Early last month, I posted some comments about the differences between the ways economists and lawyers think about problems. While any such observation surely oversimplifies, I noted that -- based on my experiences both as an economics professor and as a law professor -- each profession seems to instill certain tendencies in its practitioners. While lawyers seem to take an all-or-nothing approach to problems (leading them too often to reject useful partial solutions because "that won't solve the problem"), economists come to believe their models just a bit too much. On the latter point, Alan Greenspan's recent testimony before Congress to the effect that he has been in "shocked disbelief" at the failure of his long-held model of how the economy works (unregulated markets will lead to good results) has shown the potentially enormous negative consequences of the economist's default mindset.
Beyond the tendencies that are drilled into members of the two professions (or which, perhaps, lead to self-selection into the two professions), a more interesting question is what lawyers and economists actually do. More precisely, when we have a public policy problem, how do the skill sets of lawyers and economists determine their respective usefulness in dealing with the problem? Again, I make no claim that my answer is anything beyond a broad-brush summary and that individual cases will vary. Still, recent events suggest that, on big issues, economists' contributions are essential but can be either helpful or useless depending on what the lawyers do. Examining the current crisis and the policy responses to it will, I hope, clarify my meaning.
Regarding the ongoing financial crisis, it really does take some training in monetary economics and finance to understand the causes and consequences of the panic in the financial markets. It is especially helpful to understand the nature of financial contagions to understand why the current crisis is not merely a "too big to fail" phenomenon but rather a matter of the unique fragility of the psychology of financial markets. Economists who would never support the nationalization of, say, Wal-Mart (even if it were failing) understand that the failure of even much smaller financial firms threatens to lead to much more profound problems for the entire economy. As far as it goes, the insight from economics is that the bailout/rescue is both important and unique, and that partial and temporary nationalization of the banking system is currently called for in ways that need not set a precedent for bailouts of non-financial markets. (There are, to be sure, respectable economists who disagree about the wisdom of the financial rescue. The vast majority of economists, though, agreed that the rescue was unfortunately necessary.)
What do lawyers do? They make it work (or not). Earlier this month, the economist Alan Blinder wrote an article in the New York Times, "Got $700 Billion? Sweat the Details," in which he described all of the things that need to be done well in order to make sure that the rescue plan succeeds. Blinder tells us in so many words that the legal work is now what matters. Among the issues he raises is that the rescue plan can be disastrously derailed by conflicts of interest. Without adequate legal rules and procedures that will rein in individual self-interest among the recipients of government assistance, the plan could do more harm than good. Similarly, he describes the difficulty in setting prices for assets for which there is no market. When there is no reliable market indicator for determining the fair market value of assets, it becomes essential to write complicated laws and contracts that allow the government to include contingencies in their dealings with private actors. In principle, this is easy. "If X happens, then the parties' respective rights and responsibilities change." Anyone who has studied legislative drafting or contract law knows just how simple this is not.
It is tempting to think of this as a physicists-versus-engineers split. The economists are the theorists, and the lawyers actually implement the theory. That analogy, however, does not quite get at the nature of the problem. Economists still have things to say about, for example, the likely incentive effects of provisions to curb conflicts of interest; but their theories on the smaller-bore issues leave open much more room for uncertainty. That uncertainty must be filled in by the lawyers. The better they do their job, the more likely it is that the economists' policy prescriptions will actually work. As always, a neutral legal framework cannot be assumed into existence.
-- Posted by Neil H. Buchanan
[Today's post, in slightly edited form, is cross-posted on the Concurring Opinions blog. My guest stint there ends as of today. I will, of course, continue to write my once- or twice-weekly posts here at DoL.]