Adam Smith on Occupational Licensing

by on December 7, 2017 at 11:26 am in Economics, Law | Permalink

Adam Smith warned that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” Although Smith’s warning is often quoted, few people know that what Smith was talking about was occupational licensing. At the time Smith wrote, tradesmen such as weavers, hatters, and cutlers (metalworkers) monopolized their industries by limiting entry to students who had served long apprenticeships under a master, and tradesmen also limited the number of students a master could teach. Seven-year apprenticeships had been required in Britain since the 1563 Statute of Artificers. In Smith’s time, however, occupational licensing was beginning to fall apart because the 1563 law had been interpreted to apply only to the trades listed in 1563 and not to the new trades then arising with the Industrial Revolution. The act was finally repealed in 1813, in part because of Smith’s influential attack.

Occupational licensing is also undergoing great changes in the United States today—but in the opposite direction of those in Smith’s time.

That is the introduction to the Undertaker’s License a Cato Research Brief on my paper with Brandon Pizzola on occupational licensing in the funeral services industry.

1 Trent-2 December 7, 2017 at 11:43 am

Most professional economists generally endorse occupational licensing … and the scope of US occupational licensing has sharply increased in past 50 years. How did “People of the same trade” (businessmen) make that happen?

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2 JWatts December 7, 2017 at 12:00 pm

“Most professional economists generally endorse occupational licensing”

Is that true? Do you have a citation?

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3 Trent-2 December 7, 2017 at 12:15 pm

… i don’t currently have a license to publicly post citations, but you won’t find any GMU economists who strongly object to the licensing of medical doctors or commercial airline pilots (might be a few at Harvard ?)

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4 Hazel Meade December 7, 2017 at 12:22 pm

Not strongly objecting is not the same as “endorsing”.
It could be that the people most adversely affected by occupational licensing aren’t very politically powerful and don’t have loud advocates putting their interests in the public eye. Economists, like everyone else, tend to pay attention to issues that are in the news a lot. The news cycle is driven by issues which established political parties think are important. Everyone gets caught up in the partisan warfare, and unlicensed hairdressers don’t really have a patron in either political party – they tend to be poor people who would like less regulation and that doesn’t really mesh welll with either party’s core issues and constituencies.

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5 Trent-2 December 7, 2017 at 12:50 pm

… the economic principle at issue is whether coercive government occupational licensing is economically beneficial to general society. The many possible variations in licensing schemes complicate the basic issue, but few economist totally reject the positive economic value of ANY such licensing.

6 Hazel Meade December 7, 2017 at 1:27 pm

Again, I don’t see how you can support that statement. Just because they aren’t coming out of the woodwork saying “occupational licensing sucks”, doesn’t mean that they are endorsing the “positive economic value” of licensing. Silence is not tacit endorsement.

7 JWatts December 7, 2017 at 1:16 pm

You are moving the goal posts around.

From: “generally endorse occupational licensing” to “strongly object to the licensing of medical doctors or commercial airline pilots “.

Those aren’t remotely the same position.

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8 statler December 7, 2017 at 5:53 pm

yeah, the semantics are fuzzy. But for discussion sake, what is your (or others) opinion — roughly what percentage of US economists would agree that some government occupational licensing is justified by economic principles?

9 JWatts December 8, 2017 at 12:16 pm

I think a high percentage would agree that some government occupational licensing is justified, however, I think most would agree that we have passed the optimum point and we have an excessive amount of occupational licensing at this point.

Seriously, how many people who understand the actual costs involved, think that Hair Braiding licenses are an essential part of good government?

10 Hasdrubal December 7, 2017 at 1:55 pm

I thought that one of the common prescriptions for lowering medical costs was to shift more primary care visits to nurse practitioners or physician’s assistants. That’s actually arguing that medical licensing standards are inefficiently strict, and is actually arguing against our current system of licensing medical doctors.

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11 Cyrus December 7, 2017 at 11:11 pm

Out of date, or maybe ahead of your time if the future succeeds in bending the cost curve on medical labs and imaging. Kaiser, who as an HMO doesn’t have a dog in the fight, says that it’s a wash because mid levels order more expensive diagnostics than primary care MDs. Additional training in taking history and physical examination is for the time being worth something.

12 Floccina December 7, 2017 at 3:39 pm
13 Matt December 11, 2017 at 3:07 pm
14 derek December 7, 2017 at 12:02 pm

Easy. There is another interest at play, that of the regulators looking for expanding their influence and revenues. There are always issues and complaints, and the response is for the industry and regulators to come up with an expanded licensing arrangement.

