Trip to Russia Proves Why We Need Lawyers

In a trip to Russia last year, I had the opportunity to meet with a number of Russian officials who were very candid about the problems and prospects facing their country. I found it ironic that most of my meetings took place in the Smolney Institute, the same building in St. Petersburg that Lenin used in 1917 as an outpost for the revolution and first Soviet government.

The irony stemmed from the fact that these officials had so many anti-Soviet things to say about the regime that took its first steps in their office building. Their negativity was in large part based on the stifling of individual freedom and the cronyism, indolence and corruption fostered by Marxist totalitarianism.

At the same time they were thankful to see Russia’s cruel oligarchy as part of the past, they were also apprehensive about their ability to survive in a capitalistic environment. Their greatest fear about capitalism was not about the usual things like raising capital or having people with entrepreneurial talent and private initiative. Rather, the issue that kept rearing its head in our discussions was the lack of a legal framework and justice system.

A typical comment of this concern was voiced by the deputy governor of St. Petersburg, Mikhail Manevitch, who said, “The lack of a well-developed legal tradition is a major impediment to more rapid progress toward privatization.”

Dimitri Ryurikov, assistant to the president of Russia on foreign affairs, told me how difficult it is for banks to collect on their outstanding loans. “Without a well-functioning legal system in place,” he said, “it will be difficult to get people to honor their debts--a problem that will definitely hinder the development of efficient capital markets.”

Though lawyers are often seen as adversaries and part of the problem, we have forgotten about--brace yourself--the beneficial impact that well-trained, ethical and professional practitioners of the law have on our society.

The assertion that lawyers add significant value to a society may strike many as an alien concept. But the fact that they do relates to the presence of transaction costs--all the direct and indirect costs associated with negotiating an exchange.

Professor Ronald Coase, Nobel laureate in economics from the University of Chicago, recently said: “People talk about increases in improvements in technology, but just as important are improvements in the way in which people make contracts and deals. If you can lower the [transaction] costs there, you can have more specialization and greater production.”

He went on to say, “Lawyers do a lot of harm, but they also do an immense amount of good. And the good is that they are expert negotiators, and they know what is necessary in the law to enable deals to be made. Their activities are designed, in fact, to lower transaction costs.”

As a former student of his, I still recall Coase’s provocative class lectures. He emphasized how the invisible hand of free enterprise works only in an environment where a clear body of law makes it possible for parties in a transaction to be comfortable about the legality and enforceability of a contract.

By helping to reduce transaction costs, a properly administered justice system adds value to society. Case in point: For a person to lend money, that lender wants sufficient repayment guarantees. But without legally enforceable loan covenants, the lender may turn to criminal means as the only available option to have the debt repaid.

In Moscow, our tour guide told that us many of the wealthy people in Russia are criminals. She told us the Moscow police had to replace their decrepit Ladas with Mercedes-Benzes so they could keep up with criminals, who all seem to be driving around in luxury cars.

Alexander Lebed, Russia’s former security chief and founder of the Russian People’s Republican Party, echoed our tour guide’s sentiments when he recently wrote: “More and more often, criminal syndicates and cartels play the role that regulators should. In today’s Russia, it’s impossible to know where the government ends and business begins. Corruption at all levels of executive power has become a fact of economic life. Criminal organizations deprive citizens of their property, their allies, their competitors--even their lives.”

He goes on to say that the only way out of this situation is to create a system under the rule of law: “First some sort of incubation period is needed under which law and order are fixed and all attempts to break away from their limits are resolutely suppressed. Russian democracy, without a clear, effective set of rules, has a demoralizing and corrupting influence on society.”

The cogency of Lebed’s views was made clear to me on my Russian visit. That is why travel to other countries is such an educational experience. Travel opens ones eyes to the effects of cultural, political and socioeconomic characteristics on a society. A better understanding of those effects helps reveal attributes of our own society that we often take for granted. In the case of my trip to Russia, the value to a society that comes from a body of law that is widely accepted and well-administered was made very clear to me.