Teaching Law Students Economics

Josh Wright —  6 November 2006

Larry Ribstein has an interesting post responding to Professor Warren’s discussion of her own classroom experiences teaching Carnival Cruise Lines, Inc. v. Shute, 499 U.S. 585, 593-94 (1991). Professor Warren describes a discussion with her students involving the notion raised by Justice Blackmun that “passengers who purchase tickets containing a forum clause like that at issue in this case benefit in the form of reduced fares reflecting the savings that the cruise line enjoys.” Specifically, the discussion was aimed at eliciting student reactions as to whether Blackmun’s line of reasoning was fact or mere theory.

Long story short: Given this choice Warren’s students answered “fact” and Warren worries about what this response says about what we are teaching our law students. She asks “is it all all about deduction, with nothing left over for reality?” Larry’s post makes the case that the students were correct:

Justice Blackmum was responding to the Court of Appeals conclusion that such clauses should never be enforced because they’re not negotiated. In other words, the availability of a market means that direct negotiation should not be an absolute prerequisite to enforcement. This paragraph contains Justice Blackmun’s reasoning against the Court of Appeals’ conclusion. Recall that, according to Professor Warren’s report, she asked the students whether this was “fact” or “law.” Given only that choice, the students responded that it was “fact,” which seems logical since it was reasoning in support of a legal conclusion, and not the legal conclusion itself.

But then Professor Warren appears, again from her post, to have changed the question: was it “fact” or “theory.” That’s a different and somewhat more difficult question. She was concerned that the students “resisted.” But even as an aged law professor, I’m not familiar with this distinction, so it’s not surprising the students were confused. Perhaps the professor means to distinguish between something that does, and something that does not, require additional proof. Is she referring to the distinctions discussed in Imre Lakatos’ Proofs and Refutations? Or what?

Professor Warren clearly wants to contrast some correct method of reasoning with the erroneous “deductions” of the economic model. But it’s not clear who exactly is engaging in this erroneous reasoning. Not Justice Blackmun, who as just noted was only suggesting reasons why bargaining should not be an absolute prerequisite to enforcement. Not the students, at least from Professor Warren’s description, because they were apparently making the fact-law distinction, and seemed quite willing to recognize the qualifications necessary to make the leap to economic proof of some sort.

Read both posts. While I agree with the spirit of Warren’s post that economic logic should be subjected to empirical testing and we ought to be teaching our students how to think critically (about economic arguments and otherwise), I want to take this discussion in a different direction. What are we teaching law students about economics in various law schools? My thoughts on this subject appear below the fold.

In short, I too worry about what we are teaching law students about economics but for different reasons than Professor Warren. Professor Warren appears concerned that students uncritically accept the “erroneous deductions” of the economic model. The fear is apparently (at least, from the description in the post) that the students clung to the economic logic that lower costs resulted in lower prices despite prodding that the assumptions underlying the “model” may not apply:

“Even as I pressed on the presumptions underlying the deductive model–fully informed parties, competitive markets, low transactions costs, etc–the students hung on to their model.”

As Larry suggests, it appears that Warren was seeking some “correct” form of reasoning to be contrasted with the economic model which must only be correct under some narrow set of conditions. The message is that markets are frail, and that economics can be dismissed as an analytical tool when real world conditions vary from economic textbooks or some version of one might find in an Econ 1-level description of markets. This message does not mesh well with reality. Nor does it serve our students well. I worry more about the impact of this lesson for our future policymakers.

In this specific case, the economic logic that lower costs result in lower prices is not nearly as fragile as Warren’s description suggests. It does not depend on fully informed parties. It does not depend on low transactions costs. And it does not depend on competitive markets though greater competition may generate different pass-through rates. Monopolists also pass-through cost reductions in the form of lower prices (which is all Blackmun’s argument requires). Nor does the economic logic depend on consumers “pricing” forum selection clauses. A commentor (“Jeff”) to Warren’s post who was apparently also a student in the class recognized this point:

I think it is quite obvious that most consumers do not consider forum selection clauses when valuing contracts (we could even do an empirical study that would likely say so). The question is whether the cruise line companies value forum selection clauses and if the savings / expense of the ticket reflects this.