Story. In what I do, there are levels of regulation depending on the horsepower of the equipment, under the threshold the contractors don’t need a license. If you install equipment above that threshold in certain conditions you are required to pay for a permit, and have a contractor’s license. The majority of equipment is installed by non licensed contractors, no permits. There was a meeting recently with the regulator where he expressed his intent on collecting fees for the installations. Someone asked whether he was going to go after non licensed contractors, he said no. Half the room got up and walked out.

The licenses and permits have nothing to do with safety, installation standards, anything. They are simply fees. There is no advantage having a contractor’s license except being on a list to be harassed by regulators. The only interest of licensed contractors is for the regulator to prevent unlicensed work.

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15 Carina Silvestre December 8, 2017 at 4:55 pm

I don’t disagree with your statement that regulators are looking to expand their influence and revenues with licensing agreements. In a way that is true because like you said some licensing agreements are just not necessary. However, I believe a point Adam Smith tries to make if you have read his whole quote is that these regulations are necessary for businesses to flourish in our economy. These regulations mainly aim to help small businesses because the big businesses will most likely thrive regardless. Regulations, such as, occupational licensing are not only a way for the government to make revenue, but also to protect small businesses from being overshadowed by big businesses. In other words, these regulations can prevent big businesses from monopolizing their enterprises.

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16 rayward December 7, 2017 at 12:10 pm

A somewhat different interpretation would be that business was successful in limiting the application of the act so that it didn’t apply to the trades needed by industrialists (i.e., labor) while business was also successful in broadening the scope of patents and other restrictions on trade that benefited said industrialists.

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17 Hazel Meade December 7, 2017 at 12:33 pm

Why assume that “labor” and “business” are unified monolithic entities?
Seems to me like occupational licensing is an issue which pits “skilled labor” against “unskilled labor”. The unskilled laborer wants the chance to enter an occupation and learn on the job, and skilled labor wants to preserve a monopoly and restrict competitors from doing that. Meanwhile, whether business favors skilled labor or unskilled labor depends on the situation. If the occupation is easy to learn (ex: hairdressing, plumbing), business will favor unskilled labor, since they can easily hire people and train them on the job. If it’s difficult and expensive (doctors), then the licensing scheme allows business to avoid the cost of training by hiring from a pool of people who went to significant personal expense to train themselves.

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18 Hazel Meade December 7, 2017 at 12:37 pm

Also, “business” might also depends on the needs of a particular market or industry. A plumbing company might benefit from licensing requirements, while a general contractor might not.

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19 Mulp December 7, 2017 at 3:39 pm

Being forced to undergo more intrusive building inspections, and orders to redo work to comply with code, makes hiring certified journeyman and master plumbers cheaper than using hackers.

Building codes do not require licensed workmen, it’s just the process of getting plans and work approved are much harder, and thus costlier. And then you will suffer further costs, like not being able to buy property insurance.

Building codes were and are created by insurers. Compliance is required based on insurer requirements. Certification of tradesmen simplifies the assurances of compliance. Where public policy meets insurer specification, insurers will not require extensive inspection before issuing insurance.

Where certified workers are required, this is really privatization of government work. Ie, your septic plan must be certified by a certified septic planner who has the specific knowledge required to meet code, so government does not need to hire one at higher costs, which would require higher fees. You instead pay one price for both the plan, and the certification of the plan’s compliance. A government code inspector checks the work to verify the process is followed. Perk test, setbacks, soil analysis, etc, but not the work product in most cases.

The general contractor depends most on licenses because time is money, and thus the work needs to be done correctly the first time to satisfy both government inspectors but also private inspectors, those hired by the client, insurers, lenders.

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20 JWatts December 7, 2017 at 3:57 pm

“Building codes were and are created by insurers. Compliance is required based on insurer requirements.”

Did you just make that up?

21 Hazel Meade December 7, 2017 at 4:57 pm

Building codes were and are created by insurers.

If that’s the case, why is the insurance industry foisting the cost of enforcing codes off on the public? Let them pay for their own inspectors and build that into the price of insurance.

22 Hazel Meade December 7, 2017 at 5:00 pm

A government code inspector checks the work to verify the process is followed. Perk test, setbacks, soil analysis, etc, but not the work product in most cases.

