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Cost Disease, the Practice of Law and Access to Justice

How is it that we are such a wealthy society yet services that were once available are no longer available (at least at affordable prices)? Many people, but certainly not all, had help in their homes and farms, even full-time help. Doctors used to make house calls. When I was a child, the milkman[1] made deliveries each day. There used to be people who actually answered telephones in businesses.

What we call the “access to justice” problem seems to be similar in nature. We know that the number of self-represented litigants has dramatically increased over the last four decades. Ordinary people can’t afford lawyers. Even lawyers can’t afford lawyers. Yet, it seems that there was a time that people had a family lawyer just like they had a family doctor.

Some of this is pastoral myth. The idea that doctors were once available to all isn’t true as Tommy Douglas addressed in Saskatchewan in the 1950s. The poor didn’t have servants even though domestic help seems to have been more common than it is now. The image of the small town lawyer serving the whole town fails to recognize that there were income differences that must have affected who could afford to pay for a lawyer.

And while the price of legal services is a significant issue, it isn’t the only issue in the “access to justice” problem. There is also much to the idea that our legal system has become more and unnecessarily complex with attendant costs. A system of justice that is too expensive for most to access is a denial of access to justice even if the perfect justice can be obtained by those who can afford it.

While the problem of access to justice has more than one cause (and so must be addressed in more than one way), the cost of lawyers seems increasingly to be part of the problem. But why is that?

Cost Disease

A few weeks ago, I listened to a podcast on economics[2]. There was an interview with Larry Summers[3] who is a highly regarded economist[4]. Stephen Dubner, the interviewer, asked Summers about the cost of government and why it is that the cost of government doesn’t shrink. As Dubner asked:

You talk about us having conquered inflation, but lately you’ve been writing about the reasons why federal government can’t shrink. One of those reasons that I found really interesting — you talked about how changes in structural pricing that disproportionately affect government are huge. You talk about the Consumer Price Index from 1983 versus today and the things that have gotten relatively cheaper and the things that have gotten relatively much more expensive. Can you talk about that for a moment? I assume where that leads to is a conversation about what you economists call cost disease, yes?

Summers responded saying:

This is the phenomenon that was first noticed by the late Princeton economist William Baumol, that’s sometimes referred to Baumol’s Disease or cost disease. It refers to the fact that if workers become much more productive doing some things — and their wage has to be the same in all sectors, then there’s going to be a tendency for the price of the areas in which labor is not becoming productive to rise. That’s why it costs more to go to the theater relative to other things that it did when I was a child. That’s why tuition in colleges has risen. That’s why the cost of mental-health counseling has risen. All kinds of activities where it takes inherently a person one hour to provide a given service and where productivity growth is defeating the point. Productivity growth in education, after all, is a higher ratio of students to teachers — which is exactly the opposite of what we all want for our kids. Those structural changes are going to define our economy.

The cost disease thesis says that relatively unproductive sectors become more costly with productivity increases in other sectors because incomes increase in both productive and unproductive sectors as a result of increased productivity.

A core idea of cost disease is that there is labour mobility over time. In the long run, a sector will not be able to continue to pay people lower incomes if work is available to them elsewhere for higher incomes. Just because one sector is less productive than another sector doesn’t mean the less productive sector will be able to get away with paying its workers lower incomes. The cost disease thesis also reflects the economic view that incomes over time generally rise as productivity generally rises. Of course, there are questions about some of the underpinning of the cost disease thesis.[5]

But even if one does not accept the idea that productivity increases positively affect incomes generally[6], it must be true that sectors that do not become more productive will become relatively more costly unless these relatively unproductive sectors decrease incomes in their sectors.

Cost disease and the practice of law

I was struck by the application of the idea of cost disease to the practice of law. The last four decades have seen amazing productivity increases in other sectors of the economy. Computing capacity and networks have fundamentally changed the productivity of significant sectors of the economy. Before that, mechanization, electrification and industrialization radically changed the productivity of other sectors of the economy.