This does not mean the argument requires zero assumptions, e.g., that the clauses lowered the cruise line’s costs at all. But this is a far cry from arguing that the economic logic of lower costs passed through to consumers only applies under some world approaching perfect competition. I don’t mean to make too much of this one example. After all, I wasn’t there for the discussion and don’t know the precise nature of the conversation. I’m quite sure there are other examples in the classroom. Drawing from my own experience as a law student, the Coase theorem was occasionally presented with a passing reference to a footnote in the casebook and the concept dismissed as irrelevant because it only applies a concept that only applies with zero transactions costs, a condition always missing from real world markets.

There is a lot to Warren’s post that I agree with. It is critical that we teach students to think critically about arguments (economic and otherwise), and to think about how the predictions of various models c
omport with empirical reality. We should be encouraging rigorous analysis of the conditions under which various arguments apply and when they do not. My primary point is that it is at least equally important that we avoid teaching our students straw man versions of economic theory or any other arguments for that matter. This approach is an invitation to students that hand waving around policy issues that deserve more rigorous treatment rather than developing a deeper understanding of the economics involved. Such an approach would not be doing our students any favors. Instead, it would encourage them not to develop analytical skills that might well help shape sensible public policy.
Afterall, there is no shortage of policy issues where even a basic understanding of economic principles could do a world of good (e.g. price gouging regulation).

11 responses to Teaching Law Students Economics

  1. 

    I thought the point of the post was to address Ms. Warren criticism of the use of “economic logic” as a basis for defending a forum selection clause.

    Mr. Davidson clearly doesn’t approve of the type of thinking used by Ms. Warren’s students, i.e., believing that a forum selection clause could plausibly be part of an economic trade-off for prospective customers. Mr. Davidson would prefer that the students use a different mental model–one that assumes that Carnival was trying to use forum selection as a way to screw their customers and drive up costs for their competitors. I have to say that I was exposed to a lot of models when I was in B-school, but this one never came up as a viable option.

    Whether or not a company ought to be able to use forum selection clauses in this way to drive down their costs is, of course, a matter for the law to decide. But to invent a conspiratorial, value-destroying model of capitalism to support limiting contract terms, I think, intentionally obfuscates the core arguments of this discussion.

  2. 

    Well I don’t think I deserve to be painted as a victim here. I did quite a bit of econ in undergrad (though I stopped short of econometrics…good god that stuff is difficult). And it included some history of econ theory (from Marx and Veblen to Hayek and Keynes), so I do have some perspective.

    I think the last time I dealt with this case was in my Int’l Business Transactions course where we discussed possible consequences of the decision; I wouldn’t call it “propaganda.” The ideas expressed above are my own.

    I do believe you’re right in pointing out that there should be a limit to which corporations can insulate themselves from litigation (such as not being able to contract out of fraud, as you point out). But to me (and perhaps only to me) Carnival Cruise Lines was beginning to reach that threshold. I doubt most people would have read the forum selection clause (information cost) or, even if read, would have understood its consequences (same), which is a cause for concern because the potential consequences of the clause (litigation in a foreign venue) would (potentially) be greater than the information cost. But there are probably some people who would have bought it anyway (weighing risk and possible future costs of litigation far away v. ticket price).

    Ok, that’s about all I can muster for a friday…what was this post about again?

  3. 
    John L. Davidson 10 November 2006 at 3:02 pm

    while I am sure it will fall on deaf eyes, now new ones, the last note here proves my point.

    Mr. Magid was taught in law school that the motive for the clause was that it cut Carnival’s costs.

    He is right in sensing that there was no proof of this proposition.

    He was not taught that it could have been just as likely that Carnival was “freeriding,” profiting at the expense of the next business who tries to sell a product or service to the customer who go screwed by Carnival.

