Friday, August 25, 2006

More on Free Markets

Have you ever had a bad experience with a lawyer? Did you have to chase him or her to get things done? Didn’t return your calls? Didn’t seem that interested in seeing that you were satisfied? Did you think about switching to another lawyer? Probably not, because you realized that there was a good chance the next lawyer would be shoddy, too. Thank the restrictions on supply for your suffering: Lawyers do not have to compete hard for your business since there are too few lawyers.

Shoddy service and high prices do not have to be the modus operandi. Here is what happens when regulations are removed from a market (from Cafe Hayek):

A Deregulation Success Story
Don Boudreaux

Three years ago New Jersey's government eased many of the regulations that it had long imposed on auto-insurance suppliers and consumers. Today's New York Times has a report on the consequences:

For the first time in decades, prices for coverage are falling in the state [New Jersey] and insurance companies are fighting for drivers’ business. Roadside billboards cry out with special deals; radio and television are peppered with car insurance advertisements.

It is a mammoth change in a state where auto insurance has been a long-running nightmare and it puts New Jersey in line with auto insurance practices in most of the country.

More tellingly, it provides a case study in what happens when competitive forces are unleashed and markets are allowed to operate more freely. And while some drivers are worse off, the vast majority of consumers have gained from the changes.

Throughout the country, New Jersey and Massachusetts stood out for their heavy regulation. Some of the biggest insurers shunned the states. But that started changing in New Jersey when state officials, worried that even more insurers would leave, finally decided to give the industry much more flexibility with prices and
driver ratings.


Article continued:

The insurers had always seen great potential in New Jersey with its largely affluent population and one of the greatest concentrations of cars in the nation. They increased their pressure in a long campaign for change, and Gov. James E. McGreevey and the State Legislature stepped back and let market forces work. It was not radically different from the way auto insurance was sold in most of the country. But in New Jersey it was revolutionary.

The insurers have been pouring millions into advertising. Television stations in New York and Philadelphia blanket the state. In the New York market, which extends as far south as Trenton, spending by auto insurers more than tripled to $17.4 million in 2005 compared with 2003, according to Jon Swallen, the director of research at TNS Media Intelligence in Manhattan. In Philadelphia, spending in the same period rose nearly fourfold to $17.2 million.

In place of the few rigid rate categories, insurers are now employing computer programs to come up with hundreds, if not thousands, of gradations in prices. The insurers say these programs, now in use in most states, enable them to better match prices to the risk presented by each driver.

A result, generally, is that better drivers pay less and worse drivers pay more. That has been widely accepted because there are far more drivers with unremarkable records than ones checkered with crashes and speeding tickets.
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14 Comments:

Anonymous Anonymous said...

The dangers of deregulation...

Check this out on the Malaysian Bar Council website at:
http://www.malaysianbar.org.my/content/view/3849/27/

It is an article entitled "Lawyers - From professsionals to salesmen"

8:54 AM  
Blogger a singapore economist said...

Anonymous,

The article you linked to is quite long. I don't have time to read it and doubt many other people will read it either. If you have an opinion to put forward, I suggest you write it in a comment.

9:26 AM  
Anonymous Anonymous said...

As an economist, it should not be too difficult for you because the article is on Information Economics (i.e. information asymmetry, adverse selection, moral hazard, etc) and how it affects the legal profession. It applies equally to other professionals like accountants, engineers, architects, pharmacists and doctors. For their ground breaking work on Information Economics, the 3 economists, namely, Professor George Akerlof, Professor Joseph Stiglitz and Professor Michael Spence shared the Nobel Prize in Economics for 2001. Their work shows that Adam Smith’s “invisible hand” is no longer entirely true especially in the market for professional services.

12:04 PM  
Anonymous Jason said...

Yes, the article is very long, but quite pertinent. I've scanned through it, and here are some points.

* In the past few years, both SG and MY legal profession landscapes have NOT been dealing with an insufficient supply of lawyers. Instead, they have been experiencing ruinious levels of competition.

* Many lawyers are opting not to renew their licenses, preferring to move on to other work. That too does not fit the image of insufficient supply.

* Competition has been based on price, because clients cannot evaluate quality. Consequently, quality of work is falling, principles are being compromised, and scandals have been erupting. Public trust in lawyers is eroding. This is where the article appeals to the economics of asymmetric information.

* The element of serving the Bar and the Justice system ahead of self interests has been lost.

* One of the key reasons for this development was the deregulation of licensing fees (I am murky on this point).

It bears reminding that, with or without government intervention, the legal profession has never operated as a free market. Every country has its version of the Bar Association, which acts as a monopoly of sorts. Before embracing the free market, it would be instructive to think about why this has been so.

*

4:54 PM  
Blogger a singapore economist said...

Jason,

I have not read the article so I will respond to a couple of things that you have written in your comment.

It bears reminding that, with or without government intervention, the legal profession has never operated as a free market.

This is true but I am not arguing that only government intervention is bad. I think that restrictions imposed by the bar associations hurt society, too.