Wouldn’t it be beneficial if the person doing the inspection was driven by the profit motive to get it right, instead of merely checking boxes that “process” was followed? Hmmmmmmm…….

23 Mulp December 7, 2017 at 6:06 pm

Nope. For example, what do you think U in UL stands for. Hint Underwriter. Aka insurer.

A bit if the history leading to founding the NFPA which write the model electrical and sprinkler codes, among others.
http://www.nfpa.org/About-NFPA/NFPA-overview/History-of-NFPA

“Motivation clearly existed for the underwriters and insurance engineers of that period, such as John Freeman, to pursue the new sprinkler technology. Under the eyes of a government that was only beginning to escape its Laissez faire approach was an industrial world that suffered often from loss and destruction, especially by fire. The attitude of owners seemed to unconsciencously accept disaster, as long as economic recovery could be reasonably assured by insurance or other means. But those who sold insurance could not realistically continue to accept these losses. Something needed to be done.”

“The establishment of Underwriters Laboratories was one of the necessary steps toward a unified approach to handling electrical technology, but from the eyes of Thomas Edison, William Merrill, and others, much work still needed to be done. Most important in this regard and of greatest concern was the evolution of various separate and independent electrical codes.
“In 1890, the National Electric Light Association called a meeting to develop rules that would be universal in scope. Yet other codes were also available from various respected organizations such as the National Board of Fire Underwriters and the Underwriters National Electric Association. One of the earliest sets of installation rules was issued by the New York Board of Fire Underwriters in 1881, this being subsequently adopted by the National Board in 1882. By the end of 1895, there were five distinctly recognized electrical codes in the United States. Consistency was needed in an electrical industry on the verge of blossoming.”

“A subsequent meeting was held in New York City on November 6, 1896 at the offices of the New York Board of Fire Underwriters. Eighteen men representing a variety of stock fire insurance organization were present, including Uberto Crosby, Everett Crosby, W. Stratton, and F. Cabot, all of whom were present at the earlier original meeting in March of 1895. The meeting was called to order by Uberto Crosby, and he was subsequently elected as chair of the meeting, while Everett Crosby was elected as secretary.

“Aside from the sprinkler installation rules, the Articles for a new Association were reviewed. Of the twelve Articles of the Association, Articles 2, 4, 6, 9, and 10 were amended at the meeting, and the entire set was subsequently adopted as amended. Of these, Article No. 1 is worth repeating: “This organization shall be known as the National Fire Protection Association.”3 So it was –– and so it is. ”

I fell into international standards and qualifications as a computer engineer, especially in product testing and qualification. Computer systems use lots of power, so simply preparing test labs gets into electrical code. I worked on developing standards. I learned that history is important in understanding the how, what, why, how of standards and compliance. I was one of a thousand people at least involved in standards development and qualifying produce against them. That experience made understanding all sorts of other standards much easier. Building a building or a computer involve pretty much the same compliance steps.

Note, consumer products that start burning and exploding had to comply with standards like UL if they were sold legally, but that doesn’t mean UL codes have been updated to account for lithium battery failures yet. UL has been studying the issues for more than a decade. It’s beginning to issue standards specific to (lithium) battery storage systems.

I also did product support, so I was a bridge between product engineers and customers. As a member of what engineers called product prevention, a former member of product engineering, and a customer, I would love the real world to be like economists imagine it is.

Hey, we designed a product the easy way and you consumers just need to throw away all the products you bought over the past decade or more and buy all new products to conform to this fantastic new product which is much cheaper because we erased all standards that hindered making new products cheaper.

Take for example the stupid E-27 standard base for most of your light bulbs, the E is for Edison. With LED lamps it’s stupid stupid stupid. As is 110 vac power.

Economists would simply design and sell LED lighting using a cheaper base, then blame irrational consumers, governments, etc for their product failures. Governments account for more than 20% of product sales for almost all industries.

24 Hazel Meade December 8, 2017 at 10:25 am

Your excerpt emphasizes the point that the codes were developed by private insurance associations, not by government regulators. The insurers merely needed to accept a uniform code established by private agreement. All of this can be worked out in a manner than makes it the least risky from the perspective of insurers – they don’t want to have to pay out claims, obviously.

So the question of why the inspections much be paid for out of the public purse remains.
If the inspectors work for the insurer, they’re going to want to identify every possible risk to minimize the likelihood of having to pay out a claim. If they work for the government they’re going to act according to the wishes of the politicians in power.