On the other hand, it also seems pretty clear that lawyer productivity has little changed over the long term. While there have been some productivity changes arising from modern technology, most of that has simply been to reduce overhead as lawyers do their own document processing.

This is particularly true in litigation. The approach to analyzing documentary evidence, interviewing clients and witnesses, discovering adverse parties and trying cases for ordinary people is highly lawyer-intensive without there having been material changes in productivity over the decades[7]. This may be less true in some of the solicitor’s practices where technology has made document production more efficient and where process efficiencies can be adopted in routine aspects of legal work where there is sufficient volume.

Of course, economic theories do not always hold in practice. There can be other factors at work. Market efficiency assumptions may not hold. But actual labour market information seems to show that lawyer incomes have followed incomes generally. A few years ago, I looked at census information over the last forty years or so and found that lawyer incomes generally tracked family incomes over that period. I also understand that research has indicated that lawyer, engineer and doctor incomes track a similar path[8].

Let’s assume for the sake of argument that lawyer incomes do rise and fall with incomes generally for whatever reason. That means that if other sectors have become more productive then the cost of what is produced in those sectors will have declined. Costs in sectors like law where productivity has not improved, or improved as much, will relatively increase.

I was excited by the new (to me) thought that apparent increases in legal costs and resulting diminution in access to justice could be explained in part by increased productivity in other sectors and the limited productivity increases in law. I went looking for further discussion of cost disease and, particularly, its application to the practice of law.

Not surprisingly, I found that this was not a new thought. For those interested in reading more, Professor Gregory W. Bowman posted two blogs on exactly this point over a decade ago in his Law Career Blog[9]. More recently, Emery Lee[10] published a journal article in the University of Miami Law Review entitled “Law Without Lawyers: Access to Civil Justice and the Cost of Legal Services”[11]

In his article, Lee looked at the cost of legal services for the “Big Guy” and the cost for the “Little Guy” i.e. the ordinary person. Lee said at pp. 514 to 515 that “In relation to the Little Guy, the cost disease is his problem. As discussed above, in general, it is not the levels, or amount, of discovery that keep the Little Guy out of court. Most of the Little Guy’s cases are not going to be discovery-heavy, and reforms designed to reduce discovery levels are unlikely to help the Little Guy.” and “The Little Guy has simply been priced out of the market for legal services. Reducing discovery levels is unlikely to solve this problem.”

So what?

As a profession, we have had difficult discussions about innovating our existing business structures. Some argue that we should simply focus on procedural and substantive simplification of the litigation process, that it is only litigation that is a problem and that solicitors’ practices are just fine. Accepting that simplification in litigation is important, my view has long been that the significant areas where people do not use legal services at all (sometimes called the 85%) must be addressed and that the cost of providing services is a major part of the reason for the lack of service in the 85%. Increases in costs arising from increased productivity in other sectors may be part of the reason that the 85% cannot be effectively served without significant productivity changes. This supports the idea that it is important to bring capital and technology to bear because increasingly expensive professional labour is simply too expensive for the task[12].

What is a significant implication for me is that decreased access to justice in the 15% served by lawyers, and particularly in litigation, may be the result of cost disease and the lack of productivity increases in law. Where access to capital is constrained as is true in the practice of law, labour is overwhelmingly the means of production. Where productivity in other sectors improves, the cost of legal work certainly relatively increases. And if labour costs actually rise generally with increased productivity, the absolute cost of legal work will increase as lawyer incomes rise with productivity in other sectors[13].

If “cost disease” is a material reason for the increasing cost of legal services and diminishing access to legal services, it follows that legal costs will continue to relatively increase unless productivity in the legal sector improves. Even without this analytic framework, it is obvious that new ways of providing legal services are already here and that they are less expensive and more easily accessible. This will only increase.

The implication is significant. If the traditional practice of law becomes relatively more and more expensive over time then fewer legal services will be consumed and the threat from new and less expensive forms of legal service will increase. Legal services regulation will not ultimately hold back this tide, nor should it in my view.

