Tuesday, May 30, 2006

The Faults of the Occupational Licensure System

The effect that occupational licensure has on the economy is often not recognized, or noticed. Many are willing to accept occupational licensure as a way to protect citizens against fraud and dishonesty, but when a closer look is taken, it can be seen that occupational licensure does more to hurt the economy, and thus the people, than it does to help. Licensure edicts that individuals may not engage in particular economic activities except under conditions laid down by a constituted authority of the state. For example, one must pass the bar in order to practice law. This may seem logical, as preventing those who are not competent enough to pass the bar ensures that the individual, when searching for a lawyer, will be able to employ a competent one. This is not entirely true, however.

Taking the profession of law as an example, we must first take a look at the process that a potential lawyer must undergo in order to pass the bar. He must first go to undergraduate school, then to law school, and then take the bar[1], sometimes multiple times, in order to legally practice law. The costs of this procedure are enormous, and they cannot be undertaken by many. Thus, licensure of the law profession significantly reduces the number of lawyers in relation to their potential demand.

Occupational licensure also stunts innovation, because the licensed professional has no incentive to innovate or invent – he has already been granted the “reward” that innovation or invention would result in: money. As licensed professionals charge high costs solely for being licensed, what incentive do they have to be creative, and risky? Indeed, the professionals themselves, who are already licensed, discourage such innovation. Take, for example, two poignant examples of recent years. The medical profession attempted to inhibit prepaid health plans, and lawyers attempted to ban low-cost legal clinics. What are the effects of such suppression of innovation? Consider this: Thomas Edison, under today’s licensing regulations and restrictions, would not have been able to be a licensed engineer. Mies van der Rohe and Frank Lloyd Wright would not qualify to sit for the architects' certifying examination.

So what effects, you ask, do a limited number of lawyers have on the economy? Well, in terms of simple supply and demand, a limited supply, along with a high demand, as there is for lawyers, greatly increases the cost. So through occupational licensing, lawyers, who certainly support licensure, as it benefits them, are able to keep their costs exorbitantly high, at the expense of the consumer.

What is interesting to note, taking lawyers as a further example, is that the bar exam in some states, Virginia, for example, was not instilled in order to protect the individual from incompetent lawyers, but in fact, to prevent blacks from practicing law, as they did not have the financial means necessary to even take the exam. That was a form of government paternalism then, and it still is now. The government, in saying that only those who pass the bar are allowed to practice law, is essentially saying to the citizens: you should not be able to trust yourself to choose a lawyer, so we will choose them for you. This obviously is a grave infringement on individual liberty, and furthermore, does not allow the economy to act efficiently.

Licensure does nothing for the consumer but artificially raise prices. What it does for the professional is keep prices artificially high, and the number of people practicing the profession, artificially low. Of course, in a free market economic system, any supply and demand totals that are kept either artificially high or low negatively affect the economy.

Even so, one might argue, if the quality of medicine, for example, is higher due to licensure, the higher costs are justified. This is faulty logic, as it does not take in to account the many, who, because of the high costs, can no longer receive the medical aid that they would have had, had there been no licensure. These would-be consumers instead rely on “do it yourself” methods, which obviously put the individual at risk, and is of significantly worse quality medical aid than what would be received by the individual if there were no licensing laws.

Why is an unfair advantage given by the government to these producer groups? For one thing, it is clear that the producer groups that require licensure to operate are powerful lobbying groups. The American Medical Association (AMA), for example, has essentially a monopoly on the medical business in America, and has greatly stunted growth and innovation in the medical field. So why, you ask, has it not been targeted under the Sherman Anti-Trust Act? Well, it has, in 1943, in American Medical Ass'n. v. United States, the Supreme Court ruled against the AMA. The AMA continues, however, to operate the same as it did 60 years ago, because it is a powerful lobbying group in Washington that politicians are too afraid to contend. The same is true for other organizations of producer groups, such as the Bar Association.

So what should be done? It is clear to me that occupational licensure, in all professions, should be done away with, and true competency, as shown through actual experience, should be the deciding factor in a professional’s ability to attract customers. This is the way a true free market system works, and how the economy runs most efficiently. If licensure is abandoned, we will see more innovation, lower costs, and greater supply, thus greater availability.

[1] Although it is not necessary to go to either university or law school in order to take the bar exam, it is widely accepted as the only way to be able to pass the exam.

Gary Becker's Solution to Traffic Congestion

A great piece on how traffic congestion can be solved by an economics professor at the University of Chicago.


Monday, May 29, 2006

The Faults of Socialism

There are many who, now that the bitter taste of the USSR's failure has begun to wear off, point to socialism as a viable and successful model. These proponents of socialism (by the way, where were they in 1985, for example?) argue that socialism increases standard of living, by providing citizens with a highly centralized government, that provides myriad benefits. These benefits include free healthcare, education, welfare, etc. What socialism does not provide, however, is personal liberty. Socialism by definition requires an extremely high tax rate, in order to fund its many welfare programs. It also does not allow the economy to reach its potential, as a free market system does, because socialism does not encourage competition, and thus fosters complacency.
Many believe that it is possible for a socialism economic system to exist alongside a political democracy. I argue that such a situation is impossible. I refer to a particularly poignant passage by Milton Friedman, the founder of modern economics:
"Economics arrangements play a dual role in the promotion of a free society. On the one hand, freedom in economic arragnements is itself a component of reedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom."
An individual's power to choose is a freedom that he or she sacrifices in a socialist system. By giving the majority of one's money to government, through taxes, the socialist is sacrificing the ability to invest that money in what he deems necessary. He is, essentially, admitting that government better knows how to spend his money than he does.
In a truly capitalist system, the individual is given the ability to invest his money how he likes. In the free market system, healthcare and education systems will exist privately, because there is demand for them. Because of this demand, there will be many choices in healthcare and education available to the individual, as opposed to the only one healthcare and education system that exists under the auspices of a socialist economic and political system. Thus, the individual's power to choose is eliminated in a socialist system, but encouraged in a free market capitalist one.
Competitive capitalism, unlike socialism, also promotes political freedom, as it separates economic power from political power and thus enables the one to offset the other. In a socialist system, the government controls the economy, so the individual has neither political, nor economic freedom.


This is going to be a blog on a variety of things, hardly any of it concerning my personal life. I will comment on a range of subjects, but most often politics and economics, as these are the subjects that interest me the most. I might update weekly, maybe bi-monthly; I'll see how it goes.