1.2 Billion Copies of Adam Smith To Be In Circulation Next Year

Courtesy of a UK reader comes word that Adam Smith will adorn the new £20 banknote to be issued by the Bank of England next spring.  In The Guardian's coverage, the headline is "Adam Smith becomes first Scot to adorn an English banknote."

The £20 note is the most widely circulated of all denominations, with approximately 1.2-billion copies issued.   Aside from the portrait of Adam Smith there will appear "an engraving showing the division of labour in pin manufacturing with the words "and the great increase in the quantity of work that results"."

Perhaps predictably, there has been some genial sparring between left and right over who has the better claim to his legacy:  The left pointing largely to The Theory of  Moral Sentiments and its theme of the universality of human sympathy for others, while the right points to the "invisible hand" guided by the self-interest of each, with a minimum of governmental or societal interference, to produce the economically optimal results.  Mervyn King, governor of the Bank of England, offered a nicely inclusive statement: 

"Social institutions and market economies go hand-in-hand," said Mr King. "Second, people who, for the most part, pursue their own self-interest, are also prepared to stand back and ask how their actions should be constrained by social institutions. Such institutions arise because we build them."

I see a trip to the UK in my future to procure one of these, suitable for framing.

On Negotiation: From Harvard, Wharton, and Adam Smith

We all negotiate:  Some of us for a living, others of us just in order to live.  Most of us, I suspect, approach a negotiation without much of a coherent view or approach on what distinguishes a successful and effective negotiation, that leaves both parties economically and emotionally satisfied, from a failed one that disserves one's interests and damages the relationship in the bargain.

But professors at Harvard and at Wharton, among many other places, actually study the dynamics of negotiations and it turns out there are commonalities between better negotiators; you actually can make fairly objective observations about behaviors that will improve your chances of success.  In reading the pieces I did in preparation for writing this, the thought occurred to me more than once that "I knew that!"  Well, perhaps I did, but I had not articulated it.  And if you haven't articulated something, how well do you actually know it?

Back to negotiations:  A key issue is that of trust.  Are there ways to work on building trust?  And conversely, if trust has been impaired, is it recoverable?

On the first question, we have "Six Ways to Build Trust in Negotiations" from Harvard Business School's "Working Knowledge."  To affirmatively build trust:

• Speak the other party's language.  This is more than knowing the jargon of an industry, although it surely includes that as a baseline minimum.  (The article recounts the sorry tale of a technology consulting firm invited to bid on re-working an airline's ticketing process who didn't know that in airline-land a "lift" means a paper ticket—and who had to ask what it was.  Game over. 
  
  But more fundamentally, if you haven't taken the time to demonstrate familiarity with the other side's culture, history, and perspective, how committed to the mutual engagement are they going to think you are? 
  
• Manage your own reputation.  One can hope that if you and the other party know each other already, that this is taken care of.  And if it's "taken care of" in the sense that your own reputation is in tatters with them, you probably have another priority than worrying about this impending negotiation.  The interesting case is where you're relative strangers:  How do you pre-manage your reputation then?  Case studies of what you've accomplished in similar situations go a long way; so do testimonials from third parties widely seen as objective.  The point is not to assume that because you know how good you've been in the past, they will too.
  
• Be prepared to be dependent.  Psychologically, it's awkward for many of us to admit we're dependent on someone else.  Let go of that; dare to let the other party know that you're relying on them for a reciprocal dialogue by which you can achieve your own goals, as well as furthering theirs.  The courage to display a little vulnerability can in and of itself promote trust.
  
• Consider unilateral concessions.  Not on the ultimate issues, of course, but in order to demonstrate that you value the relationship itself, consider it a friendly one, and that you expect it to endure over time.   The trick to a "unilateral concession" is that it have asymmetric value:  It needs to be relatively inconsequential for you to offer but of real value to the other side.   Whether there's such an opportunity is of course highly "fact specific," as they say, but be on the lookout and seize the chance if it should arise. 
  
  While we're on concessions, something virtually all articles on negotiation agree on is this: 
  
• Label your concessions as such.  Won't the other side obviously know it's a concession?  Objectively, perhaps; but psychologically, parties in a negotiation are often (even unconsciously) ready to ignore, discount, or devalue the other side's concessions because it relieves them of the social and moral expectation of reciprocity.   An "unrequited concession," in turn, can cause the first mover to retreat into resentment and a vow to pursue only hardball tactics going forward.  To help ward this off, explain how what you're giving up is really a  meaningful sacrifice.
  
• Explain your demands.   This may be obvious, but be prepared for the likelihood that the other side, particularly if you're relative strangers, may not assume the best about your motives and intentions.  It's a truism that we tend to regard ourselves positively and others with suspicion—at least if we're in potential conflitc with them.  So, for example, if a literary agent tells an author that the commission on international sales is higher than on domestic sales, the agent better immediately explain that it's because she has to split the commission with a foreign agent in the first case and that she actually ends up with less for herself.  While the author's economic circumstance is precisely unchanged, at least he understands the agent's expectation for international sales.

What if trust has been impaired?  Is it terminally damaged goods?

According to three professors of operations, information management, and marketing over at Knowledge@Wharton, not necessarily.  They constructed a little laboratory money game where subjects were given $6 in each of seven rounds of the game and told that they could keep it all, in which case they simply went to the next round with their $6, or else they could give it all away to an unseen co-player (a stooge of the professors) who would receive triple the $6 ($18) and would be at liberty to decide how much, if any, to return to the first player.

At the outset, nearly everyone passed on the $6 and everyone who did was double-crossed, getting nothing in return.   To increase the complexity of things, half the players also got a note from the stooge promising to return $12 next time—upon which they also reneged.

Trust now thoroughly shattered, what happened on the final five rounds was invariant:  If they passed on the $6, they got back $9—an effort to establish a (belated) pattern of trustworthy behavior.  In addition, some of the stooges passed their players a note containing an apology ("I really screwed up.  I shouldn't have done that."), a promise ("I give you my word.  I'll return $9 every round.") or both. 

Fine:  So what did the good professors learn?

Essentially, that untrustworthy behavior is very very bad, but that deception is atrocious. 

In other words, if you're going to disappoint or double-cross somebody, don't lie to them about it on top of things.

