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“Freakonomics” by Steven D. Levitt and Stephen J. Dubner (William Morrow, 242 pages, $25.95) Morality may represent the way the world should work, but economics explains how it does work. So argue University of Chicago economist Steven Levitt and New York Times reporter Stephen Dubner in their new best-seller Freakonomics. Forgive the book’s cover. The title is garish, and the subtitle — A Rogue Economist Explores the Hidden Side of Everything — raises embarrassing questions like: What, exactly, is a “rogue” economist? Do rogue economists work alongside holistic accountants? And will the authors really explore “everything” in under 250 pages? But look past the hype. Underneath the cover lies a thoughtful and provocative analysis that covers everything from the salaries of drug dealers to the effect of abortion on crime rates. And the book isn’t just for readers who enjoy economics. The legal profession is not the authors’ focus, but their analysis can illuminate economic issues close to home, including compensation of law firm associates, lawyers’ exploitation of clients and the wisdom of spending large sums on top legal representation. TOURNAMENT JOBS Hollywood portrays drug dealers stereotypically adorned with gold and expensive cars. But if crime pays so well, why do so many drug dealers live with their mothers? The answer, Levitt and Dubner say, is that most drug dealers don’t make much money. Their conclusion comes from an unusual source of data. A graduate student developed rapport with a drug gang, one of the subunits of the Black Gangster Disciple Nation, and a gang member turned over four years’ worth of financial transactions. Among the data in the gang’s ledgers were numbers for drug sales, wages to members and death benefits paid out to the families of murdered members. The data revealed an organizational chart similar to that of McDonald’s. A franchise director (the college-educated “J.T.,” in this case) owned the right to sell crack in a 12-square-block area, for which he paid nearly 20 percent of revenues to a “board of directors.” J.T. had three officers, a number of street-level drug salesmen known as foot soldiers and even more people who paid dues for the chance to be hired as a foot soldier. J.T. took an annual salary of about $100,000. His three officers received a mere $700 a month. And the foot soldiers earned just $3.30 an hour, much less than the minimum wage available in legal employment. “In other words,” Levitt and Dubner write, “a crack gang works pretty much like the standard capitalist enterprise: you have to be near the top of the pyramid to make a big wage.” Why do gang members choose an occupation with a 1-in-4 chance of being killed? The answer is the same reason why a pretty Wisconsin farm girl moves to Hollywood and a high-school quarterback wakes up at 5 a.m to lift weights, suggest the authors: “They all want to succeed in an extremely competitive field in which, if you reach the top, you are paid a fortune (to say nothing of the attendant glory and power).” These glamour occupations, according to Levitt and Dubner, are akin to a tournament with certain rules. You must start at the bottom to have a chance at the top. You must be willing to work long and hard at substandard wages. To advance, you must prove yourself not merely above average but spectacular. And when you realize that you will never make it to the top, you will quit the tournament. Such occupational tournaments are not limited to drug dealers. Although this isn’t suggested in Freakonomics, they arguably also fit the reality of most big-firm associates. The new lawyers start at the bottom, spending long hours at tedious tasks such as document review. Although their wages are hardly poverty-level — even a first-year associate earns more than drug lord J.T. (at least pre-tax) — their salaries are a mere fraction of the money the partners receive by billing their time to clients. And at some point, as professor David Wilkins of Harvard Law School has noted, the majority who won’t make partner quit or are eased out of the law firm tournament. But unlike the crack dealers, associates don’t face a 25 percent chance of being killed. Professional education has its advantages. EXPLOITING EXPERTISE How are Ku Klux Klan members like life insurance salesmen and real estate agents? The answer, according to Levitt and Dubner, is the hoarding of information. “Once that information falls into the wrong hands (or, depending on your point of view, the right hands), much of the group’s advantage disappears,” they conclude. Thus, in the 1940s, the Ku Klux Klan lost the allure of mystery when Stetson Kennedy, an undercover informant, leaked the Klan’s laughable secret jargon to the producers of the “Superman” radio show, who then wrote the material into plots as Superman fought the Klan. Likewise, in the late 1990s, the Internet allowed consumers easily to compare the cost of term life insurance policies, and prices fell dramatically. So too with real estate agents, who have specialized knowledge about the housing markets, such as the inventory of similar houses and recent sales trends. The authors cite a study of 100,000 Chicago-area home sales that found that when real estate agents were selling their own homes, they kept the houses on the market for an average of 10 days longer than other houses not owned by agents. The agents’ homes sold for an additional 3 percent more than the homes of their clients. The authors suggest that the current system of compensating sellers’ agents, where the agents typically receive 1.5 percent of the sale price of a house, creates incentives for the agent to close the sale at a price lower than what the market might bear. When an agent gains only $150 for selling a house for $10,000 more, it “isn’t much reward for a lot of extra work,” the authors note. Like “stockbrokers churning commissions,” the authors conclude, real estate agents want to make deals and make them fast. Real estate agents are fiduciaries for home sellers, of course. Levitt and Dubner don’t mention this, but these types of economic studies would be potent ammunition for class actions against the brokerage industry. If employment class actions can win big-dollar settlements — sometimes with less-rigorous statistical evidence of misconduct — then suing (or defending) the brokerage companies might be a lawyer’s piece of the current real-estate boom. Paging the plaintiffs bar! But lawyers also should consider the ways in which financial incentives may tempt them to drift from their own fiduciary duties by exploiting their expertise or hoarding information. Billing systems that reward time spent rather than cost-efficient results are a prime example, particularly when combined with the increased billing pressures on associates to justify their high salaries. Real estate agents may want to spend the minimum necessary amount of time to achieve success; lawyers have an opposite incentive to exhaust even a marginal avenue of research at length. Of course, lawyers, like real estate agents, are supposed to do the right thing regardless of economic incentives. Fiduciaries owe their principals the “punctilio of an honor,” as Benjamin Cardozo put it. But in light of the power of financial incentives on human nature, the profession’s soul might profit if lawyers’ self-interest could be more perfectly aligned with their clients’ goals. UNTANGLING CAUSATION A large topic in Freakonomics is trying to untangle causation, that is, separating out which elements, among many, really matter. The answers can be surprising. The authors argue, for example, that the decline in crime in the 1990s was significantly attributable to the nationwide legalization of abortion by Roe v. Wade (1973). When crime rates began falling in the early 1990s, the speed and suddenness of the decline surprised everyone, the authors say. What caused this drop? Levitt and Dubner consider and reject capital punishment, the booming economy, and broken-windows policing strategies. Rather, the authors point to the 750,000 to 1.6 million abortions per year, generally of unwanted children. They posit that “Legalized abortion led to less unwantedness; unwantedness leads to high crime; legalized abortion, therefore, led to less crime.” The authors point out that causality is also counterintuitive for a variety of other phenomena. For example, when it comes to a child achieving high test scores, it doesn’t appear to matter whether the child’s family remains intact. And the amount of money spent on campaigning in congressional elections doesn’t seem to affect the outcome. Although not discussed in the book, such issues of causation also may arise when companies buy legal services. For example, how much does spending an additional dollar on lobbying really help an industry? And is paying large sums to a first-rate law firm a good use of corporate money, or could the company’s general counsel achieve the same result with cheaper, less-prestigious lawyers? If general counsel start pondering Freakonomics, the effects on bottom lines might be significant. And those sorts of new applications may turn out to be the greatest impact of the book. Levitt and Dubner’s cited examples are interesting, but applying these Freakonomics principles to one’s own economic problems may be even more so. Robert L. Rogers, a D.C. lawyer, is the associate opinion editor of Legal Times.

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