    Those how do not understanding the freeriding proposition need to recall that the customer is also supposed to be a rational economic man. Having been screwed by Carinval, when he or she next buys something, the transaction costs will go up for that seller, who must deal with a now hostile customer. It is for this reason that Court’s, wisely, refuse to enforce contracts that limit a party’s right to rescind for fraud, See Abry Partners v LP 2006 WL 358236, for such will drive up the transaction costs for everyone.

    Those who defend lying never consider that is less expensive to put lying SOBs in jail and to deter lying in that manner than it is to bit every coin in one pocket–which any reader of Mark Twain knows was a common practice when “lead coins” circulated widely.

    Nor, was he taught that the clause could have just as easily been inserted by management as a part of a pattern and practice of lying and concealing–if customers can go to court, it may hasten the day that the directors learn what is up. The recent BP explosion in Houston appears to be a prime example of this sort of “budget based” crime. Similar cases exist for cruise ships–look at all the ship born flu-like virus cases now (the Delta Queen has had to cancel cruises).

    Nor was he taught that the clause may just have been some “product” sold by a law firm to the general counsel, via comp. tickets to a hockey game.

    In other words, what Mr. Magid was taught was a half truth–spin and propaganda–the whole picture was not set out. He should start asking, why such an incomplete discussion?

  4. 

    I think it would be theory. By allowing the cruise lines to pick a convenient forum to them and thereby protecting themselves from lawsuits in other states, it would lower uncertainty and the cost of doing business. In a competitive market, that would lead the cruise line to pass any cost savings to consumers. Whether or not that actually happens…meh.

    What I remember striking me about this case in law school though (about 3 years ago), was that Carnival was able to put boiler plate language on the back of a ticket and contract out of the consumers’ access to courts. In negotiated sales contracts, I think it makes sense for both parties to limit the forum in which to bring their claims, for certainty purposes (will a certain clause be enforceable under British law? Will the ship pass through Florida waters, etc.). But it’s negotiated to the satisfaction of both parties.

    There just seemed to be something approaching the unconscionable when a cruise line can cut costs by limiting the forum in which its customers can seek access to justice.

  5. 

    Don’t miss the comments to Warren’s post! One commentator (a business law professor, no less) suggested to test pricing models by asking students whether “any of them priced their purchases based on comparing forum selection clauses.” Why not also ask Harvard Law students whether any of them considered having an out-of-wedlock child for a $500-a-month welfare payment? That would test some theories too. Never mind all this average versus marginal stuff. HLS students are never average.

  6. 

    “When I read about Warren’s complaint, I was actually gratified that her law students seemed sufficiently imbued with economic logic to make their stand.”

    This was exactly my impression of the discussion as well (at least, the description of it).

  7. 
    John L. Davidson 7 November 2006 at 8:18 pm

    Having too many years at the bar–and a lot better appreciation of economics than those I see posting here–I can assure you that I very strongly believe that there are small parts of economics that need to be taught to law students. Agency costs and tournament theory–while I don’t hold Bainbridge in high regard on other matters, his writings on this subject are very informative–are good examples–they go right to motive and intent and good lawyers need to learn how to quickly discern motive. Free riding is another example.

    I could identify lots of other pieces, but that is all. Economic theory, today, is incapable of answering most legal questions, I believe. I would make an exception for some antitrust issues. It is, too me, teaching propaganda to suggest otherwise to students.

    I realize it is “fun” to some to argue about fact or theory, but Carnival Cruise exposes deeper flaws—the court wholly misses the free riding and agency issues.

    As for concepts like supply and demand, my 2 cents is that students should already have that knowledge before admission. Then they would not be tempted to listen to someone who says a supplier will cut costs, if their costs drop. If that were true, why did oil prices go up this summer? Production costs didn’t rise–instead we saw demand + fear.

    In sum, students need to be taught the distinction between a good theory or tool and spin. The court bought spin in Carnival Cruise and someone ought to jolly well say such. Some self promoters of “law and economics” are urber pandering and someone needs to say that, also.

    If anyone would bother to read my posts you will see that I believe there is a lot that law profs should be doing viz economics, but I will admit it is a pretty far cry from where faculties are now

    as for those who are engaged in a pity party because of my comments, I can only say, get a life

  8. 

