Adam Smith Foresaw the Law School Crisis 242 years Ago
Lessons from The Wealth of Nations
It was only several years ago that Capital in the 21st Century, a monstrous tome by French economist Thomas Picketty, took the world by storm.
Via extensive analysis, Picketty showed that the rate of return on capital has outpaced economic growth over the course of the past fifty odd years. This has contributed to (although it’s not only the reason for) growing economic inequality in Europe and the U.S.
Given the important and far reaching conclusions of the book, it’s no wonder that it almost immediately became a number one New York Times best seller. However, a decidedly non-scientific analysis has suggested that most of the people who bought Capital in the 21st Century never got past the first few chapters.
This shouldn’t be too surprising. While economics is ubiquitous in its impact and importance, it’s a fairly dry subject, notwithstanding the success of mass audience books like Freakonomics.
In college, I was assigned to read Adam Smith’s Wealth of Nations. Though I dutifully went on Amazon and bought used copies of volumes 1 and 2, I never got around to reading more than a chapter or two, mostly because it was boring and unnecessary. What was groundbreaking two hundred years ago is common knowledge today and what isn’t, the professor or my classmates were more than willing to share during our classroom dialectics.
For the past four years, I’ve carried those two volumes around with me from apartment to apartment, job to job, and even country to country. Just recently, I finally got down to reading volume one. So far, I’ve found it not nearly as dry as I had feared it to be. If you’ve read much 18th century literature, you’ll know that a good deal of it is about as fun to read as a microwave repair kit.
I’m at page 160 right now. So far, the experience has been a walk down memory lane: I’ve gotten a welcome but unnecessary reminder of the importance of building a critical population mass to allow for minute divisions of labor, the factors that contribute to pay levels, and the interplay between interest rates and rates of return. Like I said, this is mostly retreading familiar ground although I suppose it must have been groundbreaking at one point and at a fundamental level these are very important concepts.
However, chapter 10: Of Wages and Profit in the different Employments of Labour and Stock, resonated with me in a very personal way. Despite being published in 1776, this chapter perfectly encapsulates the ongoing law school crisis and some of the largest issues facing the legal profession in America today.
If you’re not familiar with the difficulties facing contemporary American legal education, here’s a quick rundown: every year only about 60% of those who graduate from law school ever practice law. The salary distribution for new lawyers is bimodal meaning that maybe 17–18% of new lawyers will earn $180k+ out of the gate and something like half will earn $40–65k. Some will earn less- it’s not unheard of for newly minted lawyers to be offered work at $30k a year- fine compensation for seven years of post-secondary education.
Most new lawyers are saddled with large amounts of debt- $84k for graduates of public universities and $122k for graduates of private universities. Believe it or not, things have actually gotten significantly better over the past few years- law schools experienced almost a 40% drop in applicants between 2010 and 2013.
To start, Smith recognized that law is a bizarre sort of winner take most profession. In this respect, it has probably gotten better but given that top attorneys can charge hundreds of dollars an hour and draw more clients than they can reasonably service while less successful attorneys may struggle to get 10 billable hours a week, his observation still rings true on this side of the Atlantic in the 21st century.
“Put your son apprentice to a shoemaker, there is little doubt of his learning to make a pair of shoes: But send him to study the law, it is at least twenty to one if he ever makes such proficiency as will enable him to live by the business… In a profession where twenty fail for one that succeeds that one ought to gain all that should have been gained by the unsuccessful twenty.” (Smith, 122–123)
In political science, there’s a concept called rent. It’s neither the amount you pay your landlord nor the Broadway musical but any money made over and above the normal rate of profit that’s come about via government interference. Protectionism and the creation of cartels are two common sorts of rent seeking policies.
Cartels aren’t limited to Mexican drug gangs and middle eastern oil producers; they’re far more ubiquitous than we might think. In fact, most if not all professional organizations are rent seeking cartels to some degree. By restricting entry into a profession, they artificially limit the number of practitioners and raise the price of labor beyond what it would otherwise command.
Now this isn’t always a completely bad thing, simply because barriers to entry have multiple effects not all of which are bad. Take doctors, for example. Even getting into a low ranked medical school is difficult, medical school is extremely time consuming and stressful, and residency programs are designed to stretch would be doctors to their mental breaking points.
The end result both limits the number of doctors legally able to practice (artificially limiting supply and raising the fees they can charge) while also ensuring that practicing doctors are tough, competent, and knowledgeable.