Did the apologies do any good?  Actually, "it didn't seem to matter much at all."  The professors hastily add that the specific apology they used in the game might have been at fault for this finding, since it fell short of what other researchers have identified as the five key components of an effective apology.  Since you asked, they are:

• the statement of apology itself; I'm sorry
• remorse; I feel bad
• an offer of restitution
• self-castigation; I was a jerk, and
• a request for forgiveness.

The promise to do better in future, on the other hand, had some measure of traction in helping speed restoration of trust.  The only caution on this score is, of course, not to make promises you can't keep.

But all in all, won't your next negotiation be far simpler and more likely of success if you never open the door to your trustworthiness being doubted in the first place?

Indeed, and Adam Smith would agree.  Earlier this year, HBS' Working Knowledge interviewed a professor who had read "The Theory of Moral Sentiments," not just "The Wealth of Nations," and who had this to say:

"Q: What do you think Adam Smith's advice to business leaders would be concerning corporate ethics given what he writes about trust?

"A: This is a great question. Smith believed that there were certain virtues, such as trust and a concern for fairness, that were vital for the functioning of a market economy. He wrote about trust and reciprocity as critical foundations of the early beginnings of the market, allowing reciprocal gift exchange to emerge, and leading to trade. One might think that the need for trust and trustworthiness diminishes as a market develops, but if anything the opposite is true.

"For example, we trust managers to carry out the interests of shareholders: We can build contracts to align manager incentives with those of shareholders, but we are never able to completely contract on all the things we care about and want to enforce. Implicitly, then, we hold a belief that managers have internalized the values we care about, and trust them to act on those, particularly when they might come in conflict with their own interests.

"There are similarly other professions where individuals are entrusted to serve, like doctors, teachers, auditors, but cannot be monitored fully. We thus rely on these individuals' professionalism and honor (or "enlightened self interest") to carry out their occupations.

"Across organizations, in the marketplace, factors like brand reputation and warranties help facilitate transactions without requiring complete trust. Within organizations, the issue of trust and trustworthiness—of employees to their bosses, of managers to each other and to shareholders—becomes even more important, and even more difficult to replace by market forces or better incentives and contracts.

"Thus, Smith's advice to business leaders would likely be that they should weigh carefully the costs of breaking trust and of risking reputation. The costs of sacrificing ethical standards of conduct are much larger than any individual might imagine, precisely because they decrease trust and can strongly affect organizational and market functioning as a whole."

Further affiant sayeth not.

Guess Whose Birthday It Is?

Today, June 5, we celebrate the 283rd Birthday of Adam Smith, born in Kirkcaldy (pronounced kir-kawdy), Scotland, about 10 miles north of Edinburgh across the Firth of Forth. 

Actually, the precise date of his birth is unrecorded and unknown, but we do know that he was baptized on June 5, so that has become his "received" birthday, as it were.

You may celebrate—or not, but that would be a grievous oversight—in your own way, but I choose today to remark upon the publication of a new book about his life and thoughts, reviewed in The Telegraph. (Yes, for those of you who've followed or will follow the links, the name of the book is different in the UK than the US; and if anyone from the publishing industry can tell me why "Adam Smith and the Pursuit of Perfect Liberty" is preferred across the pond to "The Authentic Adam Smith:  His Life & Times" on this side, I'd be fascinated to hear from you.  Being completely promiscuous when it comes to all things Adam Smith, I'd buy the book were it titled, "What Adam Smith's Dog Had for Breakfast," but I digress.)

Amazon has this to say:

"The Scottish philosopher Adam Smith (1723-1790) has been adopted by neoconservatives as the ideological father of unregulated business and small government. Politicians such as Margaret Thatcher and Ronald Reagan promoted Smith's famous 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nations, as the bible of laissez- faire economics. In this vigorous, crisp, and accessible book, James Buchan refutes much of what modern politicians and economists claim about Adam Smith and shows that, in fact, Smith transcends modern political categories."

Although I might not have put it in such a Manichean fashion (neoconservative = Thatcher/Reagan = unregulated business = laissez-faire), the publicist has a point, and it's the key insight into Adam Smith's thinking that I've always subscribed to:  He does, indeed, "transcend" categorization.

The Telegraph review makes the same point far more nicely:

"James Buchan's short, sharp biography makes a powerful case for thinking that, for Smith, these divisions [in his own thinking] were creatively enabling rather than self-canceling: they were what gave his writing its characteristic sense of balance and poise."

By and large, the Telegraph is laudatory, which is altogether fitting and proper for this June 5, 2006.

I leave you, gentle reader, with these two observations on this site's progenitor:  The reviewer describes Adam Smith's style as "modest, generous and urbane, with the occasional hint of wistfulness or acid," and sums up the book as "the perfect celebration of a man who did so much to alter modern economic thinking, and claimed towards the end of his life: "I meant to have done more." "

Happy Birthday.

Aren't You Glad You Majored in Economics?

From the Journal of Economic Education (hat tip to "Truth on the Market") comes the first study I'm familiar with examining whether the choice of undergraduate major has any effect on a lawyer's career earnings.  And guess what?  If you major in economics, it helps; majoring in anything else makes no difference.

Here's the abstract, in full (emphasis supplied):

"Using nationally representative data, the authors examine the effects of preprofessional education on the earnings of lawyers. They specify and estimate a statistical earnings function on the basis of well-established theory and principles. Along with standard control variables, categorical variables are included to represent graduate degrees in addition to the law degree and an assortment of undergraduate major fields. Holding a Ph.D. or M.B.A. degree, with the law degree, is associated with significantly higher earnings in some sectors. Lawyers with undergraduate training in economics earn more than other lawyers, ceteris paribus, and economics is the only undergraduate field associated with earnings that differ significantly. The available evidence supports the hypothesis that economics training increases a lawyer’s human capital compared with other undergraduate majors."

That still doesn't mean Adam Smith would become a lawyer were he alive today; but I know in my heart that he would have an active and energetic blog.

The Dismal Science at Age 230

"The dismal science?"  You won't be surprised to hear that that's about the last way I'd describe the art and discipline of economics, and a new book, Knowledge and the Wealth of Nations, reviewed by Paul Krugman in yesterday's Sunday Times Book Review sounds like a wonderfully exciting intellectual exploration of why I believe economics retains its ability to fascinate as it attempts to explain how people, ideas, and things interact to try to produce value.