So the question is whether we should continue to restrict the practice of law to traditional practices or should we encourage real innovation in the way that law is practiced so that productivities are achieved.

I used to think that the answer was obviously that increased productivity should be encouraged because of the moral and policy obligation to promote access to justice. While still thinking that is so, I also think that existing legal practices are imperilled by our unwillingness to allow the conditions required for innovation. Cost disease is not just a disease suffered by consumers of legal services. Cost disease is suffered by lawyer and paralegal producers too and the consequences may be more severe if not addressed. Attempting to hold back the tide can work for a while but when the dike fails much can be lost that could have been saved.

Something to think about.

_____________________________

[1] Herb was our milkman and he had a very cool truck. He let me ride with him in his truck on our street when I was a little boy

[2] http://freakonomics.com/

[3] http://freakonomics.com/podcast/larry-summers-economist-everyone-hates-love/

[4] Even if not so much on other topics

[5] It is not so clear that the benefits of productivity increases are generally distributed. Labour market mobility is suspect with income disparities having increased over the last generation. Increases in productivity over the last generation have not resulted in increased real incomes for many people. Some increases in income have been enjoyed in distant economies with local labour markets facing downward pressures.

[6] i.e. that the wealthy disproportionately enjoy the profitability arising from increased profitability

[7] Significant e-discovery advances exist but are mostly irrelevant outside of “big business” disputes and mostly address the significant increase in e-documents in business over the last couple of decades. Litigation for ordinary people has not seen material productivity gains other than legal research, especially CanLii.

[8] Alice Woolley kindly reviewed a draft of this column. She advised that this observation was made in the research underlying Woolley, Alice and Farrow, Trevor C. W., “Addressing Access to Justice Through New Legal Service Providers: Opportunities and Challenges” (2015), 3 Texas A & M Law Review 549

[9] http://law-career.blogspot.ca/2006/07/baumols-cost-disease-and-practice-of.html and http://law-career.blogspot.ca/2006/08/baumols-cost-disease-and-lawyers-part.html

[10] Senior Researcher in the US Federal Judicial Centre

[11] Emery G. Lee III, Law Without Lawyers: Access to Civil Justice and the Cost of Legal Services, 69 U. Miami L. Rev. 499 (2015)

[12] If legal services are only relatively more expensive but not absolutely more expensive, it would still follow that consumption of legal services would decline.

[13] Whether because of increased productivity in other sectors or not, lawyer incomes have followed other incomes.

Comments

  1. Some food for thought there indeed. Though not a lawyer, I’ve learned a bit about law, while I won’t claim to know anything about economics.

    Let me offer another perspective. The vast majority of people, the public, too often characterized as consumers (or prospective consumers) of legal services, don’t want to be put in a position where they need to proceed with adversarial processes to secure “justice”. (Much of what lawyers – though I don’t know how much – is not, and isn’t intended to lead to litigation – e.g. the drafting of wills.)

    What most people want is to experience no injustice in the first place. So we, the public, would like the result of any litigation in which we are caught up to discourage further injustice.

    That’s supposedly one of the goals of the criminal justice system. But what I’ve seen, and I know many other people have seen, in civil litigation does nothing to discourage more injustice of the same type we’ve experienced.

    I’ll just mention something about my own experience. I have what is now a fairly long record (for a self-represented litigant) of litigation that began in the labour law arena and proceeded further into the larger administrative law arena. Even if I’d won – as much as anyone conceivably could – in the initial fight, no one would have faced any accountability and thus been persuaded to change their conduct. So the next person who faced what I faced, and the next and the next, have to fight the same fight.

    Compare that to what’s happening in medicine. Every patient is an opportunity for medical practitioners and researchers to make progress in treating and ultimately curing what ails that patient. E.G., some communicable diseases have been eradicated already.

    Do doctors want unlimited opportunities to continue treating people who are suffering physically or mentally? I hope not. But lawyers want an unlimited supply of clients contending with legal issues (and able to pay what most people can’t afford). They have no real incentive to eradicate, or even reduce injustice.

