On the whole, Adam Smith would approve of a bill recently introduced by Republicans in the Minnesota Legislature that would limit governments’ ability to require licensing of people in various professions. Indeed, the Scottish father of modern economics devoted a significant part of his seminal book “The Wealth of Nations” to attacking the myriad restrictions on who could produce and sell what, where and how.
Most such restrictions were holdovers from the medieval guild system that now has largely disappeared. But some modern governments still limit sales of hair braiding, nail beautification and tree trimming services. That not only limits personal freedom, but can reduce economic efficiency. It also, at least marginally, may reduce employment and business creation for low-income people.
The “on the whole” caveat is important, however. Smith was pragmatic and acutely observant of how the real world worked. While known as an articulate exponent of the idea that markets free of government control often produced the best results for society, he was no ideologue. Even though the term “market failure” had not yet been coined, he clearly understood that free markets were inadequate in some cases.
Most people would agree there is no need to license teenagers who mow lawns as a summer business. But most would think that some regulation of eye surgeons is a good thing. How do we draw the line?
Go back to why and when markets fail. One reason is when there is imperfect information. If people don’t know all the costs and benefits of a purchase they make, resources get used inefficiently. Moreover, the loss in efficiency varies with the magnitude of a bad outcome.
If a teenager in my neighborhood does lawn mowing, I probably can see for myself what sort of job he does for others, or I can ask his customers if they are satisfied. If I hire him and he does a bad job, the grass will grow out again soon and I can get someone else. Even if I have a bad outcome, the harm is small and temporary.
When I needed surgery for a torn retina, however, I personally knew no surgeons to do that delicate task and no neighbors to ask. A bad job might have made my life harder for the rest of my life. A medical degree and board certification is no guarantee of competence, but it excludes the grossly untrained.
Getting your hair cut is similar. You may be disappointed or frustrated by a bad job, but you can go elsewhere the next time. Importantly, however, no one else has been harmed.
That is the second issue in deciding when to regulate services. Is there any possible harm to third parties or society as a whole? If a painter you hire to do some rooms in your house does a bad job, that is your problem. But if you get a plumber who flubs some gas piping, your neighbor’s house may be damaged when yours blows up.
The proposed legislation recognizes this, exempting services from licensing requirements only as long as they pose no threat to public health or safety.
The line is not always clear, however. A bad gas installation may lead to an explosion that harms many, and so we require licenses for gasfitters and plumbers. But we don’t require licensing of mechanics, even though a badly installed tie rod conceivably might cause a truck to veer across a median into the path of an oncoming school bus.
There are similar gray areas in terms of information and magnitude of harm. It is hard to conceive of how a bad haircut could do much damage to a balding guy like me, unless a crazed barber cut off an ear. But beauticians may use strong chemicals that could cause permanent harm to hair or skin if misapplied. Hair braiding is pretty innocuous, but “skin lightening” can be dangerous.
There is an additional issue when the service requires compliance with laws, like zoning codes. Advocates of deregulation often cite sign hanging as a service that should not require licensing. But local signage codes protect others from outsized or garish signs that would reduce the value of nearby properties. Whether these codes go too far is a separate question, but the code clearly has a public purpose.
Licensing of sign hangers may ensure the worker understands the code and thus frees the customer from having to ascertain what the code is. Remove the licensing requirement and the customer may have to assume greater responsibility for compliance.
Beyond these questions, there is an issue of whether excessive regulation retards business and job creation. This is clearly the case in some places, especially developing countries with political cultures that never escaped the mercantilism Adam Smith decried. Peruvian economist Hernando De Soto demonstrated this vividly in his book “The Other Path” some three decades ago, initiating many efforts to reduce such regulation and create more jobs.
Backers of the new legislation here in Minnesota claim this will create thousands of jobs. Perhaps it will, but our state is not Peru or Burundi. With a labor force of more than 2.8 million in the state, the results will be hard to pick out from other factors.
On the whole, the thrust of this legislation is something of which economists would approve. But details are important, and one should not expect too much.