 The author, David Warsh, a former economics correspondent at the Boston Globe, Forbes, and The Wall Street Journal, writes the online weekly, "Economic Principals."  The book tells the story of how academic understanding of increasing returns to scale, and indeed of growth itself, was revolutionized in the past few decades by introducing the concept of knowledge itself as a factor of production, at long last joining the classical triumvirate of land (a/k/a tangible resources), capital, and labor.

When a book gets advance praise like this, the reason I continue to adore economics should be clear:

“Romer’s understated but earth shattering work deserves our attention and a Nobel prize in economics.”
— John Doerr, partner, Kleiner Perkins Caufield & Byers

Tag-Team (Nailed Twice!)

Having been tagged by both David Maister and Robert Millard, the handwriting is on the wall: I can't hide, and I've never been one to run. So you are about to experience an extraordinarily atypical entry on "Adam Smith, Esq.," which is not now, and never has been, about me.

Four jobs I've had:

• caddy (one summer)
• research assistant (as a 3L) to constitutional law professor Paul Brest, later Dean of Stanford Law School
• founder and CEO of a dot-com (intended to bring the Fortune 1000 and the AmLaw 200 together for spontaneous and serendipitous "expertise discovery"—essentially meant as a massive online legal KM application)
• strategic and economic consultant to law firms

Four movies I can watch over and over

• The Godfather (I, II, & III)
• Star Wars
• The Hunt for Red October
• 2001: A Space Odyssey

Four TV shows I love to watch

• The NewsHour with Jim Lehrer (PBS)
• Charlie Rose (if and only if he's not interviewing movie celebrities)
• Monday Night Football
• NOVA

Four places I’ve been on vacation

• Bologna/Milan/Rome/Venice
• Florence/Siena/Assisi/Ravello
• Positano/Capri/Amalfi/Ravenna
• Palermo/Agrigento/Erice/Catania/Siracusa

Yes, you detect a pattern.

Four tunes that play through my head

• The Siegfried Idyll from Wagner's Ring Cycle
• Le Donne e Mobile from Verdi's Rigoletto
• "Private Dancer," Tina Turner
• "London Calling," The Clash

Four favorite dishes

• cheese, olives, bread, red wine: the Four Major Food Groups
• risotto
• home-made parmesan/rosemary/sun-dried tomato focaccia
• inky black coffee and an honest-to-God New York bagel with nova and a schmear

Four books I really love

• The Great Gatsby, F. Scott Fitzgerald
• The Selfish Gene, Richard Dawkins
• Harry Potter: All of it
• [An Inquiry into the Nature and Causes of] The Wealth of Nations, Adam Smith (yes, seriously)

Four places I’d rather be

• London, Hong Kong, or Rome
• Running a full loop of Central Park
• Most any world-class university town: Ann Arbor, Cambridge, Palo Alto, Princeton
• Seated in the third row, center, of the balcony of the Metropolitan Opera as the house lights go down

But seriously, David M. nailed it: Home on the Upper West Side.

Four bloggers I’m tagging

• Bruce Marcus
• Malcolm Ryder
• Ernie Svenson
• The Wired GC

And there you have this most out-of-the-ordinary entry on "Adam Smith, Esq."

"That Dapper Fellow"

Truth on the Market is also featuring "that dapper fellow," Adam Smith, as their favicon. But they use a different iteration than I do:

Your Money or Your Reputation: Adam Smith, the First Behavioral Economist?

Seventeen years before The Wealth of Nations (1776), Adam Smith published his Theory of Moral Sentiments (1759), nowadays a relatively neglected work which, to my mind, is nearly as astute, deserves far greater current recognition, and which not-incidentally puts pad once and for all to any charge that Adam Smith was unsympathetic to human nature or cavalier about the consequences of his theories for individuals.  Merely contemplate the book's very first sentence if you doubt me:

"How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it."

One reviewer nicely summarized its relationship to Wealth of Nations as follows:

"To truly understand Adam Smith's economic masterpiece "The Wealth of Nations", one must understand its moral foundation. Without Smith's essential prequel, "The Theory of Moral Sentiments", the more famous "Wealth of Nations" can easily be misunderstood, twisted, or dismissed."

So, to today:  Harvard Business School's Working Knowledge has a piece positing that the Theory of Moral Sentiments was the original intellectual precursor to what we all know today as Behavioral Economics.  [The HBS WK article refers enticingly to the primary source, "Adam Smith, Behavioral Economist," published in the summer 2005 edition of The Journal of Economic Perspectives, but the troglodyte JEP keeps its online archives under severe lockdown—trust me, I tried.]

The premise of the HBS piece, "Adam Smith, Behavioral Economist" is that Moral Sentiments and Wealth of Nations, which Smith never sufficiently inter-connected during his own life, nevertheless together constitute the intellectual foundation of how human psychology (including incentives, preferences, risk-aversion, and the endless struggle between immediate and delayed gratification) affect how people behave in markets:  In other words, Behavioral Economics.

"Smith's two main works—The Wealth of Nations (WN) and The Theory of Moral Sentiments (TMS)—show him to be a brilliant economist and arguably a brilliant psychologist, but he was never fully able to bring the economics and psychology together."

One of the primary arguments of TMS is that human behavior is driven by passions—fear, desire, and greed among them—but that these passions are moderated by an "impartial spectator" looking out for the individual's long-term interests.  And there's apparently something to the theory:  Using it, the Harvard professors designed a "commitment savings product" for banks in the Phillipines that required customers to sign a contract prohibiting them from withdrawing funds until a certain amount of time had elapsed or a level of principal value had been achieved.   According to them, this "had a large and significant effect on clients' total savings," resulting in increased home purchases, educational investments, and small business-building.

But it's when we come to Smith's bedrock belief,  intimated in the opening sentence above, in the importance of trust, concern for fairness, and reciprocity, that the linkage of human psychology to market functioning becomes most clear.  Smith believed that those values become more, not less, important as markets evolve.  For example, with many of the professions, most assuredly including our own, clients cannot monitor "quality" in real time—and the same goes for doctors, auditors, and financial advisors.  So trust and reputation stand in where cold economic calculus fails.

