I’m considering submitting two new course proposals to our curriculum committee at our law school here in DC. I’d be grateful for your pedagogical advice.
One would be a reading-research seminar in law and economics on the current state of debate over the Efficient Market Hypothesis. I imagine we would read some standard economics articles and material running back over the last few decades, including classics like A Random Walk Down Wall Street, but also a couple of recent books on the debate, including Justin Fox’s The Myth of the Rational Market, and perhaps Dick Posner’s book, among other things. One specifically law school connection would be to help students understand how the theory underpins much regulation, how courts view cases, many parts of the law itself.
The second class would be on financial derivatives, considered as contracts. We already have a class on derivative regulation at my school – this would be a class specifically on the contracts themselves, and the economic context in which the derivatives are used.
Would those seem like useful seminar courses for business law students in their third year of law school? Or yet another example of professor doing what interests him without much attention as to pedagogical utility? We are a solid mid tier school, in DC; many, many of our students go into government regulatory agencies dealing with the economy.
Houston Lawyer says:
Both classes sound fairly useless to me. How about a class that teaches students about normal debt instruments, like indentures and credit facilities. Boring, maybe, but useful.
October 6, 2009, 8:24 pmProf. S. says:
I agree that they seem pretty useless, but I’m pretty sure that’s what your 3L year is all about.
If you’re going to talk about useful financial stuff, then I’d recommend a class on dealing with valuation and valuation experts. If you wanted to make it relevant to the current economy, I’d talk about why some companies trade at asset value * X, while others are asset value * Y, or how to read through balance sheets to figure out where money is really going.
I realize that most schools probably have some “accounting for lawyers” type classes, but I think you’d draw more attention if you gave it a litigation/investigation type bend. That sort of info should apply to all lawyers, whether in trying to price assets, find assets, or sue over assets.
October 6, 2009, 8:30 pmwesley says:
I would have loved to take the first class, and found it useful, but that might be unusual.
October 6, 2009, 8:42 pmfda says:
The second class would be useful if it included a section at the beginning on fundamental of debt and other plain vanilla instruments. Prof S, re dealing with valuation experts, I think that one needs to have a lot of basic information and knowledge in order to do that well and I am not sure that law students would get much out of it at this stage. (I say this as a 25+ year practitioner who deals with valuation experts regularly – the junior associates are still too lost in the weeds to benefit from this type of class perhaps as much as from other classes available
October 6, 2009, 9:09 pmTom says:
I have been in private practice for over 25 years. Young lawyers are already acutely aware that supply-and-demand (and other aspects of efficients markets) are a very real and personal issue. Nationwide, the courses you suggest would be useful to an infinitesimal number of law students. It may be your school is different, and, if the current administration does ramp up Big(ger) Government, there may be a demand for more regulatory lawyers. [Insert ideological expletive here].
However, I think most law students have much more immediate and practical concerns given the legal economy. How about finance courses in how to run a solo practice or small law firm? How to make enough money to pay off your student loans without getting into ethical difficulty? Or, perhaps, a law school curriculum generally more oriented towards giving young lawyers practical skills?
October 7, 2009, 8:35 amLance Cahill says:
Please, please, please don’t drag thirty+ years of financial economics research through the mud fields of law school. Justin Fox has already done enough damage–think of what law professors would do. Oh, we don’t have to wait: Richard Posner wrote a book just last year.
A little education is a dangerous thing, and that’s what many law students will be receiving (due to strict realities on class time & academic background) if they take a law & economics course. The least harm principle should come into play, and I think the most harm will be done by trying to introduce the EMH at the introductory level to people with little-no-interest in the technical profession of finance.
I really don’t see how EMH is relevant to law school, even if you are trying to have a finance course at a law school.
Anti-trust law & economics is much more relevant course-wise, even if it has not made the news in recent years.
October 7, 2009, 8:47 amCvMe says:
The first one seems primarily to be an economics course. To the extent it’s related to the law, it’s probably at a Posnerian level (i.e., useless to most of us). Of course, I may just be projecting, since I don’t understand how these ideas underlie much of regulatory laws either. My understanding of the current state of the rational markets theory in light of the meltdown is: “Well it seemed like a good idea for a while, but I guess it was just fundamentally wrong.”
The second idea seems, if it’s possible, to be even more esoteric than the first. I would run the other way from these course selections.
October 7, 2009, 8:55 amTitus says:
The second seminar, yes (at least until they destroy what’s left of the economy and people stop using them). The first class, no. But then again, I find all exercises in law and economics painfully erroneous.
October 7, 2009, 9:49 amBryan Gividen says:
IANALS, but I am an undergraduate student in Economics who hopes to take law and economics oriented courses once I do enter law school. Your first course sounds like a great addition to a school’s courses. At my undergrad, we have a 400-level undergrad course on law and economics that specifically reviews the Efficient Market Hypothesis relative to torts, contracts, and a little bit of property. To date, it is my favorite course. While the material was challenging, I did not think it was outside of ANY student’s ability who had an Econ101 background. Our professor found models that required only algebraic manipulation and even started the course with a two-day crash course on the economics needed for the course.
Given law and economics increasing impact on policy and jurisprudence, I think courses like these are important for students who hope to be involved politically or administratively in the future.
October 7, 2009, 9:55 ambyomtov says:
I don’t see how the first would be of value to lawyers, and unless the students know much more financial and statistical theory than I suspect the vast majority of law students do, it would be superficial to the point of meaninglessness. The main thing that lawyers should know about EMH is this: regardless of academic debates and fine points, it is extremely difficult for investment managers to consistently outperform the market on a risk-adjusted basis. Any claims that someone is doing/has done this should be viewed skeptically.