  2. Timothy I.G. Hyde

    Congrats Malcolm a very thought provoking article.

    Try this for fun. I’ll bet your firm has not acted on a residential purchase since the late 80’s or early 90’s. See if you can dig up an account. There is a firm in the GTA that on a purchase charges – all disbursements and the title insurance premium included – $1250.

    I’m going to guess the number on your 20 year old account is higher. Add to the fun and adjust for inflation.

    For house deals, the public’s most common interaction with our profession, there is more going on here.

  3. Thank you for this thoughtful analysis Malcolm. The legal profession is ripe for disruption. Law Societies will need to change to allow innovation – and even promote and initiate it – in order to make legal services affordable, or they will become as irrelevant as the proverbial buggy-whip maker. The accountants are way ahead of us in acquiring and offering innovative tools to their clients; we can learn from them. (The milkman used to take my brother for rides on his truck in Manchester in the early 1960s; I am still envious.)

  4. Dear Mr. Hyde, A firm charging $1,250 for a real estate purchase including all disbursements and even the virtually useless and therefore horribly expensive title insurance premium becomes, quite simply, the very last firm I would ever retain to do my house deal. A charge like that means either that too many corners are being cut or too much lawyer attention to the file is being cut.

    Dear Malcolm,
    I am glad to see that you recognize, sort of, that the solicitor side of the bar is not the problem where access to justice is concerned. But you do say, “Ordinary people can’t afford lawyers. Even lawyers can’t afford lawyers.” Such misleading language fails to make the distinction between small firm solicitor services and litigation services offered by firms of any size.

    I know of no lawyer who is buying or selling a house who cannot afford the real estate lawyer. I know of no client who is buying or selling a house who cannot afford the real estate lawyer. They pay far more to the government and far, far more to the realtor than they ever pay the real estate lawyer. Even the moving van companies charge more. I know of no client who needs a will because they have assets to distribute who cannot afford the picayune cost of a wills lawyer.

    However, I do know innumerable lawyers, clients and members of the public who cannot afford to have their disputes resolved. When the average cost of taking something to trial is virtually equal to the average before-tax (!) annual income of the citizenry, then we have a major problem. Clients can pay less than a day’s income in legal fees to buy their hundreds of thousands of dollars worth of house, or less than a morning’s worth of income for a will, but paying their entire year’s income, or a very large percentage of it, resolving a legal dispute????

    That’s where the problem is, and has always been. The problem is the time it takes to resolve the dispute. The time is filled up with labour, whether the labourers make high use of technology (such as document search engines, etc.) or not. Make the dispute resolution process a three-year misery, and the costs are sure to be high. As you point out, labour is costly. The answer is, therefore, to reduce the amount of labour needed to resolve disputes, and that means reducing the time it all takes.

    The only way, the only way, to bring down the cost of dispute resolution and thus to improve access to justice where the improvements are most needed (to the nth degree) is to shorten the time it takes to resolve disputes. This is actually easy to do in concept. It is overcoming government inertia and litigation bar vested interests that is the difficult part. Except in truly rare cases, there is nothing new under the sun. Very few files truly involve such novel points that the two lawyers cannot, within the first month, week or hour of opening the file, figure out what an informed and sensible judge would do with the case.

    Thus, the vast majority of disputes can be resolved far earlier than under our current cruel system. Take family law. Outside of restraining orders and the like, family law disputes are about two things – kids and cash. Kids are priceless, immeasurably so, and disputants will spend anything and everything to achieve what they think (or want) is best for the kids (most often for love, sometimes for revenge). Cash is not priceless; it is measurable. Except for a few eccentrics, disputants will not spend anything and everything to get their hands on more cash. It is senseless to spend too large a percentage of the desired pot to acquire more of the pot. But people will be senseless when it comes to fighting over the kids.

    So, where is the Law Society push to lobby the government to remove (except in cases of provable parental unfitness) fighting over custody and access? As has already been done in every European country, and at least two American states? Instead, the counterproductive push by the government is to allow thousands of paralegals to be added to the thousands of lawyers all trying to make a buck out of the hides of separating and divorcing parties during what for most of those parties is the worst, and most financially vulnerable, times of their lives.

