Let’s start at the very beginning. When analyzing the merits of any regulation — i.e., any rule that disrupts private ordering by threat of force — one should first ask what problem the regulation aims to avert. When it comes to the rules banning sales (and thereby preventing purchases) of legal services by unlicensed individuals, most of the familiar market failures pose no concern. There’s no technological externality (one not mitigated by the price mechanism). There’s no monopoly problem. There’s no public good.
The only widely recognized market failure that could exist in this context is information asymmetry — one party to a potential transaction (the provider of legal services) has significantly better information about the subject matter of the transaction (the quality of those services) than does the other (the client). Not only may some poorly informed clients find themselves “ripped off,” but the market for legal services as a whole may be degraded by a version of George Akerlof’s famous lemons problem.
Akerlof illustrated the systematic adverse effects of asymmetric information by hypothesizing a used car market in which cars vary in value, which is known to the sellers but not to buyers. Hoping to avoid overpaying for a “lemon,” rational used car buyers will pay no more than the average value of a used car. This limitation on buyers’ willingness-to-pay causes sellers of above-average cars to withdraw their cars from the market, so that only lemons are available. And if buyers are rational, they should anticipate that sellers of high-value cars will pull their cars from the market, which should cause them to lower their bid prices even further (to the average value of the non-withdrawn lemons). Pretty soon, the market will unravel even though there are plenty of high-value cars that could have been sold to purchasers who would have paid a high price had they possessed better information about car quality.
Assuming providers of legal services have better information about service quality than do consumers, mandatory licensing of lawyers may boost consumer confidence and thereby help ensure that high-quality legal services remain available in the market.
Of course, there are downsides to mandatory licensing. Requiring providers of legal services to attend a three-year accredited law school and to pass a bar exam that tests all sorts of subjects many lawyers never need to know (commercial paper?!) raises barriers to entry into the market for legal services. Existing attorneys can charge high rates for routine, nearly ministerial tasks because they can avoid competition from individuals who are qualified to perform such tasks but have not jumped through all the hoops required for licensing. And because licensing requirements raise the fixed cost of becoming a lawyer by mandating an expensive degree, an inordinate amount of class time, and mastery of all sorts of subjects that are, for many lawyers, irrelevant, such requirements tend to raise the rates for legal services even where there is significant competition among lawyers. In short, any attempt to ensure quality and avoid a lemons problem via licensing will drive up prices and, to put it in terms more appealing to those who don’t like all this econ-talk, “reduce access to justice.”
So a third step in the regulatory analysis (after considering the problem to be averted and the potential adverse effects of regulating to avoid that problem) should be to consider less restrictive alternatives. In this context, there are some attractive options.
The Kosher Model. One obvious response would be for the government to do nothing. All sorts of service transactions involve asymmetric information and yet commonly occur despite government inaction to fix the “problem.” Housepainters, mechanics, landscapers, plumbers, general contractors, etc. all have better information about service quality than do their clients, but we still have thriving markets for their services. All sorts of private certifiers – e.g., Better Business Bureaus, Angie’s List, etc. – have emerged to provide consumers with good information about service quality. Such certifiers compete with each other on quality and often innovate to differentiate themselves from rivals, thereby providing more precise information to consumers. There are, for example, more than 200 kosher certifying agencies in the United States, enabling observant Jews (who would otherwise be victims of asymmetric information!) to select a certifying symbol that corresponds to their own preferred level of kosher stringency. It’s easy to imagine a similar certifying system for attorneys. Some agencies could certify high-quality will drafters, others good DUI lawyers, etc.
The Organic Model. A more “protective” (paternalistic?) approach would be for the government merely to prescribe a standard for what constitutes a competent lawyer. The state would, in short, act as a certifier, conferring its seal of approval – the label “licensed lawyer,” or something similar – on individuals who had jumped through certain hoops. Consumers could then choose to hire one of those individuals or, if their needs were more limited or they knew (perhaps from a private certifier) that a non-accredited individual was nonetheless quite good, could hire someone lacking the state’s endorsement. This is the tack the government has taken with organic food: The government has prescribed what the term “organic” means so that consumers will know what they’re getting when they buy an organic product. But sellers of “nearly organic” foods can still sell their wares and advertise how their offerings differ from conventionally produced products as long as they don’t use the term “organic.”
The state could implement this sort of certification model on either an opt-in or opt-out basis. Under the former approach, the state would permit providers of legal services to opt in to the lawyer licensing system—and perhaps thereby charge higher rates—if they met the prescribed requirements. Under an opt-out approach, an unlicensed legal service provider could sell her services only if she first notified her client of her lack of certification and attained the client’s informed consent.
The Status Quo: Enforce a Non-Waiveable, One-Size-Fits-All Standard. The crudest possible approach to the legal services market’s information asymmetry problem is the status quo: prescribe a set of prerequisites that anyone who sells legal services must satisfy. Of all the approaches considered, this one thwarts the greatest number of mutually beneficial transactions. While it is the most “protective” of the uninformed consumers who manage to purchase legal services, that protection comes at a cost. The higher prices occasioned by the status quo render basic legal services beyond the reach of large number of consumers. Licensed lawyers, of course, benefit from the system, as do the politicians that favor them.
We end up, then, with a spectrum of policy options that proceeds from most to least liberal, as follows:
- Kosher (rely on private certification) –>
- Opt-in Organic (define a label and allow service providers to use it if they meet criteria) –>
- Opt-out Organic (require service providers who do not meet the state’s standards to attain informed consent) –>
- Status Quo (preclude all sales by providers who don’t meet the state’s standards).
As someone who makes his living providing one of the prerequisites to a lucrative licensed lawyer career, I have a personal financial interest in maintaining the status quo. But as someone who genuinely cares about access to justice and economic expansion, I find the current regulatory approach appalling. In the end, I would much prefer something akin to the kosher (or maybe the “opt-in organic”) model.
I suppose we’re not all rational, self-interest maximizers after all.