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Economists would not believe a gap persists between fees paid law firms and value delivered

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Classical economics holds that if law firms charge more than what in-house lawyers are willing to pay, those fees will decline. If demand is less than supply, prices fall.

Absent a monopoly, and no law firm in the United States has a monopoly on any legal service, and absent proprietary knowledge or processes, and no law firm has a patent on any legal service, supply (cost of law firm services) should reach equilibrium with demand (legal services valued enough to be paid for by companies).

If this axiomatic economic reasoning applies, then the grumbling about the high costs of law firms and a systemic gap between what is paid and what is gotten is sound and fury signifying nothing. Demand matches supply, ergo no value gap exists. QED

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One response to “Economists would not believe a gap persists between fees paid law firms and value delivered”

  1. Steven B. Levy says:
    April 29, 2010 at 1:42 pm

    Rees, classical economics also requires perfect information and assumes a closed system. Neither holds in this case.
    There are many matters in which it’s difficult to clarify up front the value of particular outcomes, the overall costs various firms would charge, their relative likelihoods of reaching those outcomes, and so on. One of the big benefits of fixed or flat fees is that they minimize some of these gaps and thus more closely approach supply/demand equilibrium.
    More importantly, the system isn’t closed. Those engaging counsel, like everyone else, make conscious or unconscious decisions regarding job advancement and security. Folks used to say, “No one ever got fired for buying IBM.” You might substitute, say, Cravath for IBM, but it still holds. When the CEO asks the GC why the company lost the case, the GC may want to say, “We hired the best available, and here are the bills to prove it.”
    — Steven B. Levy, author of Legal Project Management: Control Costs, Meet Schedules, Manage Risks, and Maintain Sanity