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Governmental Aids to Monopoly

03/09/2010Fritz Machlup

One of the oldest and most widespread methods of government regulation is to prohibit specified activities without the express permission of the government. In the 16th century King Henry II of France carried this type of regulation to its extreme limit, at least in theory, when he declared that the right to work was itself a "droit royal" — privilege bestowed by the king.1

    In medieval and early modern times, licenses, charters, and organized trade bodies formed the basis of a detailed government regulation of economic life in most European countries. This type of economic organization, loosely called the "guild system," became increasingly unacceptable as the mercantilistic and feudal organization of society, under the impact of more liberal conceptions of social organization, gave way to the institutions of a "free enterprise" system. Today, however, we are rapidly returning in important sectors of the economy to this older system.2

Economic Freedom Gained and Lost Again

The United States was established at a time when the regulatory conception of the state was on its way out in England, and this conception never took deep root in America. Freedom was one of the moving ideas in the new country, and government attempts to interfere with the freedom of individuals to carry on a legitimate trade were most jealously watched.

Thus in 1885, when the New York legislature tried to regulate the manufacture of cigars by licensing, the court was blunt in its condemnation of the legislature's attempt to interfere with the right of men to pursue their occupations unmolested by government, and it clearly recognized the similarity of the provision to the pervasive restrictions of an earlier age.

Such legislation may invoke one class of rights today and another tomorrow, and if it can be sanctioned under the Constitution, while far removed in time, we will not be far away in practical statesmanship from those ages when governmental prefects supervised the building of houses, the rearing of cattle, the sowing of seed, and the reaping of grain, and governmental ordinances regulated the movements and labor of artisans, the rate of wages, the price of food, the diet and clothing of the people, and a large range of other affairs long since in all civilized lands regarded as outside of governmental functions. Such governmental interferences disturb the normal adjustments of the social fabric, and usually derange the delicate and complicated machinery of industry and cause a score of ills while attempting the removal of one.3

But the vigilance which is the price of freedom has been undermined by confusion of thought, and today local governments of all kinds are permitted to regulate the right of men to practice even the most humble trades. An unseen net of petty regulations, pegged to local police and tax powers, has been cast over an ever-expanding number of trades and professions.

By and large these regulations do not stem from the Federal government and, perhaps for this reason, the extensive use of licensing powers has not been posed as a major political issue. The absence of the political spotlight, however, makes even more dangerous this insidious boring from within. Let us examine the process through which this state of affairs has come about.

The Public Interest and the Private Interests

The simplest use of the licensing powers of the government is for the mere raising of revenue. This creates no problems as long as the fees are moderate and nondiscriminatory and the license is not used as a cloak for regulatory controls.

    "If all I want is a house built, I should be able to hire an "unqualified" contractor as long as he knows how to build houses."

If fees are imposed by several governmental units and are more than nominal in relation to the profitability of the businesses licensed, their cumulative effect may be to restrict entry into local markets or to put the taxed businesses at a disadvantage with respect to competitors. They may thus create local trade barriers of the kind previously discussed.

The real problems of monopolistic exclusion arise when licensing is imposed under the police powers of local governments for the purpose of protecting the health and safety of the public or because the businesses concerned are otherwise "affected with the public interest."

There are clear cases where governmental intervention is necessary for the protection of the public. That certain qualifications must be required of people calling themselves doctors, nurses and dentists, of those who dispense drugs or construct buildings on contract is undeniable.

Similarly, the importance of imposing standards of purity or safety with respect to some products may call for government intervention; that milk be adequately inspected, that buildings meet minimum safety requirements, that reasonable standards of sanitation be maintained in barber shops and restaurants is certainly closely related to the public health.

It does not follow from this, however, that licensing is the best method of obtaining these ends. Although licensing laws and "codes" which prohibit the practice of designated professions or the production of designated commodities without a license, and which lay down conditions which must be observed on penalty of revocation of the license may be the most effective and simplest method, they are at the same time a means by which governments can arbitrarily restrict entry into legitimate occupations and discriminate between products.