25 JWatts December 7, 2017 at 1:19 pm

+1 for Hazel

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26 Mulp December 7, 2017 at 3:59 pm

“The unskilled laborer wants the chance to enter an occupation and learn on the job,…”

Ie, they want to work for free and pay for all the materials wasted while learning by trial and error?

If a guy learning plumbing cuts a hole in a beam to run a soil pipe which violates code and threatens structure integrity, then he will pay both to have the beam replaced, but also pay compensation for lost time covering interest, penalties???

Working as an apprentice, your master supervises your work closely until he’s confident you will do it correctly so he can claim it as his own. Your master provides training by instruction and by repetition. He takes responsibility for your screw ups and covers the costs. And you get paid for your unskilled work you do for your master.

Apprenticeships basically reflect the “10,000 hour to mastery” rule of thumb.

Plumbing isn’t easy. If it were, there would be no plumbers.

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27 Hazel Meade December 7, 2017 at 4:53 pm

We have liability law for a reason. There is no need for specific programs of instruction – if a person doesn’t know what they are doing, they are liable for damages. If they can be taught informally, they can acquire the skill without paying for the credential. A person without the correct pieces of paper may be a better plumber than one who does.

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28 rayward December 7, 2017 at 3:44 pm

To be clear, both Cowen and Tabarrok (the good economists they are) complain about patents and other restrictions on trade as well as licensing for trades (labor). My comment was intended to highlight how some restrictions (that benefit labor) aren’t nearly as costly to the economy as others ((that benefit capital). What if the Statute of Artificers had been applied to labor in manufacturing? Either the industrial revolution would have been delayed or labor would have received a much higher share of the spoils.

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29 Adrian Ratnapala December 7, 2017 at 2:41 pm

This seems to reflect a change in law-production “technology” . When it was Parliament & precedent, then conspiracies against the public could be left to wither away (unless it involved the legal profession itself).

But now we have a agencies that can produce subordinate legislation, and interpretation is in the hands of specialist regulators who stand in relation to all guilds much as judges do to the Lawyers’ union.

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30 Mulp December 7, 2017 at 3:03 pm

I think I should be given a full professorship in economics. I hope Alex will back me when I say it is outrageous to require defacto occupational licensing of a phd in economics. My associates degree in generally studies is more than enough evidence of my qualifications. I’ll give myself that status, along with accreditation of my home business, and issue PhDs in economics that look pretty much like those from GW. For $50.

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31 Tanturn December 7, 2017 at 3:12 pm

“I think I should be given a full professorship in economics.”

LOL

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32 wiki December 7, 2017 at 3:33 pm

There is no requirement of a PhD. Gordon Tullock had none. But you have to convince the faculty your publications are good enough to overlook this. It seems Mulp is so clueless he doesn’t realize his snark proves the point.

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33 chuck martel December 7, 2017 at 5:44 pm

If occupational licensing is such a great idea want aren’t bureaucrats and elected officials required to have licenses?

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34 Borjigid December 7, 2017 at 10:42 pm

Bureaucrats generally have to pass a civil service exam, I think.

Elected officials are chosen by the people, and we try not to encumber that decision with many requirements beyond age and citizenship.

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35 Bill December 8, 2017 at 11:47 am

It’s as simple as information asymmetry.

So, let’s play a game.

You do not know the quality of what constitutes a safe dwelling, a sewage system that won’t back up during a storm, or the load bearing capacity of a garage.

Someone comes to you and says: I’ll build that house for $x, that sewage system, and that garage. Here’s my price; here’s the price of someone else who uses a different standard.

No building codes.

You choose.

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36 JWatts December 8, 2017 at 12:21 pm

Well I’ve always hired a housing inspector when I’ve bought a house.

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37 JWatts December 8, 2017 at 12:33 pm

Building codes are more for uniformity and to ensure the safety of the neighbors of a person with high risk tolerance. They’ve been expanded to include energy efficiency, and ease of sales for realtors and other social goals.

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38 Normal December 10, 2017 at 6:18 am

Bill is right. The problem is latent defects.

Buildings can hide dozens of types of latent problems that can’t be detected by an inspection after construction is completed. Electricals, insulation, plumbing, mold are all invisible without disassembly.

The individual consumer doesn’t have the time or the knowledge to judge the quality of every product they purchase. Building codes, UL listings, etc are a shortcut for the consumer to avoid stupid or devious producers.

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