However, this isn’t always the case for all professions all of the time. Many lower tier law schools are essentially at open admissions currently meaning that if you have a bachelors degree you can probably get into a law school regardless of your GPA or LSAT score.
Moreover, there are problems with legal education itself. Many legal experts agree that the third year of law school is largely superfluous and could be easily done away with. Furthermore, it appears that there is a sort of consensus that law school doesn’t teach many of the practical aspects of being a lawyer and that lawyers learn far more from on the job practice than they do in the class room. The following observation is taken from a footnote:
He [Smith] added that the real motive behind such long periods of study was commercial, and they were simply designed so that the student may spend more money among them and that they can make more profit by them. (Smith, 137)
He adds:
“The institution of long apprenticeships can give no security that insufficient workmanship shall not frequently be exposed to publick [sic] sale.” (Smith, 138)
Much of the problems with law school have to do with its exorbitant price and the expectation that students will fund their studies through government loans. At many, not just top schools but also poorly ranked law schools that offer abysmal job prospects for grads, tuition might run between $40 and $60k a year.
The reason most schools are able to charge these high fees is because of the easy availability of government loans to students. Never mind that these loans generally have high interest rates nor that most students will never realistically pay them back, it doesn’t matter because current debt forgiveness programs are designed in such a way that most students will never pay back more than a fraction of the money that they borrow.
The end result is that many otherwise qualified candidates have been turned away from the profession and that increasingly, those who choose law do so less because they’re eminently qualified than because they’re willing to gamble away their future on the slim chance that it will lead to a worthwhile career.
“In professions in which there are no benefices, such as law and physick [sic], if an equal proportion of people were educated at the publick expence [sic], the competition would soon be so great, as to sink very much their pecuniary reward. It might then not be worth any man’s while to educate his son to either of those professions at his own expence [sic].” (Smith, 148)
I’ve had a personal experience with this. Shortly after college, I dated a Korean international student from my university. Her parents were already paying a very large sum of money to have her educated in America. Her ambition was to become an American attorney, but with the state of the legal market, an education even at a relatively well ranked school simply didn’t make sense for her.
Given that her ambition was to work in the public interest and that as a foreign national, she wasn’t entitled to government loans, a legal education would necessarily entail her parents paying a few hundred grand for her to try to get a job that might pay $40k a year (and which might soon disappear due to cuts in state funding for legal defense of the indigent).
Believing that she no longer had a chance at building a career in America, she asked if I would be comfortable sacrificing my own career to live in Korea (this was not an un-entirely unrealistic question as I had already moved to Korea by that point to be closer to her). I declined and we split up, which proved an altogether uncomfortable experience given that I had moved nearly 5,000 miles for her.
For an American citizen, the calculus is a little different. An American citizen can take out several hundred thousand dollars in loans, pay back a small fraction of those loans through current public service loan forgiveness programs and discharge the remainder of the loan after a period of ten years (without taxable implications- PLSF is a different beast than the normal PAYE program).
For those working in the private sector, the loan repayment timeline is about twice as long and there are potentially destructive taxable implications at the end of the loan forgiveness cycle.
In other words, the government gives a boatload of money to students →the students give that money to the schools →the students repay only a small fraction of that loan (although it’s hanging over their heads and impacting their lives in a myriad of depressing ways for a decade or two).
The students lose. The government loses. The taxpayers lose. The law schools are starting to lose as applications have fallen precipitously and some law schools have been forced to close their doors due to a lack of students or accreditation problems resulting from the admittance of students who are objectively unprepared to handle the rigors of a graduate level legal education.
The current incentive structures are totally out of wack with reality.
They would be entirely abandoned to such as had been educated by those publick [sic] charities, whose numbers and necessities would oblige them in general to content themselves with a very miserable recompence [sic], to the entire degradation of the now respectable professions of law and physick [sic].(Smith, 148)
Law school has essentially become a game, one with potentially ruinous consequences. The long term impact on the legal profession will be negative. There’s simply no good reason for the current model of American legal education.
Road-map to Redemption
To fix the legal market, the ABA needs to grow a spine and shut down most American law schools (ideally, America should have no more than 50 law schools and total admissions should be capped at 25k to induce artificial scarcity and boost wages). Applications should be blind and law schools should be barred from considering anything but GPA and LSAT scores.
Tuition should be capped at no more than $10k a year. What we have is fundamentally a question of resource allocation and currently resources are being allocated in a very wasteful and unproductive manner. We should make admissions entirely merit based. Government aid should be administered in block grants directly to the schools and an accountability oversight commission should be set up to monitor expenses. Law students should be treated as students, not customers.
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