Saturday, February 04, 2012

Kings and Queens of Transaction Costs

[Sorry about the photo but when I Googled "smarmy" this was what a got as an image.]

Granted, I have not had very many jobs but it is hard to believe that individuals in other jobs rely on transaction costs to promote their ends as much many law professors. It may be a minority of law professors but that is all it takes.

Transaction costs typically refers to the costs of, well, transactions, and law professors are rarely contracting with each other. It is probably more accurate to say law professors rely on raising information costs as a means of achieving their own ends. In any case, let's stick to transaction costs because so many people in the business regard life as one big zero sum negotiation . The cost raising is in the form or misrepresentations, half truths, withheld information or engaging in the "not technically a lie" process which, I now understand, is a way of achieveing "plausible deniability." In every exchange, when one person is not on the level it means raising the cost of others to discover the truth or take on the risk of making the wrong decision because of imperfect information. This list is hardly exhaustive. Indeed most self-promotion is overstatement meaning that to know the truth you have to incur costs yourself. Thing of law review submission cover letters, letter or recommendation, and so on.

So here is a small example. The issue was whether to give 9 hours credit toward an LLM to students who completed a night program we voluntarily teach elsewhere. The supporter of granting credit provides accurate information about the off site program that is designed to make granting transfer credit reasonable. The evidence is that there are standards for grading since there is no curve and the grades can be lower than the ones we give our students. What is not said is that there are language problems and we give very easy tests and are careful to pass almost everyone because if they learn anything it is better than nothing. The fact that the curve could be lower is irrelevant with respect to what actually happens. But to know that, you have to incur some costs. In fact, this a a good one in that the person in the best position cost-wise to describe the reality passes that responsibility to those for whom the cost will be higher.

How about one that affects the lives of people who have no idea what has happened to them. A school conducts a national search to fill three positions all currently held on a visiting basis by three people in the neighborhood. The search yields 80 applicants but guess who, out those 80, are deemed to be the best? Need I tell you? Yes, the three locals who are already friends are better than any of the other 80. Is that really possible? I'd say, it's very unlikely. Anyone who wants to challenge this obviously shaky outcome would have to absorb enormous transaction costs.

These are small things. Want to see bigger ones? Take a look at Texas and their "loan" issues. Do you think the availability of those loans was widely understood or did the professors who eventually exposed the scheme have to incur costs to do so? Do you think the recipients talked openly about the "loans" or kinda maybe did not really mention them? It looks like the system persisted because it was not widely know and it would have required some investment by someone to discover it. The Texas example is also good to illustrate why I am betting all the hoopla will not result in any reforms at all. Too many law professors are invested in playing the system and playing means keeping transactions costs high. They seem to believe they are better cost raisers than others.

Indeed, much of legal practice and our system of advocacy are based on raising transaction costs of opponents. If there is anything we know about law professors it is that their most important clients are themselves and they take that responsibility very seriously.

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