Life Without Lawyers

Congress has just passed the omnibus $787bn American Recovery and Reinvestment Act, the largest appropriation in US history. The money will be used to revive the economy after the housing credit debacle.
The populist view is that Wall Street should shoulder a great deal of the blame for the collapse. In addition to financial penalties, pundits are calling for tighter regulations to prevent this sort of thing from happening again. It appears we may be about to initiate a new cycle of rules and regulation creation. The death of free (read unregulated) markets is upon us.
The economist Joseph Schumpeter reminded us in his 1942 Capitalism, Socialism and Democracy that: “The problem that is usually being visualised is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them.”
While Schumpeter was writing about business, we should consider whether his advice can also be applied to our legal system. Just as we create laws to meet new needs, we should also destroy existing laws to be sure the entire system meets the social and economic needs of the time.
Philip Howard, a senior partner at international law firm Covington & Burling, has been on this trail for some time. Howard alerted us to the dangers of inappropriate and excessive laws in The Death of Common Sense (1996). In Life Without Lawyers, Howard points out that the law of unintended consequences is alive and well. That is to say, well-intended regulations often produce the opposite effects from the ones originally sought. Howard urges us to seek ways to achieve the Schumpeterian goal: of course we should create new laws but we should also destroy the dysfunctional laws we already have.
Howard regales and terrifies us with graphic descriptions of law enforcement run amok. He cites a plan by Mother Teresa to build low rise housing for the homeless in the Bronx. The plan foundered because of a New York City law forbidding the construction of a building without lifts, even in low rise housing. The cost of the unneeded elevator was beyond the amount Mother Teresa could raise in funds. The project was never begun and the men remained homeless for want of a lift they did not need.
Howard advises us to consider carefully the possible secondary effects of any regulations we create. We should analyse how the intent of laws created in the past has been undermined by the ineffective and unresponsive administrative structures created to enforce them. Howard urges us to provide proper latitude for the exercise of individual judgment in our future administrative structures.
There are two ways to do this. First, we can redesign authority structures – for example, create a new expert administrative court to handle malpractice claims or a new system of discipline for New York City schools. Second, we can eradicate existing rules that either cannot be effectively administered or are simply no longer necessary. In New York State, for example, non-profit hospitals have to comply with regulations that require them to file an elaborate Certificate of Need Application for even modest construction projects, which delays the schemes and adds little value.
Contrary to the zeitgeist though Howard’s ideas may seem in a world where the laws are made and enforced by lawyers (and Howard is a lawyer), we should listen. Of course we need new laws. But this time around we should be sure to measure the effectiveness of the new laws over time and have the mechanisms in place to remove them if their social value is substantially different in practice from what we thought they would be. Schumpeter had it right – and so does Howard.
Richard N Foster is managing partner of Millbrook Management Group and author of ‘Creative Destruction’ (Doubleday/Currency Books)