A Sighting of David Ricardo in Palo Alto

by Don Boudreaux on December 31, 2005

in Law

I’m genuinely delighted to learn that students at Stanford’s School of Law are learning the meaning and benefits of the principle of comparative advantage.  This fine op-ed in today’s Washington Post by Josh Sheptow, a Stanford law student, explains why the widespread practice of high-priced corporate attorneys devoting some of their time to do pro bono work for poor people is “staggeringly inefficient.”

Here’s the core of Mr. Sheptow’s argument:

My argument is straightforward. First, note that there are nonprofits such as the Legal Aid Society that do nothing but provide free legal services to low-income clients. Their offices are not fancy and their attorneys command much lower salaries than their counterparts at large, prestigious law firms. As a result, it costs these organizations (or, more accurately, their donors) less than $100 for each hour of legal services they provide to low-income clients.

Now consider a lawyer who charges paying clients $500 an hour (roughly the going rate for an upper-level associate at a large corporate law firm). If she donated 10 hours of fees to Legal Aid, she could fund roughly 50 hours of legal service to low-income clients. That’s five times the amount of service she could provide if she spent those 10 hours doing pro bono work herself. Thus it is much more efficient for her, and for high-priced lawyers generally, to donate their fees rather than their time.

Well done, Mr. Sheptow!

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{ 19 comments }

Mark December 31, 2005 at 9:41 am

Be careful what you wish for Don.

I don't doubt that someone would seek to use that argument to show that government should simply take a proportion of the lawyers earnings and spend it on legal council for the poor.

Someone will explain to me that this is a wrong application of the argument. I don't suppose it would do anything to prevent that if I said I already know. My point is that this is something that has developed in the free market without anyone forcing it to happen, so my first instinct is to wonder if there is a reason for this practice.

Perhaps helping the poor is not the only aim. It might be that lawyers gain valuable experience working on smaller cases that improves their effectiveness in prosecuting larger cases. Maybe high priced lawyers get greater personal satisfaction from dealing direct with the great unwashed masses than they do from giving money to an NGO. It is even possible that high priced lawyers earn 5 times as much because they are 5 times as productive (from winning more cases and/or by spending less time per case).

It could be you're absolutely right and this is just a case of liberal guilt overiding common sense. Or it could be that the market is looking at priorities not considered here and has produced a solution that is the most efficient, even though it is not obvious how to an observer without all the information.

save_the_rustbelt December 31, 2005 at 10:16 am

Gee whiz, if corporate lawyers spend time on pro bono work they will have less time to cheat consumers and find ways to bypass labor laws.

Besides, theys hould be busy designing golden parachutes for senior executives who screw investors.

Besides, if corporate lawyers are exposed to ethics, oh the thought is shocking.

Don Boudreaux December 31, 2005 at 10:23 am

If labor legislation and regulations restrict the freedom of workers and employers to contract voluntarily with each other, anyone who figures out ways around these "laws" performs a service for all involved.

Mark Wickens December 31, 2005 at 11:33 am

Is there no added value that these more expensive lawyers provide? Are they not capable of providing services that Legal Aid lawyers cannot? It seems to me the point being made applies only if Legal Aid lawyers as a group are equally as good as $500-an-hour lawyers or that the work being done cannot benefit from the more expensive lawyers' superior or more specialized skills.

Mark Wickens December 31, 2005 at 11:39 am

Another factor that has to be figured into the equation is the benefit that the lawyer obtains from pro bono work. Perhaps he enjoys doing 10 hours of pro bono work far more than he'd enjoy donating $5000 to Legal Aid. This doesn't change the point about "inefficiency" from the perspective of the recipients, but there is more to consider than that.

Siggyboss December 31, 2005 at 12:05 pm

Let's be serious. A top-notch-high-income lawyer is not going to put the same effort into a pro bono case, which further supports the idea of donating their legal fees to charity.

Skeptico December 31, 2005 at 12:34 pm

Implicit in your argument is the assumption that the $50 lawyer is equally as good as the $500 lawyer. How could this be? Surely the $500 lawyer must be better than the $50 one or he wouldn’t be able to charge ten times the amount?

Maxim December 31, 2005 at 1:13 pm

The point, I believe, is that the respective lawyers specialize in their own fields. Because of this specialization, the lawyers who work low-income cases have a comparative advantage in dealing with those cases.

The corporate lawyer has an absolute advantage — he is better than a Legal Aid Society lawyer even in dealing with low-income cases. But is he better than five Legal Aid lawyers (the amount that could be paid if he donated his $500 fee)? Because of specialization, it is a safe bet that the answer is no.

John P. December 31, 2005 at 1:16 pm

A few quick points, from my perspective as a corporate lawyer. Apologies in advance for the length of this:

1. Mr. Sheptow's argument (with which I agree) is not a new one. I recall people making it when I was in law school some 10 years ago. (Which is not to say that it isn't worth repeating.)

2. The issue arises because calls are frequently made for "mandatory" pro bono work, either as part of law school or as a licensing requirement. Many law schools already have pro-bono requirements.

3. The reason why some lawyers earn $50 and some earn $500 is more related to the relative values of the legal products being offered than to the differing skill levels of the lawyers. I have many friends who are capable of being high-priced corporate lawyers, but they nonetheless chose to practice in less-valued areas (academia, government, etc.).

4. A $50 pro bono lawyer who handles 100 eviction disputes a year is going to do a much better job on an eviction dispute than a $500 lawyer who handles maybe one such dispute a year — even if the $500 lawyer spends a lot more time on it.

5. The question of why pro bono exists remains a good one. In most (if not all) states, it's still not mandatory. Some lawyers do it because they feel guilty; there is a lot of pressure to do it, as the supposedly appropriate form of "giving back." Some lawyers do it to get trial skills; it's become increasingly hard over the past 30 years for green lawyers in big firms to get any courtroom time. Some do it because their firms see it as good PR. And some do it because they like it, just as I like "giving away" legal "education" in blog comments.

