Wednesday, June 17, 2015

Business Licensing and Regulation

NOTE: I am copying this from my old blog, as I cite it in my post "Some Thoughts on Medicine". However, I am amazed I never copied it before, as it is mentioned in a number of other posts on related topics. Still, better late than never.

I have, in the past, suggested that we do not need to regulate doctors and pharmacists ( "Medical Regulations", "Medical Regulation II"), that the financial industry should run without regulation ("Explaining Past Crashes", "The Inflation Engine", "Why Gold?", "The Free Market?"), and that education should be run without government oversight ( "Never Ascribe To Evil, A Discussion of Education", "Why Vouchers are not the Answer","You Don't Drown in a Glass of Water - Vouchers Revisited"). I have not written about it, but I also believe stock brokers and issuers of stocks should be similarly deregulated, food manufacturers should be freed of inspections, and, well, let us just say I want to see the end of all regulation ("The Inherent Disappointment of Authoritarianism", "The Endless Cycle of Intervention", "The Inevitability of Bureaucratic Management in Government Enterprises", "The Inevitable Spread of Regulation"). I know many think this is mad, and that the government somehow protects us, but I want to argue that just the opposite happens, that regulation, especially in a rich nation which can afford clean and safe food and drink, as well as the best of everything else, government regulation makes us less safe ("The Limits of "Scientific" Management", "Planning For Imperfection",  "Greed Versus Evil").

Before I explain why rich nations have more reason to trust private enterprise than government, and point out that the abuses which occurred in the past were largely the result of holdover pre-industrial conditions ("Child Labor and the Industrial Revolution"), as well as point out that even with regulations such abuses have hardly stopped, let me start with a very simple question. What purpose do licenses serve?

Now, I know many think licenses ensure that the holder is somehow regulated, or at least has been shown to be qualified, but I have to disagree. In general, licenses do  three things. First, yes, they show that at one time, the individual might have passed a test that to some varying degree related to their industry. Second, they ensure practitioners of that industry that there will be less competition and higher pay.("Professional Education","Anti-Business Businesses ") And finally they guarantee a steady flow of cash to the state. They very rarely, if ever, prove that an individual has been tested recently, nor do they ensure that there is any ongoing oversight of that profession.

Let me start with the most absurd of licenses to give an example. The peddler's license. The laws vary from state to state, but in most states to sell door to door or out of your car, you need a peddler's license. Why? Other than giving the state a nice little yearly check (and providing the police a pretext to pick up vendors who annoy people), what purpose does this serve? Does it protect people from fraud? Of course not! Does it ensure our peddlers are "properly regulated"? I don't even know what that would mean, but it certainly doesn't happen, as anyone who cuts a check can get a license in most states. The only thing a peddler's license ensures is that the individual had some money that they turned over to the state.

Nor do other licenses fare much better. For example, do you care if your barber knows the bones of the skull? Does it make you feel more secure that Sal once knew where the maxilla was? No? But it does ensure that Sal had to attend some classes, making money for established barbers who trained him, and limiting competition to those who can afford such classes. It put a few extra dollars in Sal's pocket by limiting competition. But does it make anyone safer? Make your haircuts better? Of course not!*

And most will admit this is the truth, but then they suddenly lose that objectivity when it comes to the FDA or the USDA or medial licensing. But I have to ask, if licensing at a lower level is sold as "for our safety" but is really just imposed to earn money for the state and limit competition, why would it work any differently on those levels? Do you think drug companies and doctors and ADM are any less clever than your average barber? Or that national politicians are more honest than local ones? Or that agribusiness less astute at lobbying that the cosmetology schools? I know we have been taught to think that medical licensing and food inspectors are good, but we are also told licensing barbers is a good thing, so why is one open to skepticism and the other not?

Now, before I go on, let me say that I am sure there are some idealists in both the ranks of the regulators and among politicians. There are people who certainly think regulation and inspection and licensing exists to keep us safe, and who try to do their job conscientiously.  I am hardly so cynical that I think everyone is corrupt or self-serving. However, that does nothing to change the point that, whatever the purpose in individual minds, most regulation does not serve the purpose intended. Licensing tends to improve quality very little, while increasing costs. Similarly, inspection and regulation tends to favor established businesses and reduce true improvements in quality, while improving our safety little if any. So, even if everyone were an angel and had only the best of motives, every problem I point out would still exist. The fact that some promote and manipulate these laws for self-serving purposes, and thus make them even worse, just exacerbates the problem.

