Freeman

ARTICLE

Pounds of Prevention, Ounces of Cure

Licensing Actually Leads to Mistakes and Consumer Harm

AUGUST 01, 1998 by GEORGE C. LEEF

Filed Under : Protectionism, Coercion, Competition, Social Security

An ounce of prevention is worth a pound of cure, an old adage tells us. Like most old adages, there is wisdom here. It is sensible to spend a bit of time and effort to prevent a more costly bad occurrence.

If, for instance, you need to go up to your roof, you make sure that the ladder is steady before starting to climb. For the same reason, you test the bath water before putting the baby in, and you stop and check the traffic before pulling out onto the street. Every day, people take many precautions.

But just because some precautionary measures make sense, it does not follow that every such measure does so. When you go up to the roof, why not take even more precautions? After all, your assessment of the ladder’s stability might be wrong. Why not purchase large foam cushions and place them all around the area in case you fall anyway? Why not hire two strong men to hold the ladder in case a wind blows the cushions away? Why not hire a team of paramedics and have them standing by to treat you if, despite all your precautions, misfortune still strikes?

The answer, of course, is that at some point, the cost of an additional bit of prevention outweighs the likelihood that it will do any good—pounds of prevention versus ounces of cure. If we took every imaginable precaution, we would never get anything done. Individuals are pretty good, though not infallible, at figuring out how far to go with their precautions.

Prevention and the Government

Many government programs are foisted on us with the argument that they are necessary to prevent bad things from happening. Advocates use the adage seductively: “Isn’t it better to prevent [fill in something bad here] than to have to undo it later?” Presented this way, many people automatically nod in approval, and soon we have a new law that supposedly protects us from harm. Our wise and farsighted government will be there to steady our ladders and prevent all kinds of calamities. Who could possibly object?

We all should—because there are two basic differences between our personal decision-making aimed at preventing harm, and laws and regulations aimed at doing so.

The first difference is that in our own actions, we use only property that either belongs to us or which others have allowed us to use. Whatever degree of security against falling off a ladder we want, we obtain it without any coercion directed against other people.

The second difference is that when individuals make decisions about safety—or anything else—they directly bear the consequences, benefiting from good decisions and suffering from bad ones. Political decision-makers, in contrast, are usually far removed from the consequences of their acts.

Those differences make for a great dissimilarity between the precautions we take as individuals and those dictated by government. The latter are often inefficient—pounds of prevention to avoid ounces of cure—and they are always coercive. Let’s consider some examples.

Occupational Licensing

Occupational licensing is touted as a means of preventing harm to consumers who buy services from people who are inadequately trained. An incompetent doctor, lawyer, architect—any professional—could do a lot of harm. Certainly it is better to prevent that harm than to try to rectify it afterward, isn’t it? Licensing is just a sensible ounce of prevention, or so most people believe.

However, occupational licensing is not an ounce of prevention. It’s not like checking to make sure your ladder is steady. Occupational licensing is an ineffective and coercive precaution that is markedly inferior to the precautions that are a part of the invisible hand of the free market.

In trying to prevent incompetent service providers, the government sets up strict standards for obtaining licenses and makes it illegal for unlicensed practitioners to hang a shingle—even if a customer wants their services. As it has often been noted, the impetus for licensing invariably comes from within an occupation itself, and the resulting system favors the interests of incumbent practitioners. Generally, the same professional association that called for licensing is given a key role in setting the licensing standards. Self-interest causes the profession to strive for “high” (meaning costly) standards so as to keep down the number of future practitioners.

Motives aside, the question is whether licensing actually protects consumers by setting competency standards. Many people regard it as a choice between standards (licensing) and no standards, but this is false. The free market is not without standards. If someone wishes to succeed in any line of commerce, he has to be good enough to pass the test of the market. He must satisfy customers and earn enough money to cover the cost of staying in business. Put another way, if someone who offers a service is not at least as good as his rivals, he will not last. He’ll upset customers, establish a poor reputation, incur losses, perhaps be sued, and, sadder but wiser, be driven out.

People do not need economists to tell them it is foolhardy to squander their time and money trying to compete where they are not very good. The market effectively deters incompetence prospectively by penalizing it financially. The cost of failure is high and people know it. The market’s standard is not one written in a statute book, but it is nevertheless real. What it takes to meet the competition and how one learns what is necessary for success are matters that the market leaves up to the individual—but not without its assistance. Because there is a demand for occupational training, we find that training programs (formal education, apprenticeships, or some combination thereof) are offered on the market. As a precaution against failure, individuals invest in training, and training programs themselves have to be good enough to pass the test of the market.

Self-interest therefore gives consumers a supply of competent service providers and filters out incompetents. Worrying about “barbers doing brain surgery” (to quote a pro-licensing wisecrack) is absurd. The market supplies well-trained brain surgeons, but also deters barbers from trying to do it.

And consider also the self-interest of the customer. To paraphrase Dr. Johnson, spending one’s own money concentrates the mind wonderfully. Foolish contracting is something consumers worry about constantly, whether the transaction involves buying apples or selecting a doctor. They obtain information about a good or service before parting with their money. A large part of the test of the market is getting past the scrutiny of potential customers who are alert to evidence of success and good value as well as to evidence of failure and poor value.

This is not to say that there is no need for law in the marketplace. Laws against fraud, negligence, and breach of contract are important to ensure, so far as is possible, that neither buyer nor seller suffers from the actions of the other. Such laws are necessary to deal with the rare transaction that goes awry, but they do so retrospectively. And at this point, licensing advocates speak up and say, “But why not prevent those few bad transactions with licensing?”

Their underlying assumption is that licensed practitioners don’t make mistakes. The fact that many malpractice cases are brought and won against licensed professionals each year is proof of the falsity of that assumption. But there is a further point that must be made in response: licensing actually leads to mistakes and consumer harm. Let’s see why.

