Law, Economics and the Economics of Law Practice

Everyone is probably aware of the strong ties that exist between law and economics. Both law and economics are social systems. Every member of society necessarily participates in both systems. It might be more accurate to say that both law and economics are sub-systems within the total framework of society.

The two systems - law and economics – are supported by differing motivational forces, and to some extent, exist independently of each other as systems. Human motivation is always complex. Adam Smith assigned “enlightened self-interest” as the motivational basis for his atomistic theory of economics. Somewhat similarly, Thomas Hobbes believed that “self-preservation” is the first law of nature. Needless to say, the motivational forces that support both economics and law are far more complex than either Smith or Hobbes suggested, but their suggestion helps one to understand the role of the elemental motive forces that energize the systems.

Regardless of the similarities of the underlying motivational force, the organization of these systems have evolved quite independently. Economics, beginning with the kind of reasoning that Adam Smith expressed in The Wealth of Nations arises in the marketplace. In western society we strongly believe that a free market economy is the most efficient means of satisfying the greatest good for the greatest number – a concept that Jeremy Bentham and other Utilitarians helped popularize. Law, on the contrary, has its institutional home in the governmental system—not in the free market. Human motive force is a pre-requisite for the effectiveness of law, as I asserted in my 1994 book, Conscience and Command, but the enforcement of law in the modern world is vested in governmental entities. Government draws on the normative force that arises in society to energize law. Morality, of course, is not a governmental function, but the same normative motive force that energizes law arises in society and is the motivational basis for morality, independent of government.

In earlier columns, we have alluded to the connections between law and economics. In the series of articles dealing with family law, I described the effects of the introduction conflicting of economic motive forces into the family. As important as child support and spousal support are, their impact in the legal system introduces conflicting economic motivation that can lead to the destruction of the important emotional aspects of family. The economic conflict creates tensions that are not good for children. Economics is also a strong factor in criminal justice. Economically, the people who most often become involved in crime are those who do not have strong talents that provide an economic contribution to society.

When we discussed the impact of differing racial cultures in a series of articles, we pointed out that four hundred years of slavery and segregation did not inspire a black culture to strongly endorse the existing legal system. In the absence of a strong working system of law, economic development is difficult, and these difficulties plaque Alabama’s Black Belt counties. Strong economic development depends on the existence of property rights and enforcement of contracts.

The interplay between law and economics, and the impact of the economics of law practice on the legal systems, are fertile areas for discussion. In the series of columns that we will now undertake, we will be discussing how the economics of law practice tend to shape the legal system itself. We will discuss the economic motives of corporate America and its relationship to defense firms, who are normally paid on hourly rate. We will also be discussing the economics of law practice for Plaintiff’s attorneys who are usually paid on a contingency fee basis. And of course, we will note the negative implications of a system that matches plaintiff’s lawyers who are compensated on a contingency basis against defense lawyers computed an hourly rate basis. We will discuss the pervasive presence of liability insurance. It is time for the legal system to recognize the fact that insurance spreads the risk of loss that is involved in litigation and that we are not dealing with insurance in the legal system with sound policy. For instance, automobile liability insurance is required by law, and everyone - jurors included - knows that, but the law still fails to take that knowledge into account. We will be discussing the implications of all of the foregoing issues for the legal system. The economics of law practice, ironically, renders the legal system less efficient for conflict resolution, often actually creating conflict.