In the past few years, both SG and MY legal profession landscapes have NOT been dealing with an insufficient supply of lawyers.

The restrictions keep the number of lawyers artificially low. That is their purpose by definition. Besides, the Singapore government has already said that there are too few lawyers.

Lawyers think there are too many lawyers because it is self-serving (just like I think there are too many economists ;) ). IMHO, it's about dollars, not some notion of better "serving the Bar and the Justice system."

When unfettered, the labor market directs labor to its best use (people are drawn to the industry in which their skills are most valuable). Having restrictions just mucks up this allocation.

7:33 AM  
Anonymous Jason said...

A.S.E.,

If you want to brush aside the arguments by lawyers in the article, at least have the good sense to read them first.

After all, they are appealing to economics, like what "anonymous" said.

12:54 PM  
Blogger a singapore economist said...

Jason,

Since the article is very long and my time is a scarce resource, I won't read it entirely, particularly since it seems to push an agenda I don't agree with in principle. However, I have responded and will respond to your comments (how is this brushing aside the lawyers's arguments?). If you and anonymous disagree with my opinion, it is up to you to put forth an alternative. Don't put the onus on me to make your case.

1:18 PM  
Anonymous Anonymous said...

The article "seems to push an agenda I don't agree with in principle". Sorry, what do you mean? I thought the article is on economics of asymmetric information, an update on the neoclassical theory of economics which assumes perfect competition. The article above all calls for the profession to be more professional and ethical, which is exactly what you complained about.

8:39 AM  
Blogger a singapore economist said...

The article above all calls for the profession to be more professional and ethical, which is exactly what you complained about.

Nope. I complained of shoddy work, not unethical practices. I also complained about prices being too high due to restrictions on supply.

The article "seems to push an agenda I don't agree with in principle".

This article uses a common rent-seeking technique: claiming that this market is "special". For example:

The memorandum said that it is not in the interest of the public or the various professions, for professional fees to be decided entirely by “market forces”.

Strangely, it follows by quoting an architect:

Citing the scandal involving an architect in Japan, Dr Tan said that would be the danger if one enters into fee bargaining to which most present agreed that if "you pay peanuts, you would get monkeys!”

Then it includes a bunch of anecdotes to scare people. Here is one:

On 7th June, 2006, the Bar Council website carried a report from The Straits Times, Singapore that the owner of a local law firm is suspected of absconding with more than $10 million of clients' money in what could be the largest case of misappropriation by a lawyer in Singapore. Mr David Rasif, who heads David Rasif & Partners, is suspected of having fled the country.

Here is another one, though the article doesn't say why it is relevant:

On 18th February, 2005, a senior lawyer was shot to death in cold blood in broad daylight in Kuching. His wife, who was with him, also suffered injuries.

So we should believe that this is a result of too many lawyers? Market forces causes lawyers to steal client's money? I don't buy it.

By the way, this argument is a bit strange. There are a lot of stories in the article about lawyers who steal thousands, who shoplift, who sell drugs. We're supposed to feel sympathetic because these criminals were forced to commit crimes?

Here is my general belief: interfering with the market hurts society. As far as quality is concerned, I believe that when there are no restrictions on supply, the incompetent lawyers will go out of business.

I think that I have made my position clear. Go ahead and respond if you want. but I don't expect to comment any further on the matter because it really is becoming a time suck.

9:30 AM  
Anonymous Jason said...

You have not addressed any of the legit economic arguments in the piece at all - asymmetric information, dual roles of service and agency.

You have also not noted/commented about the observations in the piece that people are leaving the profession.

Implicitly, your view is then that it doesn't matter why people are leaving, as long as you can get more new entrants.

I suppose a similar situation would be that it doesn't matter why some people want to leave Singapore, as long as you can get new immigrants. :P

12:25 PM  
Anonymous Anonymous said...

Jason,

Your earlier analysis and latest one are superb and spot on. You will get a standing ovation from economists round the world.

4:28 PM  
Anonymous Anonymous said...

As any doctor or even common sense will tell you, when there is a haemorrhage, pumping in new blood can only be a temporary and short term measure. In the longer term, the cause of the haemorrhage has to be found.If there are insufficient lawyers and fees are high as alleged by A Singapore Economist, then why are so many lawyers leaving the profession? This has to be answered. Jason has aswered it very well.

10:19 AM  
Blogger a singapore economist said...

You will get a standing ovation from economists round the world.

OK, anonymous, now I know you are just pulling my leg. :)

11:05 AM  
Blogger a singapore economist said...

Jason,

The point is that I can't trust that the article is telling the truth. It seems very biased and sensational. Read my last comment.

You claim that lawyers leaving the profession proves something. You haven't said what you think it proves so tell me.

Let's assume for a second that lawyers leave the profession because it is currently undesirable to be a lawyer. If this was true, potential lawyers would see that it is a bad time to be a lawyer and decide to study something else. So if it is a bad time to be a lawyer as you claim why would you have to restrict entry?

11:30 AM  

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