Applications of the economist’s “rents” to law departments

The McKinsey Quarterly, 2007 No. 2, at 23, defines what economists call “rents” – “additional earnings requiring no additional, marginal investment of capital or labor.” This blog has mentioned the term previously but briefly (See my posts of April 27, 2006 and its definition of rents as “excess profits”; and Aug. 26, 2006 #2 as “gains not offset by losses.”) so it is appropriate to offer some more examples.

When a law firm raises its billing rates, it generates rents. The firm incurs no extra costs of labor, physical plant, or management even though its profits increase. When a law firm promotes an associate to partner and the lawyer’s rate jumps $100 an hour, that is a pure example of rents.

If there were negative rents – savings without additional resources used, then when a law department freezes billing rates beyond the current year, it generates cost savings later without any further investment of resources. Another example of negative rents would be if a law department with an e-billing system tightens its disbursement formula (“As of today, no more than five cents a page for copies.”); that change costs the law department nothing, but saves money.