Arnold Kling  

Order, Disorder, and License Requirements

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A reader sent this question:


Your post on Prof. Wagner's piece on market order, especially the institutional nature of the order (differences between taxed orders and illegal orders), made me think about the nature of organization within legally established licensed fields, namely, law and medicine. My own limited exposure to these fields would seem to suggest that there is more hierarchy, rents earned by "prestige", not market merit, etc. than compared to other non-licensed fields. How would you character the organization of legally established licensed markets?

In law and medicine, the rationale for licensure is that the consumer needs to be protected from people who misrepresent themselves as qualified to perform certain services. Because the price of the service does not convey all of the information that a consumer needs in order to make a decision, the simple elegance of an orderly market seems impossible.

Nonetheless, there are many solutions to the consumer information problem. A professional can list the degrees that he or she has obtained, courses taken, past experience, and so forth. This information could be compiled, audited and evaluated by independent agencies, either government or private. Consumers could make decisions based on the information available.

Government licensing is an imperfect solution, and it does produce some disorderly behavior--optometrists lobbying against opthalmologists in state government, physical therapists limiting supply by getting regulators to require doctoral degrees of new practitioners, and so on. But the alternative solutions will have some disorder as well. Whenever there is a system for rating people or businesses, resources will be spent trying to game that system.


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COMMENTS (4 to date)
PJayC writes:

Government licensing might be more efficient when the cost of information is higher--like in the dark ages B.G. (before Google).

If this is true, then the current solution will only become more and more inefficient, with ever-increasing losses as the cost of information and archival declines.

Fundamentalist writes:

Licensing is a good thing if done by private organizations, like CPA's and CFA's. People without those certifications can still practice; they just won't make as much money. However, when the state does the certification, you get thrown in jail for practicing without a license, and no competing licensing groups can arise.

Politicians hide behind "protection of consumers" and "economic development" as their rationale behind every law ever written. Forgive me for being a little suspicious that all politicians have the purest hearts and have only my welfare in mind. The end result of licensing is that people in the licensed industry make far more money than they did without licensing because the licensing process limits supply of those services. Am I too cynical in believing that people in those industries lobby politicians to establish licensing for an industry and contribute to their campaigns huge sums of money and their main motivations is fatter salaries for themselves?

Fundamentalist writes:

PS: How did people choose lawyers and doctors before licensing? By reputation. They asked friends and relatives about whom they had used and what kind of experience they had. Young doctors and lawyers improved their reputations by working as apprentices for older pros who had good reputations. It worked quite well for generations. There never was a need for licensing by the government. Governmental licensing didn't improve on the old system at all, but it certainly increased the income of licensed professionals.

SusieQ writes:

Licensing does increase revenue to the government boards that issue the licenses, so the government does have that aspect of income. However, the amount of knowledge necessary to treat patients today is vast. Would you really want a physician who is not licensed to be performing surgery on you or prescribing medications? Licensing is important to protect consumers. It should not matter whether the licensing is done by the government or by private organizations as long as the testing is consistent.

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