Likewise with corporations:  Shareholders must at a fundamental level trust management to operate in the shareholders' interest since the range of variables over which management has control or influence is far too vast to specify contractually (and such a hypothetical specification would also be obsolete the moment it was completed).

Finally, Smith recognized, and placed great value upon, "the aerial coin of praise," and social and professional status, as critical motivational ingredients.  Reputation ("the aerial coin") is the flip-side of trust; one trusts those who have earned their blue-chip reputations.  And Smith would have insisted on the most scrupulous care and feeding of reputation, if for no other reason than the dire consequences attendant upon its destruction.

More currently, consider this (emphasis supplied, hat tip to Larry Ribstein): 

"The market is capable of levying harsh penalities [for financial malfeasance] on its own. Recent evidence comes from Karpoff, Lee and Martin, The Cost to Firms of Cooking the Books (July 25, 2005). Here’s the abstract:

"We examine the penalties imposed on all 585 firms that were targeted by SEC enforcement actions for financial misrepresentation from 1978-2002. Consistent with the view that penalties are small, monetary fines were imposed on only 7% of the firms. A larger fraction, 36%, faced class action lawsuits from investors. Overall, however, the penalties imposed on firms through the legal system appear to be small, as the unconditional mean total of all legal penalties is only $14.3 million per firm.

"The penalties imposed by the market, in contrast, are huge. Our point estimate of the reputational penalty - which we define as the expected loss in the present value of future cash flows due to higher contracting and financing costs - is over twelve times the sum of all penalties imposed through the legal and regulatory system.

"For each dollar that a firm misleadingly inflates its market value, on average, it loses this dollar when its misconduct is revealed, plus an additional $2.47. Of this additional loss, $0.18 is due to expected legal penalties and $2.29 is due to lost reputation. This evidence belies a widespread view that financial misrepresentation is disciplined lightly. To the contrary, reputational losses impose substantial penalties for cooking the books."

So next time you're cynically thinking that money is the only motivator, try putting a price on your reputation; Smith would have.

Blawg Review #39

"Adam Smith, Esq." is honored and delighted to host Blawg Review #39; I consider myself in excellent company given the distinguished and talented people who have hosted Blawg Review in the past.  

This week we celebrate:

Epiphany:  n.   1.  From the Greek epiphania "manifestation," often referring to the appearance of a divine being. Christ's appearance to Paul on the Damascus road was an epiphany. The word is used to describe the first appearance of Christ to the Gentiles in the visit of the Magi to the baby Jesus (Matthew 2:1-12), an event celebrated January 6.
2. Epiphany in fiction, when a character suddenly experiences a deep realization about himself or herself; a truth which is grasped in an ordinary rather than a melodramatic moment.

The most famous representation of "The Epiphany" in art history is doubtless Giotto's (more formally, Giotto di Bondone:  Italian, Florentine, 1266/76–1337) from New York's own Metropolitan Museum of Art:

My wife, who majored in art history at Vassar, has indelibly memorized this educational little ditty placing Giotto in art-historical context:

"Giotto, Giotto, Giotto-Giotto:  Renaissance
He paints in the morning and he paints at night;
If it's a Giotto it'll turn out right.
Giotto, Giotto, Giotto- Giotto:  Renaissance."   

Of course, here in New York City we celebrate the end of the 12 days of Christmas with our own tradition:  The annual rite of The Ceremony of the Mulching of the Christmas Trees, jointly supervised by the NYC Sanitation and Parks Departments:

Before we begin our cyberspatial tour, like all accomplished explorers, we need to be well-equipped.  To that end I commend to you Google Pack, a handy-dandy Swiss Army-knife compilation of everything the Prepared Scout of virtual-space needs, from Adobe Acrobat and Firefox to anti-virus and anti-spyware armor.

Let the tour begin!

Alito Fireworks

"Adam Smith, Esq." is resolutely non-partisan and apolitical.  That said, without question the best-quality daytime drama scheduled for this coming week will be the nomination hearings for Judge Samuel Alito to SCOTUS—they promise an extremely high entertainment-value quotient, and I for one intend to Tivo them in their entirety.  But for commentary and observation, I'll turn to those who plow these fields for a living, starting with the newest addition to the Law.Com "Inside Opinions:  Legal Blog Network," the consummately qualified Howard Bashman of How Appealing.

The "Epiphanic Moment" ("EM") from this post is Howard's intimate knowledge of the witnesses who will be testifying in favor of Alito this week: "I know about all of these judges as a result of having handled numerous appeals in front of the Third Circuit over nearly the past sixteen years and having clerked for a judge serving on the Third Circuit for two years before that. Here are my quick insights..."

Our friends at Law.Com have their comprehensive "A Field Guide to the Alito Confirmation Hearings."  You were expecting, perhaps, a red hawk pair nesting above Fifth Avenue?

Meanwhile, over at the Electronic Privacy Information Center, they've a remarkably comprehensive complete copy of a conference report from the Seeley G. Mudd Manuscript Library at Princeton University—the conference in question taking up "The Boundaries of Privacy in American Society," chaired by none other than then-Princeton-student Samuel Alito, who was responsible for putting the conference together, doing the research behind it, and preparring the "remarkable summary that accompanies the final report."   This should have the C-SPAN junkies going back to their Red Bull's for stamina.

NSA Surveillance Fireworks

Also on the late-breaking political newsfront, we have the story that our very own NSA ("No Such Agency") has developed an expertise in data-mining that Wal-Mart would envy, but rather than applying it to how our household purchases index on Crest and Pampers, they've applied it to determine how many degrees of separation lie between you and Osama.

Jay Leno has his own take on this revelation:

According to a new poll, President Bush's approval ratings are on the rise. A lot of these polls are phone polls and people were worried Bush is listening in.

Kierkegaard Lives, a new blog to me, provides a "wire-tapping link repository" aiming to constitute one-stop-shopping for digerati running down primary sources on this. 

For the attention-span challenged, yesterday TalkLeft uncovered a Congressional Research Service report questioning the NSA/White House's authority.  EM from the summary:

"The 44-page report said that Bush probably cannot claim the broad presidential powers he has relied upon as authority to order the secret monitoring of calls made by U.S. citizens since the fall of 2001."

