We’ve just managed to make the British economy a little more medieval, which really isn’t an improvement. A reasonable and useful reading of Adam Smith’s Wealth of Nations is to see it as a railing against the guilds and their control of the medieval economy, followed by an insistence that we must instead have a market economy, one with free entry into lines of work and production. Certainly, this discombobulates the producers who find the protections of their economic rents withering away under the force of competition, but then that’s the point.
It’s more than a little odd that in this neoliberal age we seem to be starting to rebuild those protections. But that’s what we’re doing as estate agents become the latest protected occupation. Mini-driving spivs who show you the front room of a “des res” will have to have a professional qualification. This will mean that showing people around front rooms will become a protected occupation, and only those with the appropriate piece of paper will be able to do it.
We know what happens in these circumstances, as Matt Ridley points out. The protections act as a barrier to entry into such markets—that in turns creates economic rents which the newly professional enjoy. A good part of what is wrong with our current economy is the presence and exploitation of those rents.
Milton Friedman spent much of his life pointing out that when the American Medical Association has a monopoly on who may call themselves doctor, and who may practice as one, then the price of doctors will be higher than it would be without the AMA. That’s great for doctors, but not so good for the rest of us.
The same point is made by Warren Buffett, who likes businesses which have a “moat” around them. That is, a defense against any competition which will erode profits. Professional qualifications are just such moats, and within their curtain walls economic rents mount up at cost to the rest of us. There are states in the US where qualifying to braid hair takes thousands of hours of study—to the great benefit of those who already have such licences. And, of course, at a significant cost to everyone who wants to get their hair braided.
We have done significant work over the decades in reducing such rents and the protections of them. Solicitors now have rights of audience in the courts, something no longer reserved for the special caste of barristers. Legal costs to the rest of us are tempered by that competition. We’ve quite deliberately thrown open our economy to trade with the rest of the world, precisely so as to be able to enjoy the advantages of competition against incumbent producers.
We enjoy lower prices on the things we buy, true, but it’s well-known (so well-known that even George Osborne’s Treasury got it right) that the medium-term effect of trade is upon domestic producers. They must face competition from those imports, and they thus face the prospect of bucking up their act or going bust. To the great benefit of us, the consumers.
Insisting upon professional qualifications for estate agents is thus a retrograde step. It carves off another area of the economy where economic rents will be collected for the insistence upon limiting market entry to the chosen caste. In turn, it means that there will be less competition.
Sure, it might be that firms such as PurpleBricks would still irrupt under these new rules, but it’s absolutely certain that this sort of regulation will reduce invention and innovation in the sector. That’s actually rather the joy of the measures, from the point of view of the current incumbents. Publicly it may be presented as a celebration of consumer protection, but privately it amounts to an ability to overcharge said consumers.
It’s entirely true that some areas of life require regulation. But we should limit such to those areas which actually do, not erect ever more opportunities for the producers to gain at our expense. Smith’s Wealth of Nations was published 242 years ago. That really ought to have been long enough for us to have grasped that we don’t want to resurrect the medieval guilds.
Originally published on CapX on April 9th, 2018