Arnold Kling  

Two Notes on PSST

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1. Some folks on the right are bothered by the term "sustainable" in patterns of sustainable specialization and trade. They seem to be afraid that I am some sort of tree-hugging wuss. Or that I think patterns of trade need to be sustainable forever. Instead, what I intend by "sustainable" is that the patterns are mutually beneficial, as evidenced by profit. I wish to distinguish sustainable patterns from patterns that are created by government subsidies of unprofitable enterprises.

2. Are there any policy implications of PSST?

I can think of one, which is the elimination of internal trade barriers. I would argue that occupational licensing is an internal trade barrier. In fact, I believe that when state X denies a license to someone licensed in state Y, that is a violation of the Constitution, in spirit if not in letter.

I can imagine having zero occupational licensing, with consumer protection instead provided by a statute that penalizes fraud and misrepresentation. You cannot claim to have graduated medical school when you have not done so, but if you make it plain that you are not a doctor, you can perform whatever service the consumer is willing to obtain from you.

As usual, I prefer a vague law to a precise statute, with gradual accumulation of case precedent helping to achieve greater clarity over time. For example, suppose somebody engages in deceptive practices to sell quack medical services. I would want the punishment to be harsher if this is done to exploit people who are poorly educated than if the target market is people who really should know better. Not that there should be no punishment in the latter case. But my sense is that fraud perpetrators often seek out victims among the weak, and that especially ticks me off. Anyway, I would not try to specify exact criteria in the law, but I would hope that over time judges and juries would arrive at sensible applications. Incidentally, there might be role for rewards for people who successfully identify scammers and bring them to justice.

The main point: get rid of internal trade barriers


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COMMENTS (15 to date)
Sam writes:

So change "sustainable" to "profitable": Patterns of Profitable Specialization and Trade, PPST. Not as snappy of an acronym, perhaps, but clearer.

Arnold Kling writes:

Sam,
I actually like using sustainable in this context. I don't like the fact that sustainable is often used as an antonym for profitable, when it should be a synonym. I want to get people to think about it.

Salem writes:

Sustainable is also better than profitable because it includes patterns of trade/production that are mutually beneficial but do not rely on the profit motive e.g. the charitable sector.

T writes:

Using the example of medical services, I assume you believe that licensing does provide some set of assurances to consumers, but that these assurances are not cost effective.

Something other than just fraud and misrepresentation laws would have to end up filling that vacuum. Private mechanisms of accreditation would develop. Would these make for more efficient markets? Are there examples where this works better?

Floccina writes:
I believe that when state X denies a license to someone licensed in state Y, that is a violation of the Constitution, in spirit if not in letter.

I am with you on that and I would extend it an insurance plan that is legal in another state should be legal in all states.

Brian Clendinen writes:
I believe that when state X denies a license to someone licensed in state Y, that is a violation of the Constitution, in spirit if not in letter.

That is a really good point I have not read anywhere. I have been of this opinion on insurance for a while. However, I never expanded the concept.

It would be interesting to see how this would work for things such as building codes. If a product was made in another state that meet its building codes would it be unconstitutional for a city not to allow the product because it did not meet its building codes due to earthquakes or hurricanes? How about harmful chemical substances that the impact is only over the long term? What if one state allowed it?

I guess my point is under Federalism I think there are legal and overall valid reason for the government to impose some types of commerical restrictions at a local level. Especially in cases where the effected are over a long time horizon. On the job licensing,however, I 100% agree.

Ray writes:

I'm reminded of an anecdote Amity Shlaes relates in The Forgotten Man. Mrs. Roosevelt had the publisher or editor of Good Housekeeping I believe it was to lunch with her and Rex Tugwell. Eleanor brought up Tugwell's ideas for regulating everything, and the editor tore him up. (Eleanor agreed with Tugwell of course, but apparently she did it for amusement.)

Point being that the Good Housekeeping seal of approval meant something, and government regulations in the same field were thus redundant, and an unnecessary intrusion of government in to the private lives of the citizens.

This also coincides with T's comment about private accreditation popping up. It does already exist in areas that government hasn't managed to regulate yet in most major industries. Every kind of manufacturing, municipal police forces, etc.

Justin writes:

If occupational licensing were completely eliminated, it would be relatively difficult to prove fraud. If I wanted to sell quack medical services, I could simply establish Quack U, award myself a medical degree, and then hold myself out as a doctor with a degree. I could set up my own organization to accredit Quack U and my own board to certify me in a specialty and then advertise that I was a board certified whatever that graduated from an accredited medical school. Patients would then be in a position of trying to determine which accreditations were real and which were fake while authorities would be hard pressed to claim that I was fraudulently misrepresenting myself. Given, for example, the number of different bodies that accredit real colleges and universities in the United States, it would be relatively difficult for the average consumer to differentiate Quack U from any legitimate college or university.