For the record, I do not subscribe to the cynical view of this imbroglio that it's merely a matter of whose ox is being gored—that if you're an upstanding American citizen you have nothing to fear from the snoops, so what's your problem, buddy? Rather, I view the debate as the latest incarnation of the timeless, "no permanent solution" tension between human liberty and free and open societies, and the reality that "the Constitution is not a suicide pact."

Lawyers Behaving Badly

This topic can only be introduced by:  "Where oh where to begin?!"

f/k/a reports on a lawyer who:

"... gets three months in jail for being one of the two major actors in a complicated scheme to steal millions of dollars [$25.6-million, in fact] from people he himself describes as "decent, hardworking people looking for an honest way to resolve their debt issues.""

How is this possible?  Maybe the judge was swayed by character witnesses, or the lawyer's own questionable character:

"Attorney Lisa B. Shelkrot came up with the usual defense gobbly- gook, including: "What stands out [in letters from prominent members of the community] is his selflessness and commitment to service." "It was a fear of destitution, not a high flying lifestyle ... that lead him to this.  Sinnott had a "deeply and tragically" flawed personality."

My EM question to Ms. Shelkrot:  Are you yourself buying that for a second?

And since when does being "flawed" exempt you from responsibility for the consequences of your premeditated actions over a period of years?

We don't apply this standard in dealing with children or dogs, and it's not time to start with grown, bar-passing adults.

More seriously, Jack Balkin asks whether it now "seemed as if there was no legal proposition, no matter how outlandish, that you couldn't get some prominent lawyer these days to defend."  Answering his own question, he writes:

"Lawyers have always, to my knowledge, been willing to come up with clever and ingenious arguments for the interests they represent."

But he's only warming up:

"Put another way, we have all known for many years that lawyers are rhetorical whores; their job is to confuse, obfuscate, and make unjust and illegal things seem perfectly just and legal, or, if they cannot quite manage that feat, to muddy up our convictions sufficiently that we conclude that it's a close case. There is nothing new about this."

"Nothing new?" Meaning it's essentialy an ineradicable and hopeless condition? Well, not quite. EM moment in bold (my emphasis:

"Lest I be misunderstood, I do not mean to say that law and legal doctrine counts for nothing, and that lawyers have no independent role to play other than as political cheerleaders for one side or the other. Rather I mean to say that the law always needs help from other sources in political culture if it is to do its job appropriately. The rule of law, I would insist, is not a purely legal or professional ideal-- it is a political ideal."

TalkLeft decodes what motivates outstanding federal prosecutors to go to the defense side—and questions whether they ever really make the transition.  "The real problem is most of these former high-level prosecutors can't make the mental shift. They don't have it in them."   Or, as former Deputy Attorney General James Comey puts it in a quote so rich you couldn't make it up (EM in bold):

“You go from being paid to do the right thing every day, from having the freedom never to make an argument you don’t believe in, to being a defense attorney, where you are duty-bound to make the best argument you can,” he told the New York Law Journal. “I have a tremendous respect for people who do defense work, and it’s not lying, but in a private moment, sometimes, you say, ‘Geez, this is a bunch of baloney.’”

And you really  anticipate even a soupcon of "zealous representation" on behalf of a criminal defendant from Mr. Comey?   TalkLeft certainly doesn't:  "Pathetic...irksome beyond description."

For a moment's worth of comic relief, the always-reliable Walter Olson at Overlawyered chronicles a Dallas restaurateur who sued the Dallas Morning News over a review of his restaurant, "Il Mulino"—specifically, so it would appear, over the newspaper critic's take on Il Mulino's bolognese and vodka sauce.  I am pleased to be able to report that the matter has been settled without admission of much of anything, it seems, but with a promise of a second review from the newspaper.  "And you're ugly," perhaps?

The serious message here is simply, Who comes off looking worse?  The benighted restaurateur who exponentially increased circulation of the critical review by his action, or the lawyer who took good money from him to help?

Craig Williams, another Scottish lawyer with a penchant for economics, regales us at May It Please the Court with Major League Baseball's claim that it "owns" all baseball statistics.  The party offending MLB's expansive notion of the territorial reach of its intellectual property is one CBC Distribution & Marketing, a fantasy baseball game operator—dependent for the reality of its fantasy upon real-world baseball statistics.  EM of the post:  "Next thing you know, they'll be charging the fans to quote statistics to one another."

Mauled Again kicks off 2006 with a confident prediction:

"The culture of corruption, of bribery, of putting one's own selfish interests above those of the public one is required to serve will also trigger yet another easy-to-predict Top Ten tax story of 2006. At least one politician, one celebrity, and one lawyer will run afoul of the tax law by failing to file a tax return or by failing to pay income taxes."

What's to be done?   You might try starting young:

"It is a challenge getting across to law students the point that when they enter the profession, and even as law students, they are subject to a higher set of integrity standards than those that apply generally to citizens of the nation."

Put that on your refrigerator.

On a less consequential, but equally depressing, note, Matt Homann of "the [non]billable hour" reports seeing a serious-minded piece of advice that clients should not talk to their lawyers until the deal they're doing is completely worked out.   What on earth would prompt such advice?  "Our predominant business model"—the billable hour.

In contradistinction to the billable hour, Greatest American Lawyer advocates serious, candid discussions with clients about budgets.  The goal?  Try, "Truth."   

Over at Houston's Clear Thinkers, Tom Kirkendall writes about "The High Price of Asserting Innocence," and sees a vicious double standard infecting the Enron prosecution, wherein the right to defend oneself has essentially been emasculated by trigger-happy prosecutors and the federal sentencing guidelines' emphasis on co-operation as a get-out-of-jail-free card: 

"Last week, former Enron chief accountant Richard Causey pled guilty to a single count of securities fraud and agreed to a seven-year prison term after vigorously defending himself from multiple charges of business crimes for over two years. Had he elected to defend himself at trial against the charges and lost, he would have faced an effective life sentence."

Yet another triumph of the Law of Unintended Consequences; but lawyers created this injustice. Can't lawyers be expected to fix it?