Licensing raises the cost of entering the market, thereby reducing the number of competitors. Consequently, practitioners will be able to charge higher prices than otherwise. That is the principal reason why professional organizations push for restrictive licensing statutes.

With higher prices, some people will be either unable to afford professional services or will regard them as a poor value compared to doing the work themselves or doing nothing at all. Either alternative can be hazardous. Doing your own electrical work may save money—or it might lead to costly and harmful mistakes. Doing nothing can also be harmful. The homeowner who says, “I can’t afford an electrician now, but that old wiring will be okay for a while longer,” may end up in a burning house.

The free market provides consumers with the optimal combination of price and competence. Government action cannot improve on that combination, even if its actions were those of a benevolent philosopher-king rather than of grasping interest groups and officeholders. Occupational licensing prevents little or no consumer harm, causes considerable harm by artificially raising prices, and accomplishes this bad tradeoff by the use of coercion.

Gun Control

Gun control is another government policy that is supposed to improve “social welfare” by preventing bad things from happening. Shootings of the innocent, accidental or deliberate, are bad things. For there to be a shooting, there has to be a gun. The smaller the number of guns in the hands of “unauthorized” people, the smaller the number of shootings. Therefore, we must keep guns out of the hands of people. Is this logic sound?

Most people who want to own a firearm want it for either self-defense or for sport. When government says to them through gun-control laws, “You cannot be trusted with a gun,” they are made worse off. The hunter or target shooter will have to be content with something else (a bow and arrow, perhaps) after private gun ownership is forbidden. The woman who worries about being attacked when she walks across a dark parking lot after work has to settle for second best in the personal-defense market (mace, perhaps), an infringement on her freedom that could have tragic consequences.

People who are intent on using violence (or threats thereof) will find that gun-control laws raise the cost of their aggression only slightly. A prohibition against legal gun transactions no more prevents criminals from obtaining guns than Prohibition prevented people from buying whisky. Commerce is hard to stop. Criminals who want guns for their “business” therefore find that, despite gun control, guns are readily available at affordable prices.

In an important respect, gun control lowers the cost of aggression. While criminalizing gun ownership does little or nothing to stop bad uses of guns, it does much to prevent good uses. Gun control in fact increases the number of bad uses because it reduces the strongest deterrent to crime—the prospect that the criminal will encounter effective resistance. The likelihood of arrest and punishment once the criminal has left the crime scene is low, and they know it. The most dangerous point in the commission of a crime is at the time of the attack. Criminals of course prefer lower risks to higher risks, so government policies that reduce the likelihood or severity of resistance by victims lower the criminal’s assessment of risk. Crime is encouraged.

The irony of gun control is that civil disobedience by the few people who illegally buy or carry guns keeps criminals in doubt about the defensive capabilities of the many who are utterly defenseless. Illegal gun ownership creates a large positive free-rider effect.

Gun control, like occupational licensing, finds widespread support because many people overestimate its benefits and ignore its costs. The government’s attempt to prevent bad from happening actually causes more of it.

Social Security

Operating on the premise that government action is necessary to prevent elderly people from living in destitution, more than 60 years ago Congress set up the coercive Social Security system. The presumed need for government to prevent this bad thing from happening triumphed over the economic and constitutional arguments raised against the proposal. Despite mounting evidence that Social Security is financially unsound, we still hear a chorus of voices praising it as “our most successful social program.” Is it?

Before Social Security, there were some destitute elderly. There were destitute people in all age groups, for that matter. However, there were voluntary organizations that assisted the deserving poor. Because there was no legal “entitlement” to income, everyone understood that there was a connection between his industry and prudence on the one hand and his ability to eat on the other.

Social Security (and other “safety net” programs) introduced the new idea that it was the government’s responsibility to prevent destitution. The construction of a government “safety net” led to less and less individual effort to provide for themselves. The national savings rate fell from 12.3 percent in 1950 to 3.5 percent in 1994 because of government largesse and high taxes on earnings to fund that largesse.

The private accumulation of wealth that comes with individual responsibility has been to a large extent crowded out by government attempts to prevent suffering. Today, instead of millions of people with personal investment portfolios that would purchase retirement annuities worth thousands of dollars monthly, we have millions of people with little or no personal wealth, looking desperately to the government for checks worth a few hundred dollars per month.

Social Security not only makes individuals poorer than they’d be if they were self-reliant, but also hinders the operation of the economy. Personal savings would flow into the capital markets, thereby allowing for increased investment in productive assets. With Social Security, however, all the wealth that is taxed away is consumed. Most is paid out to current beneficiaries, and the Social Security “surplus” of recent years is “invested” in government bonds. Instead of productive investment directed by the market, Social Security facilitates increased government spending, often on agencies and programs that further interfere with the efficiency of our economy.

Moreover, in politicizing what should be a personal matter—guarding against loss of income—Social Security has set the stage for what is certain to be a nasty intergenerational battle when receipts no longer cover the benefits. We will surely witness an ugly political battle between the old, who will want what the government has promised, and the young, who will not want to pay the high taxes necessary to keep those promises. That bitter conflict would not have existed but for Social Security.

Social Security is thus another of those government prevention schemes that has virtually no preventative value, but manages to cost a great deal.

People using their own resources make the best harm-preventing decisions they can. Alas, when government tries to add its own harm prevention, it fails to make people safer. But it does stifle freedom. Besides the three discussed here, federal, state, and local governments have many other supposedly harm-preventing laws. Take a close look at them and see if they aren’t also cases of pounds of prevention to avoid ounces of cure.

ASSOCIATED ISSUE

August 1998

ABOUT

GEORGE C. LEEF

George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy.

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