Opportunity costs

Editor's note: This column is adapted from the February 2012 edition of Louisville Bar Briefs.

Opportunity is knocking. What will you pay to open the door?

In previous columns, I have given basic information about law school admissions. I have also shown prospective students how to evaluate law school debt as a crucial first step in determining their return on educational investment. Those columns have culminated in an article, "A Degree of Practical Wisdom: The Ratio of Educational Debt to Income as a Basic Measurement of Law School Graduates’ Economic Viability," that will soon appear in the William Mitchell Law Review. I now wish to push the conversation deeper into the economic subtleties of what students can realistically expect to pay for law school — and what they can realistically expect to gain in exchange.

Read the rest of this post . . . .At the risk of overestimating my own literary powers, I deliberately intended the title of this column, "Opportunity Costs," to convey multiple layers of meaning. As a noun phrase, opportunity costs refer to a basic principle in economics. To an economist, every action, every choice must be assessed according to what the consumer has elected to forgo. Today's legal profession reflects every bit of the strain that grips the broader economy. It almost certainly is undergoing deeper structural changes that will affect lawyers' earnings for years to come. In that light, every prospective law student bears the responsibility to mind the particulars of economics as the dismal science. Going to law school commits you to a three-year wait on full-time earnings. Those three years will not be spent developing skills, honing expertise, or cultivating connections in some other field. All educational debt is nondischargeable, and there are no refunds on tuition, fees, books, or supplies.

Do understand. All of us in legal education fervently hope for bountiful season after bountiful season of law school applicants. I simply want to emphasize that students' eventual experience, during school and after graduation, will depend deeply on their expectations before matriculation. If you are contemplating law school but will go only if you hit a certain prestige level, you probably should not apply. If you are applying solely to please someone else — a parent, a spouse, a faceless figure named "Bourgeois Society" whispering at your back — you emphatically should stop the application process and devote your energy instead to mustering the courage to say "no." If you can imagine something you truly would rather do than to be a lawyer, then by all means spend those thousand days chasing another dream. Disappointment is the nearest friend of unrealistic expectations. Misunderstanding the enterprise of legal education and the eventual practice of law will undermine your success. Conversely, arming yourself now with research and deep introspection, long before you get your first tuition bill, represents a down payment on satisfaction and an actual, quantifiable livelihood.

I now reach a second level at which I want this column's title to be understood. Approach the phrase opportunity costs as a complete sentence, with a one-word subject and a one-word, one-verb predicate. Let me repeat my opening paragraph: "Opportunity is knocking. What will you pay to open the door?" Law school as opportunity demands that you open the door. Most economists would describe legal education as an experience good. Its quality and its value to you as the consumer become fully apparent only after you commit. Indeed, those very experts on consumer behavior might well describe law school as a credence good. You can't tell whether going was worth the while till long after you've left, and perhaps not even then. Even after you decide to attend and have spent four, five, six semesters on doctrinal details and practical experiences in a clinic, an externship, and a public service placement, validation of return on investment awaits the first job offer. There is a deep temptation to treat legal education as a search good, as though the culmination of each student's best efforts to engage classmates and professors during school can be distilled into single-dimension scalar measures of an extended experience — all in advance of the first three years of a lifelong professional commitment.

Let me be clear. No. No third party, let alone one that has put no skin of its own in the game, can realistically evaluate each student's educational experience or the broader market's eventual reaction to each student's accomplishments during school. That is not how it works. Global capitalism teems with products whose price, quality, and value are immediately apparent and readily enable sophisticated purchasers to make rational decisions to buy, sell, hedge, or sit out. West Texas crude. Durum wheat. But not education. Nor, for that matter, legal services.

This brings me to the final set of subtleties that I hoped to convey by naming this column, "Opportunity Costs." Focus on that word, opportunity. I will make a few observations about how law school graduates make money. As a teacher of law who has always taken pride in his own knowledge of economics and taken pains to share that knowledge with students, I can't resist one teaching more lesson in economics. And as a producer of legal scholarship informed by economics, I want to set out my own agenda — I want to lay down an intellectual marker — for future work on this subject.

In one of the chapters of The Black Swan: The Impact of the Highly Improbable, Nassim Nicholas Taleb recalls his own days at the Wharton School of Business and how one classmate urged him to pursue only those careers that were "scalable." So began the tale of how Taleb, one of the true geniuses of our time, threw his talents into trading securities as opposed to pursuing some craft whose payout hinged on his own efforts. Whereas a single bet on the capital markets — shorting collateralized mortgage obligations, going all in on European sovereign debt on the assumption that the European Central Bank and German politicians would never permit default — can move or destroy staggering amounts of wealth with no meaningful difference in effort, almost everyone else, even in an information-based economy, earns a paycheck based on some multiple of hours expended.

Again, I will mince no words. In the terms that Taleb has described, the overwhelming majority of livelihoods in law more closely resemble those of barbers, butchers, and bakers. Government attorneys, in-house counsel, and a very significant number of lawyers in highly leveraged, multiple-partner firms derive their compensation on a basis that lends itself to accurate calculation on an hourly basis. Lawyers working on any variant of the contingency fee model, far from achieving escape velocity from nonscalable work, bear the extra burden of assessing the likelihood of getting paid by a particular client for a particular case. Only the narrow tier of equity partners have a stream of income that remotely resembles those of Taleb's "scalable" professionals. This is no different from medicine. Most physicians belong in exactly the same category. Revenue depends on patients seen and treated. The overwhelming majority of cardiologists draw their pay from the number of hearts cured. A tiny, lucky fraction might win a product patent for a stent or a process patent for a revolutionary surgical procedure. But even in medical specialties, runaway profit on some sort of nonscalable business model is a spectacularly rare exception. Human optimism emboldens us to hope for outsized gains. Human wisdom counsels us to work for realistic goals.

More sophisticated economic analysis of the potential payout from legal education demands, at a minimum, a human capital asset pricing model akin to modern portfolio theory's basic tool for pricing companies and investments. For an introduction to modern portfolio theory through an application of its principles to a set of legal problems, I invite you to download "Modern Disaster Theory: Evaluating Disaster Law as a Portfolio of Legal Tools," which I will soon publish in the Emory International Law Review. The tradeoff between legal education's costs — from opportunity cost in the most traditional sense to the best available projections of educational debt service — and the economic gain from a law degree boils down, as does virtually every other question of professional training, to calculations based on probabilities, variances, and correlations. Like capital markets, though, truly accurate answers must also account for a host of unpredicted contingencies (what Taleb calls "Black Swans"), to say absolutely nothing of unruly emotional and behavioral factors that wreak havoc on the most quantitatively elegant economic models.

All of that, as economics textbooks and instructors like to say, is an exercise to be left for the reader. In this instance, for the writer as well. For now, I return to a very modest twist on my original question. The law school opportunity knocks. What are you, prospective student, willing to pay to open the door?