The Professional versus the Business Model in Law and Medicine--Posner

The central focus of economic analysis of markets is the activity of profit-maximizing business firms in unregulated competitive markets; and such firms are indeed the central players on the supply side of markets in a free-market economy. Analysis of profit maximization is complicated by the fact that large business firms are complex organizations, and persons who compose such a firm, ranging from shareholders to rank and file workers, have conflicting incentives which can blunt profit maximization to an extent. Competition is itself a complex activity, and firms often find it more profitable to collude in price and concentrate on product competition instead. There are also nonprofit enterprises and government producers to complicate the picture. 

An important though it seems a diminishing example of a service provider that deviates from the standard model of a profit-maximizing competitive firm is a professional organization such as a law firm or a medical practice. Professionals include besides lawyers and doctors architects, nurses, teachers, engineers, clergy, and military officers (the list is not example), and they constitute an important segment of the economy; there are, for example, a million lawyers and more than 700,000 doctors. 

Law and medicine are the oldest professions (other than clergy), the most prestigious and highly remunerated, the most influential, and the most discussed, praised, and criticized. They are also changing at a rapid rate—and in fact changing from professions to businesses, although the change may be reversed in the case of medicine. (I can’t see that happening in law.) 

The traditional concept of the profession (the concept that is undergoing change) provides an interesting contrast to the concept of the profit-maximizing business firm. In the business model, the goal is profit maximization in a competitive environment that operates in a basically Darwinian fashion (survival of the fittest); risk is pervasive and both extraordinary profits and devastating losses are real possibilities. Employment and leadership in such an environment attract many and repel many. The people it attracts tend to be aggressive and daring. The ones it repel tend to be cautious and thoughtful. 

In the traditional professional model, risk both upside and downside is trimmed by a combination of regulation and ethics both aimed at muting competition. With muted competition the lawyer or doctor can realistically aspire to a safe upper-middle-class income, but he is unlikely to become wealthy. The result, in combination with requiring postgraduate education and qualifying exams for entry into the profession and subjecting members of it to professional discipline, is to attract a type of person quite different from the entrepreneurial type—the latter a type exemplified by such extraordinarily successful college drop-outs as Bill Gates, Steve Jobs, and Mark Zuckerberg. The professional model attracts a more studious, intellectual, risk-averse type of person. 

Why does society value such persons and create a comfortable niche for them? The answer is that some goods and services involve a degree of complexity that makes it very difficult for consumers to evaluate the quality of the goods and services. Legal services and medical treatment are important examples. Both involve considerable uncertainty (even the best lawyer loses some cases, even the best doctor fails to cure some patients). When a consumer is unable to determine the quality of a product or service, the provider has to be regulated, either directly as in the case of the regulation of the drug industry by the Food and Drug Administration or indirectly as in the professional model, in which the conditions for becoming a member of a profession encourage self-selection by persons likely to be trustworthy, responsible, and ethical because less inclined to cut corners in order to make a killing.  

The professional model in law began to wane in the 1970s, with the beginning of the deregulation movement, which loosened restrictions on competition in legal services. The trend continued in subsequent decades, and was marked by an increased spread in earnings within law firms, an increased dispersion in the size of law firms, and increased turnover—in particular, the tendency of successful lawyers to move from firm to firm (taking their clients with them) in quest of higher incomes. Today, law firms closely resemble business firms. I am speaking mainly of law firms that handle corporate business, not of criminal or tort lawyers, who tend to practice by themselves or in small firms.  

Corporate lawyers today don’t want just a comfortable upper-middle-class income; they want to be rich; and one reason is the increased risk they face. Few law firms (remember that I’m talking only about corporate-law firms) any more practice “lockstep” compensation, in which all partners of the same vintage in a firm are paid the same—a risk-minimizing method of compensation that used to be the norm in large law firms. Today a lawyer faces the risk, if his productivity declines, of seeing his income decline, or indeed of being pushed out of the firm altogether; and to cushion that risk, naturally he wants to earn as much as he can while he can. 

Once the legal and ethical limits on lawyer competition are relaxed, the underlying riskiness of law firm practice is unchained. That riskiness lies in the fact that, like banks though less dramatically, law firms’ capital is short term but their assets are long term. The principal capital is human capital—the most successful partners and their clients—and that capital is short term; a partner can leave the firm, clients in tow, with little or no notice. This can cause a run on the firm, as happened in the collapse of the previously very successful Dewey LeBoeuf firm, because its assets, including its accounts receivable and future clients (corresponding to a bank’s loans), cannot be liquidated at a moment’s notice to match the firm’s assets to its shrinking capital and its fixed debt. 