As we shall see, governments have frequently abused their powers, and such is the force of the licensing technique that even when large numbers of the public recognize that they are being imposed upon, they have no recourse except through the courts, and the courts not infrequently refuse relief. Equivalent services or products cannot legally be obtained except from a licensed producer.4

Hence, even when it is clear that government intervention is desirable, the licensing method may not be the best method of intervening. Even if the government wishes to insist that a "qualified" contractor should be able to build bridges, sewers and skyscrapers as well as residential houses, if all I want is a house built, I should be able to hire an "unqualified" contractor as long as he knows how to build houses.5

But members of the consuming public, even if they disagree with the standards set up by the government, have no alternative but to accept them when licensing is the method of regulation.

"Unfortunately the concept of public health and safety is an elastic concept and, if a disposition to stretch it exists, it can be easily stretched."

In very many, if not most cases, in which licensing is the accepted method of regulation today, certificates stating the qualifications of the holders, or "grade labeling" of the products, would be enough to protect the public without at the same time placing in the hands of local governments the power to prohibit a man from carrying on a lawful trade or selling a legitimate product.

For unfortunately the concept of public health and safety is an elastic concept and, if a disposition to stretch it exists, it can be easily stretched. Members of existing trades wishing to protect themselves from the competition of newcomers frequently are able to convince their local government authority that very strict standards should be required of all new entrants into the trade or that new competitive products should be discriminated against in order that the public be protected against some alleged evils.

Thus does licensing in the public interest degenerate into licensing in private interests. Sometimes the courts have ruled against the legality of such attempts, seeing through and condemning the misuse of state power.

We are not permitted to inquire into the motive of the legislature, and yet, why should a court blindly declare that the public health is involved when all the rest of mankind know full well that the control of the plumbing business by the board and its licensees is the sole end in view.6

 This, however, was an early decision. Nowadays courts take a more lenient (and deliberately blind) view. They have permitted extensive educational requirements to be imposed as a prerequisite to entry into the trade of a barber, ten years experience or a college degree as a prerequisite for plumbers, good moral character for photographers,7 "sound theoretical knowledge of watch construction" as well as technical ability for watchmakers, good reputation as well as recommendation from local property owners for contractors, nine months of college and three years' apprenticeship plus the recommendation of two funeral directors "familiar with his reputation and character" for embalmers. The list could be easily extended.8

The Guild System Has Returned

In addition, and here is where the resemblance to the guild method of control becomes even stronger, the administration of licensing and regulatory controls is often placed in the hands of the existing members of the trades to be controlled, and are almost openly exercised for the purpose of restricting competition.9

This is called self-government of the trade. It results not only in exclusion of would-be entrants and in exploitation of the consumer but also in jurisdictional disputes reminiscent of the old disputes between medieval guilds, though carried on through the legislature.

Who can cut hair, barbers or beauticians? In Utah, Connecticut, Arkansas, Illinois the feud has been furious. If barbers succeed in excluding haircutting from the terms of the beautician's license, the beauticians retaliate by excluding barbers from curling, waving, dyeing, bleaching, etc. We can only ask in bewilderment, what has this got to do with public health?

Who can remove warts, beauticians or surgeons? In Oregon beauticians can do so, but only on the "upper part" of the body. In Oregon also a demonstrator of cold cream must have a license.10

"The administration of licensing and regulatory controls is often placed in the hands of the existing members of the trades to be controlled, and are almost openly exercised for the purpose of restricting competition."

In the name of public health we find that in Colorado meals may not be served in drug or department stores or where anything else is sold, in Philadelphia department stores cannot have an optical or optometry department, in New York one may not even be a copartner in a drug store without being a licensed druggist. In other places bicarbonate of soda, witch hazel, Epsom salts, or iodine can only be sold by licensed pharmacists.

In the name of public safety, prefabricated housing has been hindered by legislation in favor of conventional building methods, some building materials have been arbitrarily discriminated against, and plumbing fixtures suitable for the Department of Justice building cannot be installed in private homes by a contractor wishing to keep his license.11

This almost-unconcealed use of licensing regulations to protect public health and welfare as a cloak for licensing to protect private wealth and welfare has apparently so blunted men's sensibilities to the implication of the use of governmental power for private purposes that a third function of licensing is becoming more and more prevalent — the openly avowed use of licensing for the direct and declared purpose of regulating prices and competitive practices.

