It’s an interesting notion that relies on one god-awful assumption.
“Our key premise is that consumers aren’t stupid,” [Stanford Graduate School of Business professor Jonathan Berk] says. “Put yourself in the situation: If you know there are charlatans in a certain field, but you don’t know who they are, you’re not going to pay as much, right? Whatever the odds of getting an incompetent provider are, prices will be forced down to a level at which you’re willing to take that chance.”
That’s a heck of a key premise, particularly when the contention is that people should be willing to bet their lives on it. The argument is that licensing serves the interests of protecting the providers of licensed services more than the consumer.
So, naturally, we take it for granted that licensing requirements — now common in skilled professions, including law, architecture, and accounting — exist to protect consumers. Indeed, that’s more or less what Stanford Graduate School of Business professor Jonathan Berk assumed when he began a theoretical study of licensing and certification in the labor market.
Instead, he and coauthor Jules van Binsbergen of the University of Pennsylvania found exactly the opposite. As they report in a new working paper, “Regulation of Charlatans in High-Skill Professions,” their model concludes that licenses enrich the incumbent providers of a service and hurt consumers — not sometimes or in certain scenarios, but every time.
There is no doubt that having a license to practice medicine or law creates a guild-like situation that inhibits competition. And the spread of licensure from the learned professions to hair-braiding has followed the general, and largely irrational, route of protectionist view of consumerism. It’s not because the hair-braiders guild owns the legislatures, but because consumers demanded protection from . . . their own ignorance.
The second half of the 20th century saw an explosion in the number of fields requiring an official credential to practice, and the impetus for that often came from trade group lobbying. In 1950, 73 occupations were licensed in one or more states. By 1970 that number had grown to more than 500. Many other professions, including mechanics and meteorologists, created voluntary certification programs — even psychics now have a testing and certification board. (A footnote in the paper remarks, “One wonders why a psychic examiner would need to administer an examination to determine whether a candidate is qualified.”)
These credentialing programs serve as a barrier to entry, and as with such barriers in industry, they reduce competition and line the pockets of incumbents. In a way, groups like the American Bar Association are the equivalent of medieval guilds, which were at least open about their intent to fence off and monopolize skilled labor markets.
Mention of the ABA reflects the gap of the academics in understanding their subject matter, since the the ABA is merely a membership organization, not the licensing authority. One would expect them to know this when proffering such a controversial view. They don’t.
But is there no distinction between licensing physicians and psychics?
Skeptical that anyone would gamble on a doctor? Imagine you need a simple procedure that is wildly overpriced at $10,000 in today’s medical market — but you can also get it done in a country where 1% of the doctors are unqualified. Would you accept a 99% chance of success if it cost only $5,000? How about $1,000? At some point, there’s a risk/price tradeoff that consumers will accept. We do it every day.
To the extent that one can’t afford treatment at the going rate, they may well go for discount surgery if left to their own devices. Is this because they make the financial choice that they are willing to lose a leg for the savings? Should the poor be forced into playing Russian Roulette with their body parts based on price? Ironically, the least sophisticated consumers may well be the most vulnerable to charlatans.
So, charlatans lower the price of a service. But if that were the whole story, buyers would come out even. You pay less, and you get less — in the sense of reduced confidence in the outcome. However, there’s a second, supply-side effect, Berk says, and it always goes one way: “When you lift the regulatory barrier, you get more people offering the service. Some are charlatans, but some are just people who trained but failed the licensing exam. Competition increases, and that pushes the price down further. That’s why consumers are better off in a market with charlatans — and skilled workers are worse off.”
Much as this may be true as a general concept, there is a huge difference between getting a lousy haircut and spending your life in prison. There is no way for the market to determine that one guy is a scammer while another, despite failing the licensing exam, is pretty good at his job, without sacrificing victims to failure. Is it acceptable for somebody to die to learn that Doc Jones does lousy surgery?
And even if he really sucks at medicine, the assumption that the market will work with sufficient efficiency such that word will spread, and people will steer clear of Doc Jones’ knife, is unrealistic. People can’t tell good from bad in the learned professions, particularly since there is a huge margin of error. Even good surgeons lose patients. Good lawyers lose trials. The difference is that you have a chance of surviving, if not a guarantee.
When it comes to licensing psychics or hair-braiders, even florists, the stakes aren’t life or death. Pick the wrong person and you may be pissed, but you’re still alive, you’re still free. Sure there is a price to be paid for guilds who limit entry. There is a price to be paid for not having training and licensure as well when it comes to the learned professions. But if the key premise of the argument is that consumers aren’t stupid, then they’ve never met clients or patients.