Judge Posner Asks Where Are the Law Professors

in helping to find our way through the economic crisis? The economists are evident, even if in some kind of professional and ideological disarray and angst. But where are the law professors? And what expertise do they – should we – bring to the table of policy, law, action, and reform? As Judge Posner says, the whole affair bristles with legal questions. But they are ones requiring not just lawyers as particularly clever scribes but, instead, legally trained academics who are able to bring the skills of legal training together with economic policy … well, where are the legal academics? As he says, writing in July at his Atlantic blog, the training and orientation of academic lawyers suffers from limitations in assisting in the practical and policy work of reform:

[R]ecruitment of academics from practice has declined, as academic law has become progressively “academified” and specialized. Increasingly, in imitation of more conventional academic disciplines, legal academics are expected to focus the research component of their work (and this inevitably influences the teaching component) on specialized research the results of which are publishable in academic journals read mainly by other academics in the author’s specialized subfield. The preparatiion and publication of such research are time-consuming endeavors and therefore are ill adapted to responding constructively to rapidly evolving current issues, especially ones that cross disciplinary and subdisciplinary boundaries.

As a result, with a few notable exceptions, such as Lucian Bebchuk, Edward Morrison, and Steven Schwarcz, academic lawyers (and Bebchuk and Morrison have Ph.Ds in economics, as well as law degrees) have not made a contribution to the understanding and resolution of the current economic crisis, even though it bristles with legal questions. And I don’t mean only or primarily legal questions that can be readily answered on the basis of orthodox legal materials; for those questions can be answered adequately by the large, sophisticated law firms engaged in a commercial or corporate practice. I mean rather legal issues that cannot be resolved intelligently without consideration of issues of policy–in the present instance issues of economic, including macroeconomic, policy. And not only legal issues, but issues of economic policy to which legal knowledge is relevant, even if the issue itself is, for example, legislative in character, rather than requiring the application of existing law.

I think there actually are a lot of legal academics doing this kind of policy work, and not merely as a new academic subspeciality (what would we call it? A new Bepress journal, perhaps, Studies in Armaggeddon?). Hal Scott, Todd Zywicki, Elizabeth Warren, my new WCL colleague Anna Gelpern, Bill Bratton, Joe McCahery – I take Dick’s point, but think that there are more than meet the eye, particularly in DC. HIs post then goes on to raise a number of specifically legal issues, such as the authority of the Fed in its lending programs, and whether it is genuinely authorized by its statute, etc. But it seems to me that these examples take too narrow an approach. Both the roles of the professors Dick names, and the role of the legal academy, should be different. It is not simply answering a question as to whether the law covers something or doesn’t cover something, or should or should not, and how you would draft it.

Rather, what legal academics presumably bring to the policy table is a particular expertise in certain forms of institutional behavior under incentives, an understanding of how regulatory and legal structures actually, as distinguished from theoretically, structure risk taking and risk shifting, particularly in institutional settings that participate in broader markets. This differs, partly in principle but partly in just general acculturation in my experience, from the economist’s expertise. In my experience, at least, academic lawyers, particularly if they do have some practical experience, tend to be far more attuned to the nuances of institutions, their internal incentives, disincentives, actual behaviors, etc., than the economists tend to be. The economists in my experience, for what it’s worth, tend to be better at understanding financial markets as systems – but it leads them to make many simplifying assumptions about the internal behavior of institutions, including the behaviors of agents in compensation arrangements, etc.

I think that legal academics will have much to contribute in the reform of finance in the remaking of institutions and markets with fewer panglossian assumptions about how they will find optimal solutions on their own, and with fewer panglossian assumptions that they will do so as a matter of natural necessity. But I also think, even more strongly, and will raise it in some subsequent posts, that lawyers will bring to the table an understanding of the unquantified risks and uncertainties that are written into financial contracts – derivatives, securitizations, etc. – that financial analysts, economists, many other non-lawyer actors, took for granted as not having any effect. Covenants and conditions with particular wording – how do you quantify those contingencies? Behold the fat tail, it exists after all, and bears gifts, sort of, if you count as a gift the arrival of Shiva, dancing on the back of the world.

Put another way, a certain fluidity in the analysis, and risk pricing, across instruments in the financial markets depended upon an easy assumption that certain instruments were economically or financially ‘equivalent’ to other instruments. And so to facilitate pricing … these preferred stock instruments are functionally equivalent to certain kinds of debt instruments and so we can use them just as if they were, or price other instruments as though they were, etc. But from a strictly legal, doctrinal standpoint they might not be equivalent, should it ever come to a legal fight over the terms, at all. Or at least it raises a level of uncertainty that is not part of the “equivalence” analysis.

I plan to do some posts here, and eventually perhaps write a short paper, with the title, When Financial Equivalents Are Not Actually Legal Equivalents … and perhaps I’ll be able to persuade Judge Posner to comment, either here or at his Atlantic blog.

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