In Louisiana the legislature decided that "low prices made it impossible to support and maintain reasonably safe and healthful barbering services to the public. The result was declared by the legislature to be a menace to the health, welfare and reasonable comfort of citizens of the state and one which tended toward the transmission of disease."12

Florida set up a price-fixing arrangement for the dry cleaning and laundry business, and it was sustained by the court on the ground that "when conditions in business become such that the welfare of the public will not be adequately protected by unrestricted competition, it is within the police power of the state to remedy the evil."13 In Wisconsin an automobile dealer's license may be revoked if he makes allowances on used car trade-ins which would tend to affect competition "adversely."14

Thus the fears expressed by the court in 1885 are materializing. We have so far presented only a part of the picture. Licensing is also extensively used, as we shall see later, to regulate milk prices and the prices of a large variety of other agricultural commodities.

The use of licensing to protect health and safety is gradually merging into licensing to protect incomes in any case where it can be shown that competition is going to hurt somebody. Clearly professional, semiprofessional, vocational, and ordinary business groups hit the jackpot when they rediscovered the old principle of licensing and "board" regulation with legislative sanction.

  • 1. Needless to say, it was impossible to put such an extreme theory effectively into practice.
  • 2. "The gild has returned. Its purposes are the same as in the Middle Ages, although its techniques are now streamlined." J.A.C. Grant, "The Gild Returns to America," The Journal of Politics, Vol. 4 (1942), p. 316.
  • 3. In re Jacobs, 98 N.Y. 98, 103, 114 (1885). Today, only 65 years later, examples of public regulations of each of the activities mentioned can be easily cited.
  • 4. It is a common experience for amateur electricians or plumbers who wish to install their own fixtures in their own houses to find that they cannot do so because the local authority will not inspect and certify the installation unless it had been done by a licensed workman no matter how competently the installation had been done.
  • 5. "There are many licensing statutes covering contractors, plumbers and others engaged in the building trades or professions which are defined so broadly that one engaging only in building houses must know how to build sewers, highways, skyscrapers and bridges." Irwin W. Silverman, L. Thompson Bennett and Irvin Lechliter, "Control by Licensing over Entry into the Market," Law & Contemporary Problems, Vol. 8 (1941), p. 251.
  • 6. Richey v. Smith, 42 Wash. 237, 249, 84 Pac. 851, 854 (1906). Quoted from Silverman, Bennett, and Lechliter, p. 240.
  • 7. "Moral" and financial qualifications are very commonly imposed and are frequently interpreted in an interesting manner. In Wisconsin a watchmaker's license may be taken away if the holder is guilty of immoral or unethical conduct. That is, among other things, if he engages in "advertising of prices on watch repairing, or the giving of watch glasses, crystals or of any other watch parts, gratis, or at less than cost, in order to advertise or increase the watch repair business." Ibid., p. 245. As every fool can plainly see (to use the immortal words of Li'l Abner) public health and safety require protection from such practices!
  • 8. Twenty-four major occupations subject to statutory regulations are listed by the Marketing Laws Survey publication, State Occupational Legislation, Department of Commerce (Washington: 1942). This list does not include minor occupations such as watchmakers and plumbers. Maryland has tried to license paper hangers, and Washington and Illinois have tried to license horseshoers. These laws were invalidated by the courts who felt this was going a bit too far!
  • 9. Such "self-government" has long been common in the medical and legal professions and it is well known that it has been used to restrict competition, particularly in medicine. The difficulties placed in the way of doctors trained in foreign countries are flagrant examples.
  • 10. See J.A.C. Grant, op. cit., passim.
  • 11. See Silverman, Bennett and Lechliter, op cit., pp. 248–53.
  • 12. Ibid., p. 260.
  • 13. Ibid., p. 260.
  • 14. Ibid., p. 245.