I think the first name custom is best, because I think that law school is fundamentally the first step toward life in the professional world, and in the professional world title-and-last-name is, in my experience, very rarely used for people who interact repeatedly with each other. Someone may well be “Ms. Smith” when you first meet her, but if you talk to her on more than a few occasions, she’ll be “Jane.”
And that’s true even within hierarchies; my sense is that even when a firm’s managing partner works with a very junior associate, the associate will refer to the partner by first name. Maybe it’s just L.A., and the custom is different in (say) New York, but I doubt it. Again, things are different with judges, some other government officials, and religious figures; I still refer to Judge Kozinski, for whom I clerked over 20 years ago, and with whom I’ve remained good friends, as “Judge Kozinski” (or, when speaking to him, just “Judge”). But that is the exception, and not one that carries over to partners; I don’t think it should carry over to professors, either.
Now aesthetically, I can see the appeal of the use of title as a mark of formality, and where people remain on more formal terms for longer, so that shifting to first names is a pleasant mark of a closer relationship. My sense is that other societies are to some extent this way, especially when they maintain a difference in second-person pronouns, with an informal (in English, the long-lost “thou”) as well as a formal (“you”).
In Russian culture, for instance, there is even a phrase “let’s shift to ‘ty'” (“pereydiom na ty”) for suggesting that people shift from the formal “vy” to the informal “ty,” though I’m not sure how much that has endured to this day. Indeed, there’s a lovely song by Bulat Okudzhava (a translation of a Polish poem by Agnieszka Osiecka, and performed below by Andrei Soroker) — “why did we shift to ‘ty’?” — that even makes it sound romantic for lovers to call each other “vy,” though if that was ever the Russian custom, it is long gone.
At the same time, I can tell you that keeping track of whom you’re on “vy” terms with and whom you’re on “ty” terms can be difficult, especially since there’s no safe alternative: It can be bad either to be overfamiliar or to come across as having rejected an offer of familiarity. (Nor can you fudge things when talking to a person by just not using the pronoun; there are different verb forms for the two pronouns, so the verbs you use will reflect the pronoun that you’re implicitly using.)
Indeed, in America, using titles where people normally use first names risks coming across as standoffishness. Perhaps in universities, it might seem quaint and old-fashioned; but in professional relationships, I think, it’s more likely to seem off-putting.
Nor do I see much value in keeping “Professor” here as a hierarchical marker. All my students know that I’m the professor, that I give the grades, and that I’m at least supposed to know more than they do. All the junior associates know who the partners are.
I don’t see any particular value to adding hierarchical signals to the way people address each other, at least when they are adults, and are unlikely to need hierarchical reminders to (say) keep quiet in class or listen to what the teacher is saying. Indeed, having the same address up and down the hierarchy (whether it’s formal both ways or, as is more common in American today, informal both ways) is, I think, the right kind of egalitarianism: As human beings, we are of the same status, and ought to be address the same way, even if our knowledge and accomplishments have placed one of us in a position of control over the other.
In any case, that’s my view, based on my understanding on how things are done in my professional environment (lawyering in L.A.). I’d love to hear what others have to say.