American Guilds   Leave a comment

When I did my series on the Medieval period a while back, I ran across some articles that were critical of capitalism and advocated for a return to the guild system that operated during the Middle Ages. I found it interesting because the commentators were from both the right and the left. Under this system, each occupation had its own guild and all employees and employers belonged to that guild. The guild regulated business particulars like prices, wages, hours of operation, and product quality. It prevented shops from underselling one another and encouraged cooperation over competition. The result was occupational stability. Everybody had a niche in a given line of work.

Image result for image of a guildThe guild system seems superficially plausible, so it seems attractive to some minds. But, remember, I’m a fan of Bastiat, so I have taken to running every economic proposal through the “seen and unseen” filter.

Consider how a guild system must work in practice. For a guild to work properly, certain people who wish to enter a particular trade are denied entry. If a particular guild happened to have a relatively liberal policy of admitting new producers to its craft, it would insist on a minimum price for all goods sold under the guild’s auspices and/or it would limit the amount of the good that any given master was permitted to produce. Whichever of these three control options (high barriers to entry, fixed minimum prices or fixed production quotas) are employed, the outcome results in higher prices and less production than if free entry into the profession, a free-price system, and unrestricted production were allowed.

Aspects of the guild system have existed in our economy in the past and some continue today, with clearly destructive consequences. Perhaps the most obvious example was the National Recovery Administration, established by the New Deal’s National Industrial Recovery Act in 1933. President Roosevelt believed that business competition had to be restricted in order to tame the alleged problem of “overproduction” and to spread among as many firms as possible what consumer demand existed.

I won’t attempt to explain FDR’s economic reasoning. Biographer John T. Flynn noted that “it is entirely possible that no one knew less about that subject than Roosevelt.” (The Roosevelt Myth, c. 1948 [1998] page 116). Roosevelt’s belief in economic fallacies had terrible consequences. The President’s faulty grasp of what caused the Depression led him to introduce a system similar in operation to the old guild structure, with the explicit intention of reducing competition. FDR borrowed heavily from a system established by Mussolini, by the way.

Under the NRA, each industry was “invited” to establish a production code. This code would set minimum wages, minimum prices, and a variety of other regulations to be observed by the firms in that industry. Note that the code established minimum prices. All sellers would have to sell their products for at least the prescribed minimum. This dramatically reduced intensity of economic competition, since with an established minimum price in effect it was not really possible to undersell one’s competitors.

The great New York Times editorial writer Henry Hazlitt had no illusions about the NRA:

[T]he American consumer is to become the victim of a series of trades and industries which, in the name of “fair competition,” will be in effect monopolies, consisting of units that agree not to make too serious an effort to undersell each other; restricting production, fixing prices—doing everything, in fact, that monopolies are formed to do. . . . Instead of a relatively flexible system with some power of adjustment to fluid world economic conditions we shall have an inadjustable structure constantly attempting—at the cost of stagnant business and employment—to resist these conditions.2

You hear this a lot on social media these days. “Businesses shouldn’t compete. They should cooperate.” It’s held up as some sort of ideal economic arrangement. The NRA gave the force of law to producers’ collusion with regard to minimum prices and wages, hours of operation, amount of output, and still other factors, thereby eliminating competition among producers in exactly the same way the guild system did.

The NRA was a complete disaster in practice. First, although such a system would indeed raise prices, such an outcome obviously defeated the program’s other aim of increasing wages, since a rise in prices must reduce the real value of wages. Increases in prices reduce what wages can buy, so at best increased wages keep even with increased prices, so really aren’t an increase. Second, the program produced such an outcry among sensible people that the U.S. Senate finally managed to force FDR into appointing a commission to investigate the NRA. Its report, issued in 1934, described the agency as “harmful, monopolistic, oppressive, grotesque, invasive, fictitious, ghastly, anomalous, preposterous, irresponsible, savage, wolfish.”3  The act establishing it was declared unconstitutional the following year.

The NRA has been gone for a long time, but a great deal of the guild mentality remains in the U.S. economy. We can observe it in the behavior of such organizations as the American Medical Association, the American Bar Association, and others. These organizations lobby the government to institute stiff requirements to acquire a license to practice, and then places obstacles in the path of anyone else who might want to provide medical, legal, or other services. Milton Friedman suggests what is often really at work in such agitation:

The justification offered is always the same: to protect the consumer. However, the reason is demonstrated by observing who lobbies at the state legislature for the imposition or strengthening of licensure. The lobbyists are invariably representatives of the occupation in question rather than of the customers. True enough, plumbers presumably know better than anyone else what their customers need to be protected against. However, it is hard to regard altruistic concern for their customers as the primary motive behind their determined efforts to get legal power to decide who may be a plumber. (Milton and Rose Friedman, 1979, “Free to Choose: A Personal Statement”, Page 229)