    Have you seen how nattily Larry dresses? I don’t think it’s unreasonable to assert that Larry panders to the rich and powerful, except to the extent that “pander” implies an intellectually barren or dishonest argument, which would be a scurrilous accusation in Prof. Ribstein’s case.

    When I read about Warren’s complaint, I was actually gratified that her law students seemed sufficiently imbued with economic logic to make their stand. I think the general state of econ learning is this country among all students is appalling, the effect of which is clearly seen in polls where the vast majority of Americans believed that last year’s rise in gas prices was the result of Big Oil price gouging. My main concern upon reading that the student’s starting point was the “all-controlling… deductive logic of economics” was the awful possibility that perhaps the only people who understand economic logic are going into law.

  9. 

    I would be less kind, Josh. Although I stopped reading at the idiotic “pandering to the rich and powerful,” I’m certain there is no substance in Mr. Davidson’s comment beyond that. It’s not just that there’s nothing I can agree with, but there’s no indication from the comment that Mr. Davidson wishes to engage in any civilized dialogue; rather, he simply wishes to demagogue. You are, of course, wholly correct in pointing out his hypocrisy in that the comment disparages economics while purporting to employ some “real” economic analysis of it’s own. In addition, I regret to say that I have yet to find any of Mr. Davidson’s comments remotely helpful, engaging or interesting. I find them only silly, bombastic and content-less. We do welcome lively debate here at TOTM (although I know Mr. Davidson will ever-so-gently claim otherwise), but this isn’t it. I hope, Mr. Davidson, in the future you will engage with our posts in a more constructive manner or else resist the temptation to grandstand and hand waive without content here.

  10. 

    John, I tried very hard to find something in the above comment that I could agree with and failed miserably. I think it is virtually all wrong, which is not to say I don’t appreciate the comment. The closest thing I could come up with is that current economic theory — if by that we mean the highly formal mathematical models currently in vogue in top economics journals — is not of much use (though not useless) to law students. But nobody is talking about teaching them how to write economic models. We’re talking about teaching basic economics. There is quite a bit to be learned about basic concepts: downward sloping demand curves, elasticities, cost curves, basic game theory, etc.

    Lastly, I cannot help that point out that your argument that economics is useless appeals to the concepts of supply and demand, risk, agency costs, diversification and free-riding. Perhaps you believe that teaching students to learn these concepts well isn’t such a bad idea after all.

  11. 
    John L. Davidson 7 November 2006 at 6:39 am

    teaching law students “a deeper understanding of the economics involved” would first require an “economics” worth teaching. However, as well stated by a series of recent pieces in the Financial Times and other publications of note, current economic theory is wholly lacking, often to the point of being useless.

    For example, the idea—that’s all it is—that suppliers reduce price when their costs drop completely conflicts with the entire concept of supply and demand, as well as other issues such as agency costs–i.e., since arbitration often costs more than litigation, isn’t the more likely reason that companies seek such is that agents want to hide information about their own conduct?

    Also, the idea that suppliers reduce price conflicts with everything Drucker has written on how to price, but I leave that for another day.

    Similarly, the theories of diversification and efficient markets are both disproved by Warren Buffett.

    Last, few if any tools exist for separating the micro and macro economic consequences, which can be entirely different. For example, non-compete agreements aid the firm but damage the economy as a whole. The same is true for harsh bankruptcy laws and lawsuits for deficiency judgments following foreclosure. Studies of all these “laws” show that they discourage risk taking and new business formation.

    Anyone familiar with the writings of Mr. Ribstein knows that his postings–while self trumpted as law and economics–are but uber pandering to the rich and powerful. The shallowness of the discussion of Carnival Cruise makes that plain–where is the discussion of the economic costs arising from the cynicism of customers treated unfairly over a period of time? Rational man doesn’t forget that the last time he got screwed; thus, the next time he may not buy at all. Accordingly, it can be also accurately argued that Carnival Cruise is nothing but a free rider, profiting at the loss of the next seller.

    If there is anything to be taught law students about economics today, it is that what is being offered is “spin,” not good science.