by Barry Goldman
In my last piece I mentioned that the lawyers working on the FTX 
bankruptcy were billing at $2,165 an hour ($595 for paralegals). Since then we learned:
A legal team that forced Tesla’s directors to agree in July to return more than $700 million in compensation to the automaker for allegedly overpaying themselves… want[s] a judge to approve $229 million in fees, or $10,690 an hour, according to a Sept. 8 filing in Delaware’s Court of Chancery.
One of the points of my earlier piece was that the money to pay the lawyers in a civil case comes out of the deal. Lawyers, I said, eat pie. Admittedly, the FTX and Tesla cases are extreme examples, but the fact remains that our system of civil justice is an expensive one. And it is expensive not just in dollars but the way biologists use the term. It takes a great deal of time and effort, talent and resources simply to feed the apparatus. This raises the question of how such an expensive arrangement could have evolved. Wouldn’t society naturally gravitate toward a more efficient system? There are two concepts from social science that I think can help explain: agency capture and the Iron Law of Oligarchy.
Capture works like this. Suppose there is an opening on your local sewer commission. Are you going to apply? Of course not! I assume you are a responsible citizen, and you support efforts to see that public funds are expended in a careful and prudent way. No doubt. But there is no way you are going to sit on the sewer commission.
So who will volunteer to be on the sewer commission? Or the Road Commission or the Board of Manicurists and Nail Technicians? Or any of the dozens of other regulatory bodies in every political jurisdiction? The question answers itself. No one seeks those positions out of civic-mindedness. The only reason anyone serves on any of those bodies is that they have an interest in the actions they take. No one else cares enough to bother. As a result, regulatory bodies become controlled by the entities they were designed to regulate.
This is agency capture.
And, inevitably, it produces regulations that are in the interest of the regulated entities rather than the general public. That’s why, for example, you can’t get a new pair of glasses with an old prescription. The optometrists who get paid to do eye exams want it that way. Naturally, they justify the regulation in the language of patient safety and public health and early detection of serious disease and so on. Of course they do. Naked pecuniary self-interest doesn’t look nice. But that’s what it is.
As Adam Smith told us in The Wealth of Nations, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”
The Iron Law of Oligarchy is related, but not quite the same thing. It was first described by Robert Michels in the early years of the 20th century. It says any organization, no matter how democratic and egalitarian its intentions, is going to end up being run by a clique, and the clique will act to perpetuate itself.
Pick an organization. It could be anything – a bowling league, The Friends of Zug Island, the communist party, it doesn’t matter. Some people in the organization are going to find their way to positions of leadership. It may be because they have more time to devote to the organization, because they have more talent or more charisma, or it may be because no one else wants the leadership positions as much as they do. In any case, a leadership clique will form because no organization can operate if every member participates in every decision. After a while, the people in leadership begin to spend more time with each other than with the rest of the membership. No one has to want this to happen. It happens by itself. And after another while, the interests of the leadership and the interests of the membership begin to diverge.
You might not think the leaders of your organization need to have a jet. That is because you don’t know how hard they work and how much more efficient it would be for the organization if they didn’t have to spend time waiting in the TSA line. They are closer to the situation. They understand these things.
Again, this doesn’t happen because the individuals involved are especially greedy or selfish or narcissistic. It happens because people identify with the groups to which they belong. If you start hanging out with golfers or skaters or Republicans or Buddhist monks, after a while you will begin to dress like one and talk like one. Soon enough you will begin to think that what is good for golfers is Good.
Back to lawyers. The reason there are laws against the unauthorized practice of law is the same as the reason you can’t get new glasses with an old prescription. Lawyers will tell you it is because they want to protect the public from practitioners who don’t know what they’re doing. They say untrained people can’t manage the intricacies of legal procedure, and the risks to the public are too great to allow unlicensed practitioners. Like the story about regular eye exams, there is some truth to this. Sadly though, a bar card indicates competency about as well as a gym membership indicates fitness.
I am reminded of something I heard on a Mob Tour of Little Italy some years ago. Our guide asked us to imagine we owned a small restaurant. Some young guys come in, drink a lot, harass your customers, leave cigarette burns in your table cloths, and leave without paying. This happens a number of times. Then an older, very polite guy comes in. He expresses his concern about your difficulty and offers to help. Naturally, there will be a small fee involved, but as long as the fee is promptly paid you can be confident the troublesome young men will not return.
This business model has two steps. First you create a problem. Then, for a fee, you make it go away. It is a way to make something out of nothing.
I apologize to my lawyer friends for comparing them to the goons in a protection racket, but there it is. We need to protect the public from the unauthorized practice of law because the law is so intricate and delicate and mistakes can be so devastating. True enough. But how did the law get that way? It got that way because lawyers made it that way. Not always and everywhere out of greed, though that certainly has something to do with it, but out of the natural effect of agency capture and the Iron Law of Oligarchy.
None of this is terribly surprising. We expect optometrists to form an organization to look out for the interests of optometrists and car dealers and manicurists to do the same. Lawyers, however, do not just patrol the boundaries of their own guild. Lawyers are everywhere. They write the rules not just for the conduct of the law business but for the conduct of business itself and for the resolution of disputes throughout the society.
Carl Sandburg summed up the situation nicely in “The Lawyers Know Too Much.” Here are some favorite lines:
In the heels of the higgling lawyers, Bob,
Too many slippery ifs and buts and howevers,
Too much hereinbefore provided whereas,
Too many doors to go in and out of.
Why does a hearse horse snicker
Hauling a lawyer away?
The Iron Law of Oligarchy also predicts another key feature of our legal culture. As Stanford Law professor Robert W. Gordon put it:
In practice, of course, access to the complex and expensive procedures of law and the services of lawyers is largely determined by clients’ ability to pay: the major share of legal services goes to business entities and wealthy people. The lawyers who enjoy the greatest professional success and prestige do most of their work on behalf of the rich and powerful.
So let’s review. I started this series by saying the adoption of the Rule of Law was the second worst mistake in human history. In Part I, I said rules and laws can’t produce Justice because they are necessarily incomplete. In Part II, I said in a system based on laws and rules we end up arguing about the laws and rules, and we fail to fight about what we’re fighting about. In Part III, I said the adversarial system was little better than resolving our disputes based on the outcome of an elaborate system of arm-wrestling matches. And here, I’ve tried to show how the legal system benefits the lawyers themselves rather than the society it is supposed to serve.
What is the alternative? That will be the subject of the next piece.