Do Lawyers Have Any Disciplinary Comparative Advantages in Designing Financial Regulatory Reform?

An economist at the Federal Reserve Bank of Richmond, Kartik Athreya, recently raised a bit of ruckus with a personal-views paper titled, “Economics is Hard.” It was mentioned on Greg Mankiw’s widely-read blog, among other places, and elicited an irritated response from, among others … well, just google the article and you can get all, all manner of reactions, pro, con, and in-between.  Why the intense responses?  Athreya goes after the “amateurs,” as it were, who write on economics and economic policy in the blogosphere and elsewhere.  To quote the abstract in full:

In this essay, I argue that neither non-economist bloggers, nor economists who portray economics —especially macroeconomic policy— as a simple enterprise with clear conclusions, are likely to contibute any insight to discussion of economics and, as a result, should be ignored by an open-minded lay public.

The targets of this attack are wide and varied.  They include bloggers, particularly on macro, who do not have Ph.D training in economics, but also lots of other people who comment in various ways, including business and finance journalists – I guess one would say, all the non-Ph.Ds.  And some of the Ph.Ds when they comment in popular, “bloggy” ways.  So, for example:

The response of the untrained to the crisis has been startling. The real issue is that there is an extremely low likelihood that the speculations of the untrained, on a topic almost pathologically riddled by dynamic considerations and feedback effects, will offer anything new. Moreover, there is a substantial likelihood that it will instead offer something incoherent or misleading …

Economics is hard. Really hard. You just won’t believe how vastly hugely mind-boggingly hard it is. I mean you may think doing the Sunday Times crossword is difficult, but that’s just peanuts to economics. And because it is so hard, people shouldn’t blithely go shooting their mouths off about it, and pretending like it’s so easy. In fact, we would all be better off if we just ignored these clowns.

What to make of this?  Ambrose Evans-Pritchard, international business editor of the London Telegraph, is representative of one view:

Kartik Athreya, senior economist for the Richmond Fed, has written a paper condemning economic bloggers as chronically stupid and a threat to public order.

Matters of economic policy should be reserved to a priesthood with the correct post-doctoral credentials, which would of course have excluded David Hume, Adam Smith, and arguably John Maynard Keynes (a mathematics graduate, with a tripos foray in moral sciences) … Actually, Greenspan never got a Phd. His honourary doctorate was awarded later for political reasons. (He had been a Nixon speech-writer). But never mind.

Dr. Athreya’s outburst was probably not so well-timed, but my feelings are mixed.  I don’t think the expert economists have done such a great job, but that does not lead to a conclusion that one should switch to the amateurs.  It is a little hard to sort out – George Soros and Warren Buffett do not have these credentials, and yet hedge funds such as Soros’s make pure macro bets with huge amounts of money – should they be listened to, despite their lack of academic credentials?  Surely the late Peter Bernstein was not an “amateur” in the sense that Dr. Athreya means?

It’s peculiar – the distinction Dr. Athreya seems to be groping toward is, indeed, as much about the nature of amateurs and amateurism as it is about economics and economics experts.  Unfortunately, his form of technical education does not seem to leave him with the intellectual resources to search for it – because, not insignificantly, this kind of distinction is something found in the humanities, not economics.   I was once asked to write about this for the Times Literary Supplement – on the difference between amateurs such as the King of Prussia (or me) at the cello versus an amateur, in the sense of someone who did not get paid or even any professional remuneration for his work, despite it being of consummate skill, such as Charles Ives.  The reason Ives was an “amateur” in music was precisely on account of the demands of his art, which overwhelmed anything that a professional musician could hope to offer, and be paid for so as to make a living, in the market for culture.  The world is a much more complicated place than merely those with Ph.Ds and those without.

Still, it does not follow that the failure of the experts means the success of the non-experts.  I’m a lawyer and a law professor, and I do confess myself sometimes exasperated by the confidence with which amateurs assert their views on topics on which I am expert, and would never speak so confidently.  Including, alas, the comment threads to blogs on occasion.  Okay, all that is wind-up, however, for what might be thought of as the flip side to Dr. Athreya’s concern for the boundaries of his professional world.