Part of the problem may be that lawyers can't be expected to fix injustices if they simply can't be trusted in the first place.  To that point, Dennis Kennedy recounts the "baffling" decision of the Florida Bar's Board of Governors to prohibit lawyers from looking at metadata—presumably on the principle that gentlemen don't read other gentlemen's mail.  To my mind, the only conceivable rationale for such (a feckless) rule of "Enforced Ignorance" is that the children can't be trusted near the liquor cabinet.

Is there hope?  Point of Law writes about "Merit-Based Judging" and urges all of us (is the MSM listening, here?) to get the notion out of our heads that judicial decision-making is a clone of the legislative process, where all that matters are results.  Ted Frank comes out decisively in favor of hoping Alito will truly judge matters strictly on the merits, and even though Frank is confessedly pro-business, he argues correctly that "business is better off in the long run with a judge and judiciary that decides cases on the merits"  rather than "a hack judge who makes his or her decisions based on the identity of the parties in the caption." 

Wouldn't it be nice if a greater proportion of the American public (and again, the American media) understood that "decisions based on the identity of the parties" enjoys a one-for-one identity with being "a hack."

Finally, we can all breathe a sigh of relief—inbetween chuckles, anyway—at the extremely welcome news that The Bitch is Back. 

Practice, Practice, Practice

Lest you begin to form the impression that lawyers never get any real work done, we have an eclectic roundup of practitioners opining on their specialties.  I'm not sure any one of this exactly qualifies for an "EM," being, as they are, proudly technical and rational self-contained essays, you hey, you might learn something; I surely did.

• Ever wonder about the extraterritorial application of US Antitrust Laws?  You understand, of course, that ever since Alcoa (1945), it's been settled that they do have some such reach.  Law & Society sets us straight (and I'm personally a sucker for their banner image).
• Patent Baristas educates us on the USPTO's proposal to limit continuations, which have "become the current whipping boy."  (Who knew?!)  PB opines that "this has not been thought through very well," and as part of their argument to that effect notes (and trust me, I quote):

  "Note that proposed Rule § 1.78(f)(2) provides that for applications that fall under set proposed § 1.78(f)(1) above, there will be a rebuttable presumption that the nonprovisional application contains at least one claim that is not patentably distinct from at least one of the claims in the one or more other pending or patented nonprovisional applications. In that case, [etc.]"

  I'm willing to take them at their word.
• Staying in IP-land for a moment, The Invent Blog notes that David Allen's "Getting Things Done" (a collection of techniques I heartily endorse), which relies upon tabbed folders for organization, wouldn't be possible without the handiwork of one James Newton Gunn, who in 1897 obtained a patent for tabbed folders and index cards.  Respect your ancestors, I always say!
• My e-friend Ingo Forstenlechner has just completed his Ph.D. thesis titled "Impact of Knowledge Management on Law Firm Performance - An Investigation of Causality across Cultures" and wants to let you know that you can get a copy directly from him.  I'm sure Joy London already has hers.  Here's an excerpt from Ingo's abstract of the thesis: 

  "The set of cause and effect relationships at the heart of the [balanced] scorecard - referred to as the success map – is at the core of this research, which aims to investigate if the link between managing knowledge and financial performance really exists and – if it does – how it can be influenced." [And his conclusion?] [...]  "This thesis provides the empirical evidence for a link between KM and organisational performance."

• Carolyn Elefant at My Shingle offers very practical advice (##'d 1 through 5, in fact) for people seeking contract work from local attorneys or solos.
• And last, both Carolyn and I contributed to the launch of Law.com's "Career Center" earlier last week.

And The Final Word Goes to The Economics of Law Firms

I hope you all saw that coming.

Patrick Lamb, at  In Search of Perfect Client Service, essays upon "The Essence of Leadership."  The first thing he does, with a hat tip to Tom Peters, is distinguish leadership from management:  "Management has a lot to do with answers.  Leadership is a function of questions. And the first question for a leader always is "what do we intend to be?""

Those of you who were comparative lit majors may be interested to know that I took off from the same Harvard Business School paper Patrick is launching from, in a post of my own, here.

The anonymous Wired GC kicks off the New Year by turning his thoughts to New Ventures, and to the pilot fish that invariably accompany them in schools, your friends the Venture Capitalists, and The Top 10 Lies of VC's as recounted by Guy Kawasaki, who's in a position to know.  My personal favorite is #9 (EM included) :

"Do you know why we all know about Google's amazing return on investment? The same reason we all know about Michael Jordan: Googles and Michael Jordans hardly ever happen. If they were common, no one would write about them. If you scratch beneath the surface, venture capitalists want to invest in proven teams (eg., the founders of Cisco) with proven technology (eg., the basis of a Nobel Prize) in a proven market (eg., ecommerce). We are remarkably risk averse considering it's not even our money."

Gerry Riskin at Amazing Firms, Amazing Practices (who I know well, whom I hope to have breakfast with in New York this coming week, and who deprived the world of stand-up comedy of a potential ace when he stuck to law-land) turns the kleig lights on "old-fashioned bad management" at Dorsey & Whitney's London office, leading the en masse departure of 8 associates. What, Gerry asks rhetorically, does it cost to recruit 8 associates? And what firm would "dare subtract that number from the billing revenue of some maniac in order to determine compensation?" Another rhetorical question.   But the EM is this:  Thanks at least in fair measure to the blogosphere, dysfunctional people cannot remain anonymous.

Finally, the question you've all had in the backs of your minds, especially those of you contemplating hosting another Blawg Review of your own some day: Am I glad I did it?

Yes, I thoroughly enjoyed it!  I had the chance to delve deeper into some old friends, to meet some new ones (as it were), and finally, to point you all towards two of my own post-children of the past week:

• Five Questions (Or Is It Only One?) For Your Firm in 2006, and
• Build on Your Strengths or Tackle Your Weaknesses?

It's good to be King For A Day.  Still, I hope I've done justice to Blawg Review #38's 10 Resolutions for Better Blogging.

And to all a good night, and a most merry and enjoyable 12 Days of Christmas next year.

Blawg Review has information about next week's host, and instructions how to get your blawg posts reviewed in upcoming issues.   Final Note: I'm also interviewed there.

