Law as an immature industry

Larry Ribstein —  17 June 2010

It’s no news that law grads can’t find good law jobs and can’t pay their debts. Steve Bainbridge explains:

The post-war expansion of the regulatory state, the opening of the courthouse doors to new claims during the warren Court era, and the litigation explosion provided an exogenous shock that caused demand for lawyers to rise rapidly. Following a fairly standard s-curve model, the demand for lawyers grew faster than the population and economic expansion would have predicted, driven by the aftermath of those shocks. Over the last couple of decades, however, the market for lawyers has adapted to those shocks. Because there have been no comparable major exogenous shocks affecting the demand for lawyers, the market has matured. We would therefore predict that growth in the demand for lawyers would slow until it reaches a level that can be sustained by population and economic growth.

Steve says law has the characteristics of a mature industry: growth of large firms squeezing out smaller ones; stiffer competition and price-cutting; less innovation. The result will be permanent oversupply, a problem that law schools refuse to confront. Ultimately the market will shut down the lowest ranked schools.

Plausible but wrong. The real problem is that law is an immature industry. Constricted by heavy regulation of the legal profession and the absence of conventional property rights in legal knowledge, not only has it not matured, it has not really even achieved full-fledged existence. Innovation has not declined – rather, it has not really even begun. Also, as I argued in Death of Big Law, this absence of a viable business model has led to the demise of large firms, and the industry’s devolution into smaller ones – the exact opposite of Bainbridge’s symptoms of “maturity.” Big Law’s relatively brief period of success owed to a confluence of macroeconomic factors with the licensing-enforced monopoly. When this vein played out, the prospectors went bust.

Innovation and entrepreneurship can create the first legal information industry. Studying how this can happen is my next project, as I discussed a few weeks ago. More specifically, Bruce Kobayashi and I will be focusing on the creation of formal and informal property rights in legal knowledge. Tentative title: “Owning the Law.”

This has obvious implications for legal education. The winners will not necessarily be the current first tier, but the law schools that find a way to train the first generation of legal entrepreneurs.

Larry Ribstein

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Professor of Law, University of Illinois College of Law

One response to Law as an immature industry

  1. 

    Larry, some half-baked reactions to what I view as a really interesting real-world industrial organization economics project with important legal/ policy implications. Its exactly the type of research project that current IO economists should be interested in — but have long ago given up (excluding your co-author) in favor of more formal theoretic contributions.

    Anyway, here goes: it doesn’t appear that either you or Steve mean something as simple as “industry age” when discussing maturity here (or that you are necessarily using the term the same way). I think you might both mean something like how far an industry is along some model evolutionary path. It is a bit confusing to discuss in these terms because the model path you are using seems to be “toward efficiency,” i.e. an industry that has not tended toward its efficient organization is immature (in this case because it is fettered by regulation and poorly specified property rights). Steve’s is something different. In any event, at least as I read you, mature v. immature doesn’t seem to really get at underlying economics of the dynamic I understand you to be talking about here at all, i.e. sub-optimal economic performance because of state-imposed barriers to entry and lack of property rights in legal information, both leading to weak incentives to innovate. I’m also interested to hear more about how the various economic forces at work predict lower firm size in your model. Is it increased specialization? Reduced transaction costs? Both?