As for derivatives, again I’m dubious about the background of the students. A basic course on what derivatives are, starting with forwards, futures, and options (as a professor of mine once said, “I am going to live th erest of life in the future, and I would liketo know my options.”) would be valuable. How much vlue is there in studying the details of the contracts?
I confess to being surprised at these suggestions. Based on what your own posts have implied about the level of understanding of finance among law students, these do not seem like useful classes.
October 7, 2009, 10:07 amTCO says:
The first is a waste for lawyers. It would be like quantum relativity for poets.
If you really think the lawyers need more finance (and have the noodles to learn it), give it to them straight. But not a debate on EMH. Pu-leeze.
October 7, 2009, 10:27 amGoat Scape says:
I think they would be “useful” to very few students, although, at the same time, I think they would be “interesting” to a greater number. I took a Law & Econ. Seminar in my 3L year and found it fascinating. I’m not sure I’ve had much use for game theory or indifference curves while in practice during the ensuing 23 years, but I nonetheless found the subject interesting and the course worthwhile.
That’s all by way of saying that most law students take, beyond the school’s required courses, a mix of what “they’ll need” (either in practice or to pass the bar exam) and what they find interesting (but won’t likely “need” in the future).
October 7, 2009, 10:33 amPLR says:
I agree with that. I’ve basically practiced M&A and corporate bankruptcy for all 25 years of my legal career. My undergraduate degree in economics has served very little purpose, but the 9 credits in the graduate business school for financial accounting, managerial accounting and portfolio management were invaluable.
If a law student wants to take finance, statistics or economics classes, take them from the college at the university that teaches those subjects. And for God’s sake, stay away from Posner.
October 7, 2009, 11:00 amMary Barnicle says:
I manage and hire regulatory attorneys and while not a lawyer work in the area of regulation, with the benefit of a strong background in economics. As a client, I don’t think that the first course would be valuable. I’d prefer to hire someone who has studied enough economics and statistics to at least evaluate economic and arguments.
October 7, 2009, 12:23 pmFedya says:
“How to create billable hours out of thin air”. :-p
October 7, 2009, 1:00 pmTim says:
I’d enjoy the first class a lot, myself.
Although I’d basically be cheating considering by then, I’d have my BA in Economics + a couple business classes under my belt (financial accounting, managerial accounting, corporate finance).
October 7, 2009, 1:04 pmJRL says:
I took a Law & Econ seminar my third year of law school. It was a good class. Unfortunately, the people that really need the class will never gravitate to it. See some of the comments above for proof of that. It ought to be a required 1st year, 1st semester course.
October 7, 2009, 1:33 pmohwilleke says:
The second class, perhaps more broadly conceived, would be much more valuable. Business law and business taxation make very little sense until you understand the customary terms of the transactions that people actually engage in. Understanding the transactions allows lawyers to infer what interpretations are sensible and what intuitions about what is going on in situations where they have incomplete information more accurate. Much of the tax code and bankruptcy code is indecipherable without this understanding.
Routine big business and financial transactions are totally outside the realm of experience of 95% of law students, even though the majority will have some exposure to the broad outlines of the economic theory of corporate finance (particularly after having taken a securites law survey). Many law students don’t know that due on sale clauses are routine terms in mortgages. Most law students couldn’t tell you with certainty what a $57 a square foot commercial lease term translates into on an annual basis. Fewer still could lay out the typical intermediate steps (e.g. angel investors, followed by venture capital) that a business takes between being a garage business and becoming a publicly held company. Only those with Wall Street experience or an MBA can typically classify the main kinds of derivatives that are out there and when and why they are used.
Yet, the first job many associate attorneys will have is to determine whether there is anything out of the ordinary in, and to quickly identify the key provisions of, business contracts that they encounter in due diligence or discovery.
One of the most valuable classes I took in law school was commercial transactions from J.J. White, which was awash with diagrams and explanations of the underlying deals and payment systems. I may not know from memory all the rules of letter of credit law or negotiable instruments law, but once you know how the deals work, finding the answers to the questions is straight forward. But, you can’t walk into Barnes and Nobles, or log onto Amazon, or even read the Wall Street Journal on a semi-regular basis in bits and pieces and quickly get up to speed on these underlying issues.
Equally importantly, a lot of the bad scholarly work and bad litigation argument done by very smart people flows from a lack of understanding of the transactions. Unless you know what the customary terms are, and what the usual disagreements are when disputes arise, understanding these contracts is like trying to derive Roman Catholic practice and doctrine solely from the Biblical text. Possible, perhaps, but an approach prone to wrong turns and wasted time.
October 7, 2009, 1:35 pmDLD says:
I’d like to disagree with the folks who have said the first course (on the Efficient Market Hypothesis) wouldn’t be of value to lawyers. One area directly affected by this is securities law — specifically, the establishment of reliance (through a fraud-on-the-market theory), loss causation, and damages in private actions for enforcement of the securities laws (such as Section 10(b) of the Exchange Act). So, the purely economic material could be supplemented by a review of caselaw in this area to see how courts have applied the economic theory.
Of course in actual practice, expert testimony by economists will almost certainly be submitted to the court but I still think a lawyer practicing in this area would want to understand the big picture issues regarding the EMH.
October 7, 2009, 1:48 pmMichael F. Martin says:
If the first course were to combine the theory of EMH with study and practical application to GAAP accounting rules, that would be more useful.
October 7, 2009, 3:58 pmAlanDownunder says:
“Teaching the controversy” on EMH would be like teaching the controversy on Intelligent Design. In a sane world, there would be no controversy, no ID and no EMH.
October 7, 2009, 6:51 pm