Occupational Licensing — Neither Free nor Just

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Occupational licensing is a favorite libertarian punching bag. In certain cases, licensing boards seem to exist solely to protect the interests of the powerful – existing largely to erect barriers to entry that shut out competition from those without the resources to attain arbitrary credentials, all the while keeping artificially high the prices that consumers must pay. This sort of behavior seems to be a clear-cut case of a corrupt bargain between business and government – the sort of thing that libertarians like to label “crony capitalism.” However, despite this power dynamic of the strong exploiting the weak, progressives tend to view licensing through the lens of consumer protection. In an ideal world, licensing boards protect consumers from shoddy work that might have severe consequences – an issue of public safety. So who has the picture right? Are licensing boards primarily a necessary source of protection or an unjust force for economic inequality? Or is this a false distinction entirely?

Being as – full disclosure – I am myself somewhat of a libertarian, let’s take an “easy-punching” example to kick things off: in many states of the U.S., practitioners of African hair-braiding have been threatened with hundreds or thousands of dollars in fines a day because many of them lack state-sanctioned cosmetology licenses. Do unlicensed hair-braiders pose so much of a threat to society that they must be either educated properly or threatened with legal attack? The trouble with the former argument is that the education required by the licenses teach nothing about African hair-braiding – so what possible justification could there be for pursuing the hair-braiders?

In the case of Mississippi’s cosmetology industry, the licensing board was filled with representatives from the cosmetology schools. The schools had a direct economic interest in strict and absurd enforcement of the licensing rules, and small-scale entrepreneurs – many of them impoverished immigrants – were designated to foot the bill. That isn’t free enterprise by any measure. It is a case of the economically strong using a government-backed entity to squeeze the economically weak. Thankfully, some of these cases have ended in victories for the hair-braiders.

It is easy to see the inanity and injustice of occupational licensing in the realm of cosmetology. But what about an industry with clearer consequences for incompetence? What about plumbers, electricians, and contractors? Does the public safety argument for licensing fair better in such cases?

As Sheldon Richman of the Future of Freedom Foundation puts it:

Consumers would also be better protected if producers had no shelter whatever from free competition (which all licensing, permits, and costly regulation provide to some extent) and no prospect of government subsidies, bailouts, or other privileges, such as limited liability for damages or immunity from lawsuits because minimum government standards were complied with.

Far from seeing occupational licensing and other legal structures as a protection for consumers, Richman sees it as a double-whammy for tradesmen: not only are they protected from competition, they are protected from litigation as long as they adhere to minimum standards which may or may not apply well to certain projects.

The effect of all this is that upper-middle and upper class people might get a higher average quality of services, but at the expense of pushing the prices so high that middle and lower class people might not be able to afford the service at all. One could make the case that the public safety benefit is worth it, but these implications for economic equality should be taken into account. Personally, I am not convinced that the balance turns out in favor of the safety argument.

So let’s up the ante. What about the industry with arguably the most severe consequences for subpar work: the medical industry?

It is easy to understand why many people would intuitively support licensing medical professionals. We want to be able to trust the people we go to when our health or lives are on the line. But unfortunately medical professionals have proven themselves untrustworthy with the power of self-regulation that comes with occupational licensing.

An instructive example comes from Arizona, where animal massage therapists have been legally attacked – facing thousands in fines and possibly even prison terms – because they lack veterinary certification. But the missing licenses – which require a full veterinary school education — do not even require knowledge of massage! As the Institute for Justice explains:

Massage therapists do not need a medical degree to massage humans, but entrepreneurs like Celeste who want to massage animals in Arizona must spend hundreds of thousands of dollars to attend four years of veterinary school where they are not even required to learn massage.

The picture isn’t much prettier when we examine medical professionals that serve humans. But the various factors at play have been interacting in messy ways for a century, so we are going to have to look to the past before examining the now.