    And where is the push by the Law Society to lobby the government to greatly streamline the litigation process by showing the government that having more judges bringing disputes to an end at the six-month mark instead of the three-year mark would save or earn the government billions (including in greater workplace productivity and reduced demands on the health care system)? Indeed, I say that a properly devised system (such as the one in my head) would not even require more judges, but the gains would still be huge.

    For three and a half years, I have campaigned for the Law Society to strike a task force that would look at effective ways (not fringe ways) as to how we can create, adapt, buy, lease, borrow, or even grab (from the public domain) technologies that would enhance the delivery of legal services. I have gotten nowhere. I attribute that to two main factors: poor leadership and vested interests by the barrister-controlled Convocation. Maybe human inertia is a third.

    Instead, I have witnessed attempts to sacrifice the solicitor bar by making such ludicrous claims that the cost of wills is too high ($200 versus the $40,000 cost of a trial – it is too laugh), or by having a Skype lawyer give a “free” consultation after a computer produces a will thereby eliminating any assessment of capacity or undue influence by the evil child just out of camera range).

    I have also witnessed pats on the back for such initiatives as more legal aid money (from a cash-strapped government carrying the largest subnational debt in the Known Universe), more pamphlets, more e-filing, the re-purposing of the Shirley Dennison legacy to pay for an award for people who enhance A2J each year, and encouraging our First Nations people to make more use of (very useful) circles of healing. I support all five of those initiatives, by the way, but they do nothing about the real problem – the Ruinous Time and Cost of Litigation.

    Until the government smartens up and the Law Society starts really acting in the public interest, nothing will change.

    But thank you for acknowledging that the issue of the problems “may be less true in some* of the solicitor’s practices” (*actually, virtually all).

    Cheers.

  5. P.S. I have also seen concerted, mind-bogglingly misguided and myopic efforts to sell out the profession to ultimately anti-competitive, profit-seeking outside investors – the worst idea to hit the profession in 1,000 years.

    P.P.S. I also believe that a properly designed dispute resolution system would not greatly impact lawyer incomes because significantly reducing the time and therefore the cost of resolving disputes would make that process affordable for those court-clogging hordes of self-represented litigants and many other justice seekers besides. In other words, lawyers would end up with double or triple the number of clients and, for the same annual income, would be able to resolve double or triple the number of disputes in far less time and for far less cost to each client.

    Cheers again.