 

Limits to Capitalism: The New York City Subways and When Public Benefits Private

Aside from law firms and the business thereof—my genuine professional passion—I must occasionally share a personal passion, but only if it touches upon economics.  One personal passion is the almost unimaginable centrality of the subway system to New York City as it exists today.

Today's threatened subway strike in New York (which was averted by "stopping the clock" for four more days, at which point we'll be on the brink again barring a settlement), is such an occasion for breaking the rules about what you come to "Adam Smith, Esq." expecting.

What on earth do the subways have to do with economics and business?  Plenty.

If you look at a map of downtown New York in 1900, before the subways were built, there were no skyscrapers.  Look at the same map 10 years later (the first, primary, branch of the IRT opened in 1903, from City Hall to Harlem), and you will see a virtual curtain wall of skyscrapers down Wall Street and Broadway.  Did engineering technology change?  No—what changed was the ability of the subways—the physical infrastructure of the city—to deliver the throngs of office workers from Brooklyn, Queens, and the Bronx needed to make those skyscrapers economically viable.  

The same is no less true today. 

New York could not live without it.

Courtesy of the WSJ:

FAST MTA FACTS

• Carry 7,711,945 passengers on the average weekday
 
• Have 343 routes, 8,259 train and subway cars, 4,895 buses, 2,058 miles of track, 2,967 miles of bus routes, 734 train stations, and 63,884 employees
 
• Give New Yorkers about 2.4 billion rides each year
 
• Carry roughly one in every three users of mass transit nationwide and two-thirds of rail riders.
 
• Serve 14.6 million people in New York City, Long Island, southeastern New York and Connecticut.
 
• Are used by four of every five rush-hour commuters in New York City.
 
• Had a 2004 operating budget of $8.0 billion
 
• Last went on strike in 1980, when they were out for 11 days
 

There's a Reason I Named This Blog As I Did

Occasionally it's a worthy endeavor to pay a moment's tribute to the eminent Scot for whom this site is named, and in the on-line world there are few better starting points than The Adam Smith Institute (London).  There you can find a highly abbreviated list of Adam Smith quotes, search the text of The Wealth of Nations, browse their very own blog, and even read a fascinating timeline of his life. 

For example, did you know that among his contemporaries—many of them acquaintances if not friends—were: 

• Sir Christopher Wren, Sir Isaac Newton, Edmund Burke, John Wesley, David Hume, Voltaire, Jonathan Swift, Jethro Tull, Alexander Pope, Benjamin Franklin (and all the American Founding Fathers, for that matter), Charles Louis de Montesquieu, William Pitt, Joseph Priestley, William Blake, Captain Cook, Sir William Blackstone, Peter the Great and Catherine the Great, James Watt, Jane Austen, Edward Gibbon, and Dr. Samuel Johnson; and noteworthy events during his lifetime included:
• The invention and subsequent refinement of the steam engine; the discovery of New South Wales; the American and French Revolutions; the founding of the British Museum, Covent Garden Opera, and the Royal Academy of Sciences; and publication of Blackstone's Commentaries and the first edition of The Encyclopedia Britannica. 

Of more intellectual substance is a review by Leo Rosten of The Wealth of Nations, which begins as follows:

"It is a clumsy, sprawling, elephantine book. The facts are suffocating, the digressions interminable, the pace as maddening as the title is uninviting: An Inquiry into the Nature and Causes of the Wealth of Nations. But it is one of the towering achievements of the human mind: a masterwork of observation and analysis, of ingenious correlations, inspired theorizings, and the most persistent and powerful cerebration."

Alternatively, try a delightful 1994 "interview" with the master himself.

For the last word, see this.

Now get back to work.

Bruce Profiled on "LawCrossing"

The LawCrossing site just went live with a profile of me, written by the engaging reporter Regan Morris.  Here's a nice sound-bite:  "'I started out in stealth mode because there's always the dangerous possibility that you might not have anything to say.'  ...It turns out MacEwen did have something to say."

Anyway, for a little bit more about how "Adam Smith, Esq." came to be, go read the whole thing.

"Courage," or Why Profits Really Do Matter More Than Anything

Rarely, if ever, do I link to The Wall Street Journal, on the premise that the overwhelming majority of you have already seen it, so why point to what's been in front of your face?  But rules are made to be broken, so this morning I give you two WSJ links.

They have in common that they undergird the raison d'etre of this blog:  To increase the revenues and profits of law firms.   (Had you missed that?—sorry, sometimes it helps to state the obvious).  More importantly, this is a "have no fear" post:   Damn the Politically Correct Police, and stake your claim to superior financial results, unconflicted by duelling considerations (within, of course, the limits of law, ethics, and simple humanity).

The first WSJ link is to Alan Murray's brisk and refreshing reminder about what's wrong with corporations garbing themselves in the robes of "social responsibility:"

"What harm is there in companies taking more responsibility for social and environmental problems? Plenty, if you adhere to the theories of Adam Smith..."

Still have a soft spot in your heart (or head?) for global corporations voluntarily going "beyond compliance"—taking steps viewed in the wisdom of NGO's as beneficial to society albeit not required by law or regulations? Then I invite you to look at the 20th-Century's track record of creating wealth and alleviating poverty: Was it the indubitably well-intentioned socialist or heavy-handed paternalist "capitalist" countries that raised their citizens highest, or was it the more rough and tumble American model? And if that seems old news, look at what China has accomplished in the short years of the 21st-Century, by betraying communist principles (economically, if not yet politically), as opposed to, say, the previous 50 years being more or less true to communist principles.

But relatively unfettered capitalism can be hard, can it not, particularly on those at the bottom of the ladder?  Hasn't the MSM lately been full of articles undermining the American Dream's notion of upward mobility based on drive and determination?  It's hard for the least fortunate to get a leg up!  Well, as they say, it depends on what the meaning of "hard" is.   

Alan Reynolds succinctly points out the statistical and methodological flaws in the latest anti-Dream studies: "It helps to focus on a few reasons why some people earn more than others -- they work harder, and have more experience and/or more schooling."

