.

Law and economics is social science -- it inquires into how changes in law (i.e., the independent variable) affect the economy (i.e., the dependent variable). In the case of Prof. Warren, she looks at how changes in bankruptcy law affect the middle class economically.

Law and economics has very little to do with assessing the legality of policy shifts, drafting statutes, and so forth. On the Hill, policy advisors farm that work out to legislative counsel.

Law and economics specialists may use their legal training to identify and read statutes, but they are not acting as lawyers. Again, the litmus test: advising on law and economics does not require bar membership. So it is unsurprising that many of the legal academics involved in policymaking are economics PhDs.
8.21.2009 3:27pm
Eli Rabett (www):
We recently had a discussion of why law schools should use math course grades for admission. Posner is the Dunning Krugar poster child for that one
8.21.2009 6:13pm
ttre (mail) (www):
They've done such a good job with law school, let them loose on the country!
8.22.2009 12:02pm
In my experience, law professors know even less about economics than the "economists" do. Out of two professors so far who have ever spoken about economics, one seemed to be some sort of quasi-supply sider, the other a Keynesian mad hatter who didn't even understand Bastiat's broken window fallacy. Of course, the latter has a PhD in Economics.
8.22.2009 12:08pm