Of course, it's likely that private accreditation programs would pop up that would address many of these problems. It seems unlikely, though, that there would be a Good Housekeeping-type entity that could reasonably certify a variety of different types of professionals like so many household products. The only non-government entity that is likely to have the experience and expertise to credibly certify doctors, for example, would be a large trade group like the AMA which would undoubtedly erect higher internal trade barriers than the government would choose. While a handful of consumers would benefit from, say, nurse practitioners being allowed to perform tasks that only a doctor could perform today, other consumers would be defrauded by the hypothetical Quack U graduate with few, if any, recourse. And that's before we consider the probability that your health insurance in our hypothetical would only cover treatment from an AMA-certified doctor which would eliminate most of the benefit to poor consumers of being able to seek out lower cost providers.

That is not to say, of course, that most of the occupational regulations the government has in place are economically reasonable. I can think of no reason that the government should need to license barbers, interior decorators, or beauticians since the average consumer is perfectly capable of judging the results these providers deliver and it is very unlikely that a bad haircut could permanently damage a consumer. For professionals that average consumers cannot realistically evaluate without a great deal of effort, though, like doctors and lawyers, some level of occupational licensing by the government seems likely to increase economic efficiency.

MernaMoose writes:

Justin,

I see your point on the one hand. On the other I see another issue that's just as important.

People didn't always believe in this little thing called "germs". The doctors who did in the early 19th century were considered quacks by their own profession.

On one hand we need some kind of consumer protection vehicle. On the other, there still needs to be room for rational dissent (essential for scientific and technological progress in general). I sense that the current setup is squashing progress in some areas because there isn't room to deviate much from whatever the majority consensus is.

This is a tough problem no matter how you look at it. My beef with what we currently have, is that it does not give high enough priority to a) the need to not restrict free trade any more than utterly necessary, and b) the need to allow room for dissenting opinions.

How you distinguish dissent from quacks I don't know....

Various writes:

I think your PSST has a lot of merit. Probably not worth tinkering with the specific language (since the point of the matter is not to mess with the phraseology)....but "robust" or "productive" may be good substitutes for your use of "sustainable".

CBBB writes:

Medicine is often used as an example of a field in which licensing should be abolished but
I think a better example is accountancy; people's lives aren't put at risk.

In Canada we have Chartered Accountants ( which I believe is about equivalent to CPAs in the US).
I believe it used to be that to become a CA you had to sit for exams, but it was fine to simply self-study to pass these exams.

Nowadays it's become completely ridiculous. You need to have a university degree to be eligible to sit for the CA exams but not just that - you need to have taken VERY specific courses in university to be eligible.
Suppose you graduated with a degree in physics and later decided maybe accounting would be a good career. Surely someone with a physics degree is more then intelligent enough to become an accountant. However, since specific course requirements were not met the physics graduate is not even allowed the opportunity to sit for the exams.

Ray writes:

Justin

Our views don't differ too much, but the hinge point is the belief that the state must serve as a neutral and supposedly objective vehicle for regulating safety.

In a scenario in which we did away with professional licensing, groups like the AMA would still exist, but the consumer could choose between an AMA endorsed doctor or facility, or they could choose an independent. Because life and death are risk here, surgeries, emergencies, and other such things would eventually fall almost totally to the AMA sanctioned professionals.

But we see the popularity for self-medicating; everything from nutritional supplements to homeopathy so it seems very likely that there would be a robust market for independent doctors of all sorts.

Point being that there would still be a very secure and trust worthy market for every medical need. If someone wanted to choose Quack U - an obviously independent entity not sanctioned by the AMA - then that would be their choice.

However, I would like to hear someone lay out a good case for bridges, and other such public items where it would not just be a matter of individual choice.

Philo writes:

You write: "I wish to distinguish sustainable patterns from patterns that are created by government subsidies of unprofitable enterprises." That's a helpful clarification. But are you suggesting that economic agents don't look for ways to gain from government subsidies--that they pursue only activities that would be profitable without such subsidies?

Tom McKendree writes:

I read in "sustainable" an echo of Coase's theory of the firm. Actor's are looking for "sustainable" patterns so that, once they find their part in such a pattern, they can avoid the search costs for a while. Eventually, something else may change (e.g., a new invention in a different industry creates heavy demand for one of your core inputs, raising its price to the point where you can no longer serve your market at a profit), so "sustainable" does not mean you will never have to search for another pattern ever again, just that you are mostly done with searching for a while. For an individual person reaching their part of a sustainable pattern could be being hired into a company that's not on a path to go bankrupt. With the risk of future pattern changes, some of the omitted "search cost" is perhaps wisely spent on investing in robustness, and looking for changes in the pattern you will need to respond to.

I would suggest that Arnold also think about the distinction between changes that "don't break the pattern," and changes that do. Here I'm thinking of an echo of _The Innovator's Dilemma_. Going from LPs to CDs in the music business was in many respects a big change, but for the Music Lables and artists, it was not a change in the pattern. Small incremental improvements in products, which might be substantial after a number of years, might also not "change the pattern." A "low end distruption," a la Christensen, is a local change in the global pattern.

Hyena writes:

To me, "sustainable" referred simply to your ability to continue some activity. I don't really like the political turn. Technology is constantly reducing the sustainability of many enterprises. By contrast, an unprofitable activity is highly sustainable under subsidy. Militaries come instantly to mind, especially large ones.

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