Before we go any farther, let us look at the arguments offered for regulation and licensing and ask ourselves if they make sense.

The basic argument is this: Without the government ensuring that our food and drink is pure, our drugs safe and our workers qualified, we would just go out and buy anything, without thought, and end up hurting ourselves.

To which I have one response: Consumer Reports.

Think about the significance of that magazine for moment. As well as Amazon reviews, all the gaming review sites, Angie's list, all the review sites and others, and ask yourself "If people spend hours and hours trying to get the most for their dollar when buying a $40 video game or a DVD player, are theyr eally going to just hire any docotr or take any pharmaceutical someone gives them?"

The truth is, we are rich, rich by the standards of the present world, and obscenely rich by historical standards.We are rich enough that we can afford to waste fruit and vegetable that are still edible but unsightly. Does that sound like a society that would accept rotten or unwholesome food? And, more importantly, does that sound like  a society likely to accept food from fly by night firms, just because it is a few cents cheaper?

No, we are rich and our providers know it. They know we will make them rich if they just give us quality. And so the firms which provide us with food and drink, or drugs, or any other service, has no interest in trying to slip by some substandard goods just to earn a quick buck. The loss of future sales, as well as the lawsuits arising if it goes wrong, are not worth the small gain.

Which means that the only people likely to do it are those committing outright fraud, and those people are not going to be deterred by regulation. The people who will break the law will also violate regulations, so regulating makes no difference. While legitimate firms have an interest in promoting quality goods.

On the other hand, under our current regime, there is little incentive to sell based on quality. Oh, high end goods might, but run of the mill products have no incentive, as regulations ensure us that everything is "good enough", and so we get very little quality competition on the low end of things. In other words, by establishing a floor, on the low end at least, laws also establish a ceiling.

Worse, by creating barriers to entry, since one must met all the regulatory guidelines and all the expenses of meeting inspection requirements, whether they make sense or not**, firms can actually afford to let standards drop as low as the law allows, since competition is made more difficult and prices are artificially elevated.

And that, in a nutshell, is the problem. A free market would cause quality to be an issue, even at the low end, while government inspection regimes tend to lower low end quality to the bare minimum, or maybe all quality in some fields.

I know I have jumped around and hit many topics, including licensing, regulation, inspection, food and drink standards, medical regulation and so on, and in jumping around I have not done as much as I could. I had hoped to write more, but realized this article could go on to one hundred thousand words or more. So, let us consider this a brief introduction to  series of posts. In the coming days I will revisit this topic in terms of specific cases and show how each area is harmed by regulation or licensing, and how the free market would work in each field.

Sorry fit hat makes this article seem a bit of a tease, that was not my intent. However, having bitten off much mroe than I could handle at once, I think it is probably the best solution.


* To cut short any angry Italians, I had a childhood barber named Salvatore, so I always use that name in barber examples. It may be stereotypical, but I can't help it, it is the truth. And before you get up in arms, my son is one half Italian, my wife 100% Italian, so I have no issue with Italy or the citizens thereof. Well, I am still stumped by the whole Cicolina running for office thing, but other than that, no problems.

** For example, in my state, bars are required to have three chamber sinks, as are all restaurants, even those using disposable cups and plates. So, you must buy a three chambered sink and keep disinfectant stocked even if you sell beer in paper cups. Think about how costly that is for a very small vendor working from a cart. Obviously regulation makes it difficult for newcomers in many fields by imposing such absurd costs, while existing firms, having already spent the money, are freed from competition.


I addressed some of this in the past, specifically the regulations enforced by the FDA and USDA. To see more please read the following posts:
If They Were Serious
For Your Own Good
It Is Time
Nerf World
Be Careful When "Sticking It" to "Big Business"
A New Fairy Tale
Why Regulation Makes So Little Sense
Another Thought on Regulation
The Endless Cycle of Intervention
Bad Science and Environmentalism
Practicality Versus Dogma
The Inherent Disappointment of Authoritarianism
Most deal with the regulation of food and drink, as well as pharmaceuticals and tobacco. Clearly there are other posts also on point, but I tried to omit most of the articles linked in the post itself.

Originally posted in Random Notes on 2009/10/01.

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