Faultolerant December 31, 2005 at 1:45 pm

Is this article not a micro-case argument in favor of outsourcing? After all, that's fundamentally what's occurring here. Instead of outsourcing to India, this article advocates outsourcing from a FP Law Firm to a NFP Pro-Bono entity.

I'm not complaing about the concenpt at all. Just a question.

nate December 31, 2005 at 2:59 pm

Did I read correctly that Gov Schwarzenegger may increase the minimum wage in CA? Or am I confused?

What is your analysis of this?

Kevin December 31, 2005 at 10:33 pm

*** Did I read correctly that Gov Schwarzenegger may increase the minimum wage in CA? Or am I confused? ***

I think he should raise the minimum wage to $500, so that everyone can be as rich as a flashy lawyer. Then lawyers won't need to do pro bono work.

Signed, Howard Dean.

Mark January 1, 2006 at 5:06 am

Thanks John P. I had no idea pro-bono work was mandatory in some states or that there were calls for it to be made mandatory. Mandatory charity sounds like a wonderful way to increase tax and spend without actually raising taxes. In that case my concern about the argument being used to justify bigger government doesn't apply.

I'm reading point 3 to say that there is a higher disutility attatched to practicing corporate law than to working in other fields. Otherwise I can't see any reason why two equally skilled lawyers would earn different rates regardless of the value to the client (except price discrimination which should not apply here). That would counter my first thought (and others commenters after) that the high priced lawyer was simply more productive.

At least the main thrust of my argument survived; namely that (when there is no compulsion) lawyers do pro-bono work for reasons other than the obvious, and this should be taken into account in accessing the efficiency of the market.

Finally, my condolences to the low priced lawyer in the example. He began earning $100 an hour and half way through the comments section had his rate cut to $50. I see the high priced corporate lawyer suffered no such hardship, still earning $500 an hour. Thus the comparative advantage has doubled in the space of one post.

lydia January 1, 2006 at 10:34 am

Mr. Sheptow missed the more important point that only a small number of hours are donated by the high-priced lawyers, not ALL of the hours. He would do well to recognize that the 'donation' is actually a purchase of satisfaction and 'warm glow', and tha perhaps it is much less in monetary value than Mr. Sheptow estimated. A lawyer charging $500/hour do not actually earn that full amount after company cuts and taxes (and even less after the costs of 'keeping up personal appearances'). On the margin, the last hour donated has just about the value of that net income, and that's the maximum amount of hours donated since additional hours at the margin gets more expensive than the satisfaction received.

If we see many more lawyers doing pro-bono work (or an increase in pro-bono hours), perhaps we can conclude that there's not really that large a gap in the net earnings (incl the traditionally non-monetized aspects of charity work) of posh corporate lawyers and the legal aid-types?

John P. January 1, 2006 at 4:50 pm

Mark wrote: "Otherwise I can't see any reason why two equally skilled lawyers would earn different rates regardless of the value to the client (except price discrimination which should not apply here)."

I'm not sure if I understand this point correctly, but I will try to explain. The vast majority of lawyers are specialists, and it can take years to become skilled in a specialty, primarily through a form of apprenticeship. Thus, even though the market price for lawyering in my specialty (corporate governance and commercial law) is higher than the market price for litigating landlord-tenant disputes, for example, it is not easy for someone in a low-valued specialty to switch to a higher-valued one.

Customers of high-cost legal services are also very brand-dependent, so that it's hard for a new-comer to break into that market without affiliating himself with an established brand (i.e., a firm well known in the specialty). Most of the competition at the higher end comes from big firms that are trying to increase their number of specialties, not from individual lawyers who decide that they're sick of working for a legal aid organization.

It's therefore not a situation where one guy making widgets gets $50 per hour and another widget-maker gets $500. Rather, one guy is making widgets and the other guy is making gidgets, and people will pay a lot more for gidgets than for widgets.

Glen Whitman January 3, 2006 at 1:33 am

A couple of years ago I coined a term for the practice of donating fees instead of time: proxy bono. Think it'll catch on?

http://agoraphilia.blogspot.com/2002/12/pro-bono-by-proxysasha-volokh-observes.html

Eric Crampton January 3, 2006 at 7:43 pm

A similar problem is that of charity races and such, where folks are invited to solicit donations for their participation in the event. Once you take into account the time that goes into training for these events, the charity would almost certainly be better off if each participant devoted all of that time and effort to working overtime and donating the extra earnings to the charity. There must exist warm glow benefits that cause more participation than under the alternative arrangements. But I still find it puzzling.

RevWaldo January 3, 2006 at 11:59 pm

One of the better arguments for pro bono work is that high-priced corporate attorneys tend to be the talent pool used for judicial nominations. So hopefully the next time we have supreme court nominations we'll have some with experience in cases that involve, y'know, people.

Of course, we could do the converse. Legal aid attorneys could be selected to work "pro malum" in corporate cases for the opportunity to earn money, experience, connections, etc.

Carolyn Elefant January 7, 2006 at 2:13 pm

I made the same argument made by Sheptow almost a dozen years ago in an article in American Lawyer (only back then, lawyers only billed $250/hr). And I continue to blog about it here – http://www.myshingle.com/my_shingle/2006/01/business_as_usu.html

It is a terrible inefficiency having large firms doing pro bono, particularly because they're doing it not to help, but to retain qualified attorneys and get them experience. Absolutely nothing wrong with that, but if helping the poor is secondary, you're not going to get the same results as you would if you gave the $$s to a group like Legal Aid whose purpose is to represent indigent.

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