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Saturday, July 26, 2003

Legal Markets

In a 1994 leader on "A Future for Socialism", the Economist wrote:

In framing market-friendly policies . . . left-of-centre parties actually have two decisive advantages over their conservative counterparts. First, they can more readily attack certain sorts of privilege. In many countries in Europe and elsewhere, the fiercest opponents of change are those who have traditionally benefited from the restrictive practices established over the years by the middle-class professions: doctors, accountants, lawyers and so forth. The left may be -- and certainly ought to be -- less willing than the right to defer to such interests. Second, the left's motives in reform are less in doubt. As a result. as "socialist" governments in Australia and New Zealand have shown, leftist reformers can often be more radical than right-of-centre governments in pursuit of efficiency, as well as in pursuit of equity.

Britain's Labour party, the main (but not exclusive) target of this leader, has been generally a disappointment in these terms. It's most successful policies, ironically, have been either when it followed this advice and built markets (such as in furthering electricity deregulation, which has drastically brought down consumer prices) or gotten out of the way (as in Gordon Brown's establishment of the Bank of England's Monetary Policy Committee). Aside from this, the government's interventions have been far from optimal, and, in the case of railways, even been welfare-destroying. The government also over-intervenes, reacting to, and having a position on, every issue that comes up. Not a good record to build on.

What then to make of this article in Friday's Guardian?

Supermarkets could draw up wills and handle accident compensation claims under proposals being considered by the lord chancellor, Lord Falconer.

The Tesco law option will be looked at by a wide-ranging review of the way legal services are regulated, with the aim of increasing competition and providing a better deal for consumers.

The government favours "one-stop" shops - with solicitors, accountants and other advisers under one roof - and wants big corporations to be allowed to offer legal services.

I first read of restrictive practices in professions like law in Milton Friedman's book Capitalism and Freedom; the issues he brought up are just as relevant as they were 40 years ago when they were first published. The legal profession, as currently structured, exists because of government favour and protection, and if the government is predisposed to shifting the balance towards consumers, then the power to it. The proposals are not revolutionary (multidisciplinary practices, for one, have been around for a years, especially in the "big four" accounting firms) but important, and could improve access while broadening the market for legal services.

Like all established interests, the response of the Bar Council is not surprising:

The bar's chairman, Matthias Kelly, said barristers would fight the proposals for one-stop shops with lawyers and accountants practising together "tooth and claw", because they would lead to the "Enronisation" of the legal profession.

The Lord Chancellor's proposals were prompted by a report from the Office of Fair Trading, the government's independent competition watchdog. In a progress report on restrictive practices in professions, the OFT writes:

Freedom to compete is a fundamental theme throughout our work. At no point do we prescribe, even tentatively, how professional services should be supplied. We believe that this is generally best determined by unfettered competition
between producers for the custom of consumers. Where others restrict the freedom of patterns of supply to evolve and improve, it is right that the onus should be on them to justify the restriction or remove it. The freedom to compete that results will benefit those who use professional services and those who serve them well.

This is indeed an odd thing for a government body to be saying. The government may not be going very far--to start with, it's review will last 18 months, followed by yet another consultation; drafting legislation will take even longer, as will its passage. (The OFT first looked into this in 2000.) Still, if the reforms develop in the way they are proposed, British competition policy will have gone a long way towards improving consumer welfare. Another example of the government doing better by setting up markets and getting out of the way.