Medical practices in the United States have changed dramatically over the last century, and licensing played a big part of that story. The “lodge practice” of “fraternal societies” is a good example of what legal history has left behind. As explained by Roderick T Long:

The principle behind the fraternal societies was simple. A group of working-class people would form an association (or join a local branch, or ‘lodge,’ of an existing association) and pay monthly fees into the association’s treasury… “Lodge practice” refers to an arrangement, reminiscent of today’s HMOs, whereby a particular society or lodge would contract with a doctor to provide medical care to its members… Most remarkable was the low cost at which these medical services were provided. At the turn of the century, the average cost of ‘lodge practice’ to an individual member was between one and two dollars a year. A day’s wage would pay for a year’s worth of medical care.

In today’s America, where a single significant medical event can bankrupt even middle-class people, the idea of working-class folks securing a year of medical care for a day’s wage sounds too good to be true. And it was – but only because the medical industry in the U.S. endeavored to put an end to it. Why? Because lodge practice physicians – who typically came from second-tier medical schools – were undercutting their more privileged or accomplished colleagues. Long provides the cost comparison: seeing a doctor outside of lodge practice would run you one to two dollars a visit.

Enter the AMA:

Medical societies like the AMA imposed sanctions on doctors who dared to sign lodge practice contracts. This might have been less effective if such medical societies had not had access to government power; but in fact, thanks to governmental grants of privilege, they controlled the medical licensure procedure, thus ensuring that those in their disfavor would be denied the right to practice medicine.

As Long tells it, it is a quite clear-cut story. Medical licensure may have been set up with the intent to protect the public from physical harm, but the power was used to do serious economic harm to the lower classes – explicitly in the name of enriching medical professionals.

And these abuses of power are not a thing of the past.

Kevin Carson from Center for a Stateless Society examines a case where modern day “lodge practice” was attempted but ultimately thwarted by state licensing:

In New York City, John Muney recently introduced an updated version of lodge practice: the AMG Medical Group, which for a monthly premium of $79 and a flat office fee of $10 per visit provides a wide range of services (limited to what its own practitioners can perform in-house). But because AMG is a fixed-rate play and doesn’t charge more for “unplanned procedures,” the New York Department of Insurance considers it an unlicensed insurance policy.

Alternatives threaten the cartels. This is why licensing boards around the country go after independent dental hygienists, teeth whiteners, and nurse-practitioners. Boards use their power – both directly and through lobbying legislatures – to constrain the options that consumers can choose from.

Kevin Carson puts the issue succinctly in Markets not Capitalism: “The problem is we’ve got a regulatory system that outlaws hamburger and compels you to buy porterhouse if you’re going to buy anything at all.” And to top it all off, we are all mandated to purchase “grocery insurance” that comes with additional strings attached.

Given all of these examples, from hair-braiding to horse massage – and all the way up to medical care – it is difficult to see occupational licensing as purely a form of consumer protection. Even in the case of medical licensing, there is example after example of the power being abused to suit the financial interests of the professionals. After all, the existing professionals themselves control the boards.

There is a useful name for this phenomenon. It’s called rent-seeking. It is part of what David Boaz has dubbed “the parasite economy,” wherein it is more effective for businesses or professionals to spend effort and money lobbying for state power than putting those same resources into offering better services.

In an ideal world, we could trust all powers to be used responsibly. But in the world that we have, the power of licensing is used by rent-seeking professionals to establish economic privilege, all the while hiding behind the propaganda of consumer protection. And in their wake they leave a string of unintended consequences as in the above case of the obliteration of fraternal organizations. There doesn’t need to be a conflict between social mobility and consumer safety. And there doesn’t need to be a false choice between state-of-the-art health-care or no health-care at all. That’s just the way it’s been rigged. And a rigged market is neither free nor just.

And there’s one more thing that doesn’t need to happen. Progressives and libertarians need not disagree on licensing. Both groups care about the social justice concerns at stake. Both groups are sensitive to the abuses of entrenched power. My hope is that they can learn from each other’s favorite punching bags.