I have a different concern, which is anxiety about what the proper role of non-expert experts, so to speak, such as business and finance lawyers and law professors, ought to be in opining on horribly complicated and difficult matters such as financial regulation reform.  You might think that it is not complicated or difficult but, I’m afraid, you would be wrong.  It is hard, for all the reasons that Dr. Athreya said with regards to economics and macro particularly.  The failure of the experts did not show that it was easy; quite the contrary.

What, then, is the right role for lawyers and law professors in these issues?  What, if any, is the comparative advantage of non-economist lawyers and law professors in offering views on these issues?  If you accept that parts of this really do require genuine expertise – however acquired and whether credentialed or not – and that a big part of that is economics, and that important parts of it turn on the substance of economic views, what is the role for the non-economist experts in this?

I addressed this a few months ago in a talk to students at my school, and was asked to turn the remarks into a short essay for a publication that the business-oriented law students produce for practitioners and send around fairly widely – the Business Law Brief at my school.  It’s not an academic production, deliberately not, and I was asked to produce a brief essay.  I decided to devote it to the question of comparative advantages for lawyers in financial regulation reform.  It deliberately exaggerates the idea that lawyers and law professors are sufficiently distinct from the economists – which, if one ignores the formal credentials, is obviously often not the case in these regulatory affairs – in order to sharpen the analytic categories.  But at bottom, it is a short, 4500 word exercise in professional … anxiety.  It is the flip side to Dr. Athreya’s confident assertion of credentialism.

I was going to wait until the final published version came out in the Business Law Brief and post the final pdf.  It is short and non-academic, a published talk given to students.  But I’ve gone ahead and posted the near final version as a working paper at SSRN, because I think it adds something to the heated arguments over Dr. Athreya’s claims.  Below the fold is the SSRN abstract.

This short (4,500 word) essay addresses a worry sometimes at the back of the minds of financial lawyers and law-and-finance scholars seeking to intervene in the debate over financial regulation reform in the wake of the financial crisis of 2007-09. As lawyers and law professors, what – if anything – do we have to contribute to the debate? Are the fundamental questions of the financial crisis not economic in a professional and disciplinary sense? Questions that require formal disciplinary skills and training in economics in order to be able formulate positions on the fundamental issues, in which the skills of the lawyer and law professor are, at most, those of scribe seeking clearly to write down policy positions necessarily reached elsewhere? Framed in this way, these questions aim gently to provoke a bit, and exaggerate a bit, in order to ask the still-sensible question: what, if any, is the comparative advantage of lawyers and law professors in arguments over financial regulation reform?

This essay began as a talk to law students, and it remains an informal, discursive, and meditative consideration of professional and disciplinary roles. It seeks in a very short space to identify several areas in which lawyers and law professors bring particular insights to the regulatory table. They include not just the ability to read closely and formulate complicated ideas in words that form statutes and regulations – and a professional ability to see unintended consequences in the form of words – but also a particular disciplinary appreciation in the law for the “thick” relationships of agency, fiduciary, loyalty, and care that bind together institutions far more than the simplification of “nexus of contracts” can capture.

Moreover, regarding financial markets and instruments, lawyers have a better appreciation than other disciplines of the ways in which financial instruments used in markets as though they were economic equivalents are not actually legal equivalents, if one reads, so to speak, the fine print – fine print that matters particularly when their equivalence is challenged as a matter, unsurprisingly, of law. Additionally, lawyers have a greater sensitivity to the contingencies of processes such as bankruptcy – even when “rule-base” – and the uncertainties that, on efficient market theory, are priced into financial instruments, but – at least the lawyers will wonder – how so and on what actual, rational valuation method, if, after all, the lawyer-experts are themselves are uncertain.

This (ruminative) talk will be published in the American University Washington College of Law Business Law Brief as a short essay.

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