• households in which two people work earn five times as much as households in which no one works
• households in which one person works full-time earn more than twice as much as those in which someone works part-time
• college graduates earn three times as much as high school dropouts
• experienced people (45-54) earn more than twice as much as those starting out (under 24)
• there are two workers per household in the top fifth of the income distribution, less than one worker in the bottom fifth

Still protesting?  Aren't the rich getting richer, etc.?  Yes, they are, and the shocking fact is:

"Since the Census Bureau overhauled the way it counts income in 1993-94 (making the figures incomparable with prior years), the share of income earned by the top fifth rose to 49.8% in 2000-03 from 49% in 1993-94."

Back to Adam Smith.  The title of his most famous book reads in full:  "An Inquiry Into the Nature and Causes of The Wealth of Nations."  In other words, he was concerned with the creation of wealth, and was at least in most of his published writings an agnostic as to how it was spent.  (Only after his death was it learned he had, in fact, donated a large proportion of his income to charitable causes.) The first order of business must always be to generate wealth; the distribution of it comes later.

It is only fitting to conclude with an excerpt from Smith himself (Wealth of Nations, Modern Library edition [1994], Book I, Chapter 1, pp. 12-13), which resounds with truth and, to our 21st-Century ears, that damnable political incorrectness.  But ask yourself this:  Is it preferable to grant people the power and liberty to seek self-enrichment, or to presume one knows their best interests and can provide it for them?:

"It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a  well-governed society, that universal opulence which extends itself to the lowest ranks of the people. [...]

"Compared, indeed, with the more extravagant luxury of the great, [a day labourer's] accommodation must no doubt appear extremely simple and easy; and yet it may be true, perhaps, that the accommodation of a European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many a [tribal] king, the absolute master of the lives and liberties of ten thousand naked savages."

 

Editorial Time-Out: A Word In Favor of Legal Aid Donations

Pro bono work, services or cash donated to legal aid, and charitable contributions by law firms in general have received scant attention at "Adam Smith, Esq.", a shortcoming I hereby resolve to remedy, if for no other reason than that the actual Adam Smith was found only upon his death to have donated a substantial proportion of his income to charity.  (And you thought capitalism has no place for eleemosynary activities—think again.  Capitalism is about how one generates wealth, not so much about how one spends it.  But that is a topic for another day.)

Comes word that Allen & Overy will now be donating the "excess" interest it earns on client's escrowed funds to legal aid centers in the UK that offer counseling on issues such as housing, family law, and employment, and further that it has written a letter to Tony Blair encouraging the government to increase legal aid funding.  Needless to add, A&O is encouraging other Magic Circle firms to do the same, and even going so far as to say that "any firm with more than 20 partners" should do the same.

Back up for a second:  What is this "excess" interest, again?  We all know law firms hold clients' funds for different periods of time and for a variety of purposes;  A&O, like any firm that has graduated beyond doing its accounts at the kitchen table, aggregates all those funds and holds them in a single bank account,  on which it has negotiated a higher interest rate than any one of the clients alone could obtain by virtue of the size of the account.  The "excess" interest, then, is the margin A&O earns over what each client alone could earn; the client's share is obviously returned to the client, but in the past A&O (and everyone else) had simply pocketed the excess—estimated to total around £200,000 over three years.   Now that amount will be going to legal aid.

So what?  Editorial time, people:  It is occasionally a proper role for MSM and bloggers alike to champion good citizenship among their readers, and this is such an occasion.  (Don't worry; they will remain few and far between on "Adam Smith, Esq."!)  Just as The American Lawyer tries to do with its "A-List" giving ranked firms credit for their commitment to pro bono work, I want to urge AmLaw 100 firms to take a page from A&O's book and contribute comparable funds to legal aid on this side of the Atlantic.  £200,000 is estimated to be about four months' profits for a single A&O partner.  Is that honestly too much to ask, from those to whom so munificently much has been given?

"Worldly" Philosophers? Yes.

The world has just learned that Robert Heilbroner, author of the justly famous and best-selling The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers, first published in 1953 and still in print, died here in Manhattan last week at age 85.  "Worldly Philosophers," which I read as a teenager and which cemented my fascination with economics, profiles, among others, Adam Smith, Karl Marx, David Ricardo, and Joseph Schumpeter, but the operative word here is "worldly"—what Heilbroner cares about is the impact these men's thoughts have on our everyday lives.  Those he profiles thought large thoughts on a large stage, whereas, to me, far too many of today's economists think crabbed and impoverished thoughts on an intensely mathematically-driven stage:

"The worldly philosophers," Dr. Heilbroner said in a 1999 interview, "thought their task was to model all the complexities of an economic system - the political, the sociological, the psychological, the moral, the historical. And modern economists, au contraire, do not want so complex a vision."

If you haven't read it, a word of advice: Do.

Will the Real Adam Smith Please Stand Up?

Adam Smith's thought (the real Adam Smith, that is) has been famously characterized by the economist George Stigler as a "stupendous palace erected upon the granite of self-interest."  I have long labeled this a "mischaracterization," and I am now pleased to report that I am in good company. 

To be sure, "self-interest" is a real phenomenon, albeit a rather humdrum one. Of far greater significance to Smith's thought, and his intellectual legacy, was his bedrock—and spectacularly uncommon at the time—belief that individuals, even the impoverished and unschooled, knew and understood their own best interests far more keenly than the wise and virtuous classes that were then readily perceived as their betters. 

This core faith in the judgment of every individual is the foundation upon which Smith rests his aversion to heavy-handed governmental intervention in the economy:  It is not (just) a "positive" argument Smith is making against excessive government involvement (i.e., the argument that the government tends to get it wrong, and that its interventions have pernicious unintended consequences); rather, it is primarily a "normative" argument (namely that the intelligence and autonomy of each individual should be minimally interfered with, and then only for the most compelling reasons and where there are no meaningful "less intrusive" alternatives).

In his crystal-clear but inimitable prose:

"It is the highest impertinence and presumption... in kings and ministers, to pretend to watch over the oeconomy of private people, and to restrain their expence either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs."

Need I add that these observations are of wide applicability today?   (Can anyone say, "school vouchers," where the wise and virtuous classes would deny poor parents the educational choice they themselves enjoy for their privileged children?)

But enough editorializing for this quarter; in case you hadn't picked up on it, I am a profound and enthusiastic admirer of the original AS.

And yes, I do believe he'd have his own blog today.