The American Medical Association serves to reduce the number of people who can practice medicine, and thereby increases the cost of medical treatment beyond what it would be in a competitive market. According to Clark Havighurst, Duke University Professor of Law, “Professional licensure laws have long made the provision of most personal health services the exclusive province of physicians. Obviously, such regulation limits consumers’ options by forcing them to use highly trained, expensive personnel when other types might serve quite well.”6

Consider Friedman’s description of the guild’s operations:

One effect of restricting entry into occupations through licensure is to create new disciplines: in medicine, osteopathy and chiropractic are examples. Each of these, in turn, has resorted to licensure to try to restrict its numbers. The AMA has engaged in extensive litigation charging chiropractors and osteopaths with the unlicensed practice of medicine, in an attempt to restrict them to as narrow an area as possible. Chiropractors and osteopaths in turn charge other practitioners with the unlicensed practice of chiropractic and osteopathy.7

Yes, I’m sure most members of the AMA believe that such requirements work to the consumer’s benefit by protecting us from substandard medical care, but truthfully, this highlights how interest groups subconsciously conflate their own interests with those of society as a whole. Mancur Olson cautions people to “note that the examinations are almost always imposed only on entrants. If the limits [on entry into the field] were mainly motivated by the interest of patients, older physicians would also be required to pass periodic qualifying examinations to demonstrate that they have kept their medical knowledge up to date.”8 The fact is, studies find that non-physician providers of medical care, such as midwives, nurses, and chiropractors, “can perform many health and medical services traditionally performed by physicians—with comparable health outcomes, lower costs, and high patient satisfaction.”9

Government regulations on the chiropractic profession, lay midwifery, and on the freedom of nurse practitioners to offer services within their competence, all of which make perfect sense from the point of view of the medical guild that lobbied for them, often make no sense at all from the point of view of consumer wishes or from economic considerations. For example, studies have shown that lay midwives have a much lower mother-infant death rate and a substantially lower delivery complication rate than doctors or nurse-midwives, but they remain outlawed in many states. In many cases, non-physician medical professionals can provide health services far more cheaply than can licensed physicians, but consumers are prevented from making their own decisions regarding their medical care. We shouldn’t be surprised to find that the AMA has put so much effort into undermining its professional opposition.

But if the government doesn’t do it, who will keep us safe from unqualified people practicing medicine? Economist George Reisman explains:

[T]he members of the various state medical licensing boards around the country could constitute themselves into private certification agencies and give or withhold their seal of approval to individual medical practitioners on any basis they wished. They would simply lack the power to make the absence of their particular seal of approval the basis of fining or imprisoning anyone who chose to practice medicine without it. The consumers of medical care, who presently retain the right to judge the qualifications of the state governors and legislators who are responsible for the appointment of the members of the medical licensing boards, would decide for themselves the value of certification by this or that organization. . . . Indeed, if ordinary men and women are to be allowed to vote in elections in which their votes ultimately determine the most complex matters of foreign and domestic policy, and thus where their decisions affect not only their own lives and those of their immediate families but also the lives of everyone else in the country, then surely they are entitled to the responsibility of determining matters pertaining exclusively to their own well-being.10

Reisman further observes that if government regulations allowed only automobiles less than five years old on the roads, there would certainly be an overall increase in the quality of automobiles on the roads. But a great many perfectly serviceable automobiles would thereby become unavailable for use at all. The main victims of such a policy would be the poor.11

The legal profession in the United States is also akin to a guild (or could be called a cartel).  Everyone knows that legal services are expensive, but few realize that the barriers to entry erected by what is in effect a lawyers’ guild bear much of the responsibility for that expense. Thanks to the lobbying of bar associations, the only people who may enter the legal profession are those who possess a license from the state, which is available only to those able to afford the extraordinarily costly path of law school and the bar exam. The outcome is the desired one: fewer lawyers, and therefore higher fees.

As with the medical profession, where costs could be dramatically reduced by allowing medical personnel below the rank of physician to perform routine work, paralegals are more than capable of performing a variety of legal tasks that the guild currently reserves for lawyers only. That means people wind up paying a lot more for basic legal services. In 1987, the chairman of the Legal Services Corporation, W. Clark Durant, made an extraordinary address to the American Bar Association in which he suggested that his agency be abolished and that all barriers to competition in the market be removed. One day later, the president of the ABA was calling for Durant’s resignation.

One paralegal in Portland, Oregon, decided that enough was enough. Robin Smith, who worked for several years in a large law office, had grown tired of lawyers charging exorbitant fees that their clients could barely afford, all for work that she herself had done. She opened her own business, People’s Paralegal, Inc., where she and her colleagues offered basic legal services, such as the drafting of common legal documents, at lower prices. Not surprisingly, the guild went into action. People’s Paralegal found itself on the receiving end of a lawsuit by the Oregon State Bar, accusing the firm of violating Oregon’s prohibition on the “unauthorized practice of law.” People’s Paralegal was shut down, and ordered to pay the legal fees incurred by the Oregon State Bar when litigating them out of business!