  6. A law society apologist’s post must be challenged: Other professions and manufacturers have successfully dealt with the same cost-versus-price problem by innovation. But, it must be innovation in the method by which the work is done to produce the services (or goods). Law societies refuse such proposals, as if to say, the present method is the only possible method by which to produce legal services. It isn’t.
    For example, the method of providing medical services is constantly evolving. But not legal services methods of production. Support services methods of production are essential to solving the “unaffordable legal services problem.” The whole of the medical services’ infrastructure is made up entirely of mutually-interdependent, highly specialized, high volume support services. There are no “generalists.” Even the family doctor is a specialist. So the whole infrastructure is made up of specialized, doctors, technicians, technical services, drugs, and hospital services. And so no doctor’s office provides all treatments and all remedies for all patients the way a law office does for all clients. The innovation never stops; in the legal profession it never started. There are no support services for lawyers, because law societies don’t sponsor their creation.
    For example, a highly specialized legal research support service for all lawyers would save lawyers money because it can do legal research more cost-efficiently than can any law firm. That is because volume of production determines the size of the economies-of-scale obtained. The volume of production of law firms is too small to create significant economies-of-scale. “There are no economies-of-scale in the practice of law.” True; but it doesn’t have to be that way. CanLII should be providing such a support service, using the technology of centralized legal research developed at LAO LAW.
    LAO LAW at Legal Aid Ontario, is a highly developed legal research support service. By its 9th year of development, it was producing legal opinions for lawyers in private practice willing to do legal aid cases, at the rate of 5,000 per year. That volume was achieved by lawyers’ wanting to use the service because it helped them make money and serve their clients better. That happened while the Law Society managed Legal Aid Ontario (1967-1997). But the Law Society didn’t sponsor the creation of a comparable service for all lawyers’ non-Legal Aid cases even though it saw the great success of LAO LAW. In fact, when I, as the Director of LAO LAW, asked the Legal Aid’s Law Society managers to allow LAO LAW to sell its legal opinion services to all lawyers, the answer was “no,” with no reason given. It would have earned Legal Aid Ontario a lot of money. Legal Aid Ontario has always been severely under-funded ever since its creation on March 29, 1967.
    Malcolm, why hasn’t your very big law firm sponsored the creation of a comparable service? It would save lawyers a lot of money, and because of the high degree of specialization of its staff and all other factors of production, for most cases, it would do it better. The reason it hasn’t happened is because there has been no pressure to bring about such innovation. The reason it did happen at Legal Aid Ontario was because the Ontario government insisted on its happening. It accused Legal Aid’s law society managers of allowing far too much money to be paid out on lawyers’ accounts for legal research hours claimed. Your law firm Malcolm, is the best kind of place for such innovation to happen, and Legal Aid Ontario is the worst place, because of its chronic under-funding. But, no pressure; no innovation.
    And there are many other parts of the work of lawyers that could be much more cost-efficiently done by a specialized support service.
    Malcolm your favorite solution, alternate business structures (ABSs), they cannot solve the unaffordable legal services problem because they propose no change in the method of producing legal services. ABSs can make a law office more cost-efficient, but that is never enough to make a service or product affordable. That’s why support services methods exist everywhere in the production of everything, except where there are poorly functioning monopolies such as in the production of legal services. But that is the fault of law societies, not lawyers. You’re a law society bencher-manager Malcolm; do something about it!
    And see:
    (1) “Access to Justice—Unaffordable Legal Services’ Concepts and Solutions” (SSRN, pdf. Sept. 6, 2017), at: https://ssrn.com/abstract=2656464 ;
    and,
    (2) “Alternative Business Structures’ ‘Charity Step’ to Ending the General Practitioner” (SSRN, pdf. Oct. 5, 2017); at:
    https://ssrn.com/abstract=3020489.
    — by Ken Chasse.

  7. Hi Malcom –

    Thanks for opening the discussion about the economics behind how legal services are delivered. It doesn’t get discussed enough in the debates around ABSs. The bottom line is this: the A2J challenge is not going to solve itself; in fact it is only going to get worse as time goes on. Nor is the law society or its members able to solve it single-handedly: history has shown them incapable. It’s only by opening the industry to outside capital, people, skills, and ideas, and giving them the opportunity to profit, will we see solutions that bring about the efficiencies we need to keep pace. Just like how opening other parts of the economy to outside investment and competition has led to efficiencies, reduced costs for consumers, and ultimately our high standard of living.

    Now, the solutions may be unconventional and uncomfortable, in that they make us question the value of our own work (e.g., title insurance). They may also come with tradeoffs and risks (e.g., will kits). But perfection is the enemy of good and ultimately progress.

    In the end these solutions bring down costs, increase demand for legal services (whatever they may be), and grow the industry for the benefit of everyone in it, consumers, workers, firms and businesses alike.

    Unfortunately for Bradley, though it’s not de rigueur to say it these days, those greedy profit-seeking investors have given many gifts to the world.

    Keep up the great work.

    JS

  8. Timothy I. G. Hyde

    Dear Mr. Wright – highest volume firm in the GTA.

    I remember when conveyancing was practically a “bespoke” service but I also remember memory typewriters. Conveyancing has been a high volume low margin commodity for some time and as a profession we need to admit it, and deal with it.

    You could begin admitting a single core point. A purchaser with a title policy in their file at the end of a deal is in a better position than a purchaser with a title opinion in their file. There is no contest.

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