In the previous essay in this series, I pointed out that the economics of law practice can actually impede the ability of the legal system to efficiently resolve disputes. In other essays in this series, I discuss in depth the economic motivations of both defense lawyers and plaintiff lawyers that contribute to the problem. Before launching into those specifics, however, I need to provide a broad general understanding of the relationship of economics and law in the resolution of disputes. The relationship between law and economics extends far beyond the economics of law practice, but for now I am only discussing the impact the the economics or law practice on dispute resolution through litigation.
Almost all cases that arise in our legal system can be analyzed as an economic problem. Regardless of whether the underlying problem is a tort (such an automobile accident or a fight), or a contract (such as the building of a house, the sale of a car, or a myriad of other transactions), the plaintiff has some type of a claim against the defendant. In most instances the ultimate resolution is the payment of money. This means that the plaintiff has a claim, or an asset which he or she is asserting, that the defendant has an obligation to pay or to buy. The question then becomes how much is to be paid. The legal system provides answers to that question. Ultimately if the parties are not able to reach an agreement themselves, courts assign a value to the plaintiffs claim and requires the defendant to pay that amount. It is not necessary at this point that we discuss in any detail the matter of payment by one side of the other side’s attorney’s fees, which is sometimes required by contract or by statute. But we are deeply concerned with the amount of attorney’s fees and other costs that are involved in resolutions of the disputes.
The service provided by courts and attorneys is conflict resolution. The legal system provides a way for a plaintiff to present his or her claim. Lawyers on both sides participate in the effort to settle the matter, using their skill at predicting possible outcomes, and helping the client evaluate risks. But if the matter is not settled out of court then the legal system itself—judges and juries—provide an ultimate answer and bring a final conclusion to the controversy. Finality is a very important element of the legal process of dispute resolution.
In every economic transaction there are transaction costs. A sale of real estate might involve costs for title insurance, title examination, a real estate commission, etc. These are transactions costs that must be paid. They are costs beyond the payment for the real estate and what the seller receives. The same is true of the purchase of an automobile. There are transaction costs for almost every economic transaction. Transaction costs are an important element of economics.
The cost of attorneys and court costs are transaction costs, when the resolution of legal controversies by courtsis analyzed as an economic problem. The problem that we are suggesting in this series of essays is that the transaction costs for dispute resolution through the legal system have become unreasonably expensive. The economic value assigned to the transaction costs itself might very well equal or exceed the economic value either side of the underlying problem that is being solved. Transaction costs include not only attorney’s fees, but also the court costs, the cost of witnesses, the cost of depositions, judges, court reporters, and the like. Transaction costs are the main factor that renders the legal system inefficient as a method of conflict resolution. This makes finality—regardless of the actual results of litigation—the driving force in the system: disputes must be resolved! Finality winds up being the principle benefit offered by the system.
In other essays in this series, I analyze the economics of law practice, both from the standpoint of economic motives of the plaintiff lawyers and the economic motives of defense lawyers and insurance companies. I suggest that these economic motives, in and of themselves, inflate the transaction costs that are involved in the resolution of disputes presented to the legal system for resolution.
It should be noted in passing that there are many significant problems that the legal system simply cannot address, because lawyers are a necessary part of the process, and there are no funds to satisfy the economic requirements of attorneys. For instance, a faulty refrigerator can be a significant problem for a consumer. But a dispute over a faulty refrigerator can be a very difficult problem for the legal system to effectively resolve. A bad auto repair job can also be a significant problem for a poor individual (or even a well-to-do individual). But again, those types of problems are very difficult for the legal system to address because the economics of resolution in the legal system do not justify the engagement of competent legal services. There is a huge number of such disputes. In some instances, court costs themselves—even in “small claims court where lawyers are not necessarily involved—make court dispute resolution prohibitively expensive. But even for the disputes that the system is economically able to address, the economics of law practice adversely affects the efficiency of the system.
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