The guild mentality results in a privileged few reaping abnormally high salaries while the vast majority are made poorer by higher fees. Should anyone attempt to give consumers an alternative to this kind of exploitation, the guild springs into action to quash the challenge. An entire society organized along these lines is scarcely conceivable, but that is what the guild system amounts to.

Lesser examples abound. During the 1990s, 15-year-old Monique Landers of Kansas opened her own African hair-braiding business. Upon returning from a visit to New York, where she was honored as one of five outstanding high school entrepreneurs, she was informed that the state licensing board of Kansas was shutting her down. No customers had complained, but the guild mentality of already existing establishments didn’t like her competing with them. She was told that she could stay in business if she spent a year at a licensed cosmetology school, but few of them teach the particular skill she already possessed, and none of them would admit her prior to her seventeenth birthday. “The Board won’t let me earn my own money, and won’t let kids like me learn to take care of ourselves,” she said. “I think owning your own business is a way of being free.”15

In The State Against Blacks, Walter Williams provides a lengthy catalog of occupational licensure laws and other barriers whose effect is to place overwhelming obstacles in front of those who wish to enter an industry.

For example, to operate a taxi in New York City, a potential driver needs a medallion from the city, which costs hundreds of thousands of dollars. It is impossible to measure how many jobs are destroyed by this kind of behavior, but we can get a sense of how much higher taxi fares are now that Uber is competing with taxis in some markets.

Agriculture provides perhaps the most disgraceful example of what the guild mentality wrought in reality. The federal government’s assistance to farmers has often amounted to encouraging them to destroy (or not plant in the first place) huge stocks of crops, in order to increase their selling prices. This is what a guild would do, though the guild would more likely keep supplies down and prices up by allowing fewer people entry into the guild in the first place, and/or requiring existing guild members to adhere to a production quota. Government is a substantially less far-sighted than guides were.

The costs and consequences of such an antisocial policy are staggering, and are all the more insidious because the beneficiaries of these policies are clear and visible, while the victims are dispersed and largely unaware that an organized cabal is taking advantage of them. Right, that sounds like Henry Hazlitt’s “Economics in One Lesson”, where he stressed the need to assess the outcome of a given policy — to be aware of the long-term consequences for all groups rather than the short-term gains of one group. How many Americans realize that the price they have to pay for sugar and all foods containing sugar as an ingredient is much higher than necessary as a result of a government program?

For most of the 20th century, the price of sugar to Americans was 500% higher than the world price, thanks to government price supports.17  Sugar producers receive an average of $235,000 a year from the policy, but it costs consumers well over $3 billion per year, and it puts all American industries that use sugar at a competitive disadvantage to foreign producers who are not forced to pay such an inflated price for sugar.18  This latter point is always overlooked by opponents of free trade, who in their zeal to protect jobs in Industry X from foreign competition neglect altogether the destructive effects that their preferential policy for Industry X has for Industries A, B, and C that use X as an input in the production of their own products. Job losses in those industries will rarely be attributed to the tariff or other privileges shown to Industry X. Meanwhile, the government can point with pride to the jobs it has “saved.”

What is seen and what is not seen.

Since 1937, as much as 40% of all oranges grown annually in the U.S. have, by law, been destroyed, fed to livestock, or exported in order to raise domestic prices. Think about that the next time you wince at the price of oranges at the grocery store.

Quotas on peanuts effectively double the price of peanuts and peanut butter.

Every dairy cow in America is subsidized to the tune of $700 per year.

All this inefficiency and destruction of wealth impoverishes society as a whole, and hurts  the poor the most. We will never know the full cost of these policies, since many of their costs include jobs never created and businesses never started.

Still, is this really how we’d like our entire economy to be run?

All of these examples of genuine exploitation amount to one of many reasons that free-market economists hold the beliefs that they do. The greater the scope of state activity, the greater the potential for each pressure group to use the state apparatus for its own enrichment, at the expense of the rest of society. Since the benefits that accrue to such pressure groups from their political agitation are sizable and concentrated, while their costs are dispersed and hidden, the tendency over time is for more and more of this kind of activity to go on at the expense of the ordinary person.

Since guilds operate to restrict competition and price cutting, we must expect that the monopoly power of the guilds will have consequences analogous to those of the government favoritism we have just examined. Through a variety of methods, the federal government has granted special privileges to certain industries. In one way or another, these privileges dramatically limit competition, just as the guild system did and would.

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Posted June 24, 2017 by aurorawatcherak in economics, Uncategorized

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