When The Economist doesn't understand economics

Hat tip to John Chisholm in Australia for sending along the following article from the Australian edition of The Economist, a magazine I read regularly and have tremendous respect for.The article is from the August 28th print edition. It's titled "Killable Hour." Here are the highlights:

Is time almost up for clockwatching lawyers?OF ALL the tedious tasks that lawyers have to do, time-recording is perhaps the most deadly. Private-practice lawyers account for their time in increments of 15 minutes, or even five or six minutes at some firms, and then send the bill to clients. This structure has been in place for decades. But cost-cutting has put a squeeze on companies' legal budgets, and there is growing interest in doing away with the "billable hour" approach in favour of other pricing schemes.

So far so good. But then it goes on to conclude:

If the billable hour does perish, it will be at the hands of the clients, rather than the private-practice lawyers themselves. Some companies are starting to switch to fixed fees, with a performance bonus related to results. Tyco, an American conglomerate, took this approach with Eversheds, a British firm, in a deal signed earlier this year. The firm has taken on Tyco's commercial legal work for a fixed fee, and will receive a bonus if it improves its client's satisfaction by 35% and reduces litigation against Tyco by 15%.

I've written about the fallacy of this logic so much my head hurts. I used to believe exactly the same thing—that the clients would be the impetus for change. After all, those with the gold rule.But it's historically not true, nor does recent evidence support this conclusion. Sure, some firms will enter into a fixed price agreement with customers who demand them in order to get the work.But do they then spread this pricing to the rest of their customers? No. If so, the profession would have adopted fixed prices and thrown out the billable hour in the early 1990s when the ABA began to publish books on the deleterious effects of the billable hour.It's not the buyer's job to change a pricing strategy. It's the sellers.Even one lawyer, D. Michael Grodhaus, who initially disagreed with me has come around to this way of thinking, given the evidence, in this post.The article goes on to offer this nonsensical statement:

Litigation is less suited to fixed fees, however, because of its unpredictability.

Replace "litigation" with "earthquake insurance" and see if the logic holds up.Then this:

Finding a new model to price legal services is no easy task. A lawyer's skill, knowledge and experience are hard to quantify, as is the importance of a legal matter to a company. The fixed fee at least gives in-house lawyers certainty when budgeting and confidence when explaining that budget to the board.

Exactly. There's the new model—fixed prices, just like every other business on the planet. Notice how "time" isn't mentioned in this sentence. It's used because it's quantifiable.At least their conclusion is correct:

But the legal industry is not known for welcoming change. Whatever it turns out to be, the billable hour's replacement must be easy to use—and must strike a compromise between clarity for the client and profits for the law firm.

Why is it so hard to understand that fixed prices, along with change orders, do exactly that? What are we missing here?But wait, it gets worse. In the American print edition of The Economist, August 23, there's this gem:

Few managing partners know their firm's profit per billable hour, even though that is the main product law firms sell.

The Economist, of all magazines, should know better, especially since Karl Marx is buried in their backyard. This is the labor theory of value, and they've debunked it in their pages often.But, somehow, when it comes to professionals, it becomes what they sell. This is nonsense. By this logic, all everyone sells is time, from doctors to automakers. But why doesn't anyone say this about them?Well, for one, they've done a more effective job at understanding what, exactly, their customers are buying. Time can't be bought. If it could, I'm sure we'd purchase it from someone cheaper than $1,000 per hour.You know the labor theory of value is endemic when The Economist starts to promote its virtues.We have a lot of work to do to change this thinking.