The market response to the transition of the legal services industry from a profession to a business has been increased vigilance by corporate house counsel, who are expert monitors of legal services, and a related trend toward business firms’ bringing legal business in house, where direct supervision of the lawyers handling it is feasible. Are these adequate substitutes for the ethical and regulatory restraints that define a profession? And if not are the costs offset by increased competitiveness? I don’t know the answer to the first question, but I am skeptical with regard to the second. Even if the business model is more efficient, it is unclear that efficiency in corporate law is a public good. The reason is the adversary nature of corporate law, not only in litigation but also in negotiation of deals, structuring of transactions, and coping with regulation. If there are good lawyers on both sides of a case, the aggregate costs of litigation are higher, and the benefits to judge and jury of a more vigorous and informed adversary process generally quite modest. If private lawyers with a regulatory practice are abler, the regulatory agency needs to hire abler lawyers, and so the cost of regulation increases, though there may be a net gain in the quality of regulation. And do abler lawyer on both sides of a deal negotiate a better deal in a social sense, or simply increase the costs of negotiation? 

Turning briefly to medicine, about which I know less: When I was growing up in the 1950s, doctors constituted a highly respected profession, though their capabilities were distinctly inferior to what they are today, after more than half a a century of remarkable progress in medical technology. Like lawyers, doctors in the old could realistically aspire to a comfortable income but not to become wealthy. 

Opportunities for wealth developed, not because of significant changes in regulation, as far as I’m aware, but because of the rise of costly though effective specialized treatments and because of the increased availability and generosity of private and governmental health insurance. Most doctors in the old days were general practitioners, or at the higher end specialists in internal medicine, but really they were generalists too; like general practitioners they both diagnosed and treated. With increased specialization, treatment for the rare, complex, debilitating, or lethal diseases gravitated from general practitioners to specialists in particular fields of medicine. These specialists were understood to “deserve” higher incomes because of their more protracted medical education. Moreover, health insurers are more comfortable reimbursing procedures than visits to a general practitioner, because the optimal length of such a visit is impossible to gauge. 

As a result specialists now outnumber general practitioners and some specialists, if able through automation or staff to treat a large number of patients in a short span of time, have extremely high incomes. And yet, since medicine more than law has as a career a powerful appeal to a relatively large number of able people, including many foreigners who would be eager to relocate to the United States (in fact a significant fraction of our doctors are foreign-trained), one can imagine a medical system in which doctors were paid somewhat less than they are today yet would be content. This would be some form of “socialized medicine,” such as found in much of the developed world, and it may prove to be the direction of reform of our much-criticized health-care system. 

In sum, the professional model is giving way in corporate law to a business model, whether for good or ill, though quite possibly the latter. The professional model is endangered in medicine as well, but there it may actually be on the verge of renewed vitality.

Comments

[Account Deleted]

Is this one of the reasons America is so litigious? If so, those costs should also be factored in.

[Neilehat]

The question ought to be, "When does Business, competition and the desire to succeed in a highly competitive environment trump the Code of Professional Ethics"? Does the "Arthur Anderson" fiasco ring a bell?

[Christopher Graves]

I agree with the following characterizations described by Judge Posner: "The result, in combination with requiring postgraduate education and qualifying exams for entry into the profession and subjecting members of it to professional discipline, is to attract a type of person quite different from the entrepreneurial type—the latter a type exemplified by such extraordinarily successful college drop-outs as Bill Gates, Steve Jobs, and Mark Zuckerberg. The professional model attracts a more studious, intellectual, risk-averse type of person."

The first point of agreement is on Judge Posner's acknowledgement of different innate temperaments, which is frequently overlooked in these sorts of discussions. The second is the social need for the people Judge Posner observes to be drawn to the professional model in order to curb the excesses of those drawn to the business class. And this bring us to the third point of possible agreement, and that is there are natural classes of people with the attendant need for a society to be properly ordered in terms of classes.

I am afraid that many conservatives and libertarians are all too willing to overplay the hand of the business class at the expense of those who are more reflective and discerning. Those on the left are even more prone to mistakes in the social ordering process by overlooking the contribution those in the business class make to producing the economic surpluses that make civilization possible. The left's penchant for equality of result makes for a general lack of appreciation of natural classes of people.

But I strongly disagree that those without official medical training cannot actively participate in their medical care or the care of a loved one. All too often, doctors and nurses, and even nurse's aides, believe that they have some sort of official dispensation to neglect the insights or even questions of the patient or the patient's family in setting out treatment. This tendency leads to incredible arrogance not only in medical treatment that can and does turn out to be wrong, but extends to doctors and nurses making "official" pronouncements on issues outside their area of expertise, e.g, forcibly presenting their own views on end of life issues as if the humanitarian or hedonistic views were the only games in town philosophically or theologically. Most of these professionals have little or no training in philosophy and merely repeat the line drummed into them from mainstream bio-ethics without serious thought behind their dogmatic assertions.

During the past year, I have witnessed my mother suffer horrendous mistakes at the hands of doctors leaving her in a debilitated condition. After the first of these mistakes, I have questioned doctors on the wisdom of their course of treatment. Every time that I have done so after the first major mistake, I have turned out to have been right. I can reason as well, or better, than they can using inductive reasoning and the scientific method. Before my mother' fall last year, doctors whom we had an on-going relationship with listened to my questions and observations especially after they saw my concerns or suggestions play out as I had predicted. But doctors and nurses whom we float among in the callously impersonal care of hospitals and nursing facilities do not have the contact with us much less the on-going relationship with us to heed my concerns until another set of mistakes occurs. Some then take what I say more seriously, but then we are on to another facility before long. Others have become very hostile and have created unbelievable problems for us leading me to have to hire a lawyer to protect my relationship with my mother. They believe that they know better and have more concern for my mother's welfare than I do. This level of arrogance is remarkable (hidden pun here).

It is imperative that medical personnel recognize the autonomy of the individual and the person's ability to make decisions about their care ( or a family member assisting in these decisions) as they offer information on issues that do require specialized knowledge.

[Neilehat]

Chris, As Client and Customer one always has the right to turn their back on and ignore any and all professional advice. In Medicine one has a similiar right. A case in point is the Christian Scientists versus Medical science. How many have died needlessly at the hands of Theological Medicine? As an adjunct to the Client-Customer privelege there is always the option of getting "Second or Third Opinions".

[Eric Rasmusen]

I wonder if the causality goes not from risk-trimming to studiousness but more the reverse. Exogenously, law and medicine (like the traditional Greek-reading clergy) are scholarly, unlike, say, business. Scholarly people dislike risk. Thus, they created rules which limited upside and downside potential. Perhaps that was even efficient.

Law and medicine are still low-risk, aren't they, for high-end talent? Being a big-time partner is risky, but isn't being an in-house lawyer less risky than being a middle manager? Or, you can work for the government at a comfortable salary, one better than a humanities professor's. This is even more true for doctors. There isn't really much downside risk, and you have to go out of your way to be a stand-out specialist or a hospital manager.

[Terry Bennett]

Chris, I'm really sorry to hear about your mother. The club she has joined is regrettably far less exclusive than we would all hope.

I have a large scar across my face. It was put there 20 years ago by a black man with a knife - to be more precise, a scalpel: he was a board-certified plastic surgeon out of Johns Hopkins. I had had stiches in my wrist as a child, which have never healed. Knowing my own physiology better than anyone else ever will, I felt stitches on my face were a bad idea, but I accepted the doctor's assurances. He was 100% wrong, and it ruined my movie career.

I became a lawyer out of self-defense. As a businessman, every path of endeavor I ever followed eventually led to a lawyer, and I got tired of it so I got my own license. As an older law student, I was peripherally intrigued by the sociological aspect of the experience, and over the course of my three years I interviewed virtually all of my schoolmates regarding their aspirations. To a person, they all admirably expected that on top of making a very good living they would also be able to contribute positively to the world in one way or another. The only exceptions were the children of lawyers, who exuded a sense of entitlement as they entered the family business.

My idea of a lawyer was the guy down the street with the shingle outside his office, where you went for wills and deeds and traffic tickets. I had no idea there were thousand-lawyer multinational firms willing to pay a first-year lawyer $160k. The book Shark Tank is a good recapitulation of the beginning of the end of the law "profession". It recounts the vision of Steve Kumble, embodied in the slogan, "When we are the biggest, our clients will assume we are the best", which eventually collapsed under its own weight.

As a lawyer, I get to meet people on the worst days of their lives, and I am gratified by the many ways I can, armed with my license, ameliorate their problems. Still, a doctor has patients' lives in his or her hands, all day every day. The gravity of that responsibility has to mean something. If you are a corporate lawyer, your client is at worst facing dissolution, hardly the sobering reality of human death facing a doctor. It's easy enough to acclimate to the import of the work and just go for the money. Few doctors have that luxury, and I believe this supports Judge Posner's contention that medicine still carries the noblesse oblige that makes a job a profession.

I think the notion of the lawyer as an officer of the court is anachronistic and unrealistic. No man can serve two masters, and lawyers serve their clients, period. Courts should drop the pretense that the lawyer is anything but a representative for the client. We should still be licensed for purposes of judicial economy, but we should have no special standing before the court. Nobody is buying it anyway.

[Sherlock Holmes]

Judge Posner

1. Glad to see you speaking a writing on a number of topics, albeit too late.

2. Would suggest you look for papers by Mark Suchman, sociologist, on the law business.

Mark Suchman
208 Maxcy Hall
401-863-2535 phone
401-863-3213 fax
[email protected]

Ph.D. Stanford University
JD Yale Law School

Brown University Research Profile Page

Curriculum Vitae

Areas of Interest:
Sociology of Organizations; Sociology of Law; Economic Sociology; Innovation and Entrepreneurship; Professions; Healthcare

Professor Suchman comes to Brown from the University of Wisconsin-Madison, where he was Professor of Sociology and Law. He is currently writing a book on the role of law firms in Silicon Valley, and he is midway through a multi-year project on the organizational, professional, and legal challenges surrounding new information technologies in health care. He has also written on organizational legitimacy, on inter-organizational disputing practices, on the "internalization" of law within corporate bureaucracies, and on social science approaches to the study of contract

Your POV is entirely wrong about the large law firm. Get in touch with Suchman and ask him to get your the paper he gave in Chicago many years ago

And, law and medicine have nothing in common

The demand for health care rises, the more the patient knows about health care

The demand for legal services declines, the more law the client knows