Saturday, April 14, 2007

Restrictive Practices Are Seldom Benign

Edward Lotterman, and economist who teaches and writes in St. Paul, Minn., writes in the Idaho Statesman that “State-funded schools should serve public” and explains why in an article of measured good sense, both economically and philosophically that Adam Smith would have been in complete agreement. Such articles in the media are rare. Read it here. Usually they are incorrect and have no connection Adam Smith’s writings. Ed Lotterman is an exception.

“Adam Smith, the first great economist, would not be surprised at all by this union's demand. He gave many examples of how different groups feather their nests by restricting competition. The impulse is widespread and entirely rational. Smith would, however, rebuke any kowtowing to such an anti-competitive request.

Labor unions can perform a useful economic function in providing a counterweight to the disproportionate bargaining power of large employers. In many situations, this can improve economic efficiency. However, federal policies have been particularly hostile to unions since 1981. The proportion of the private-sector labor force that is unionized is a fraction of what it once was. The skilled building trades are a partial exception to that general trend.

But unions also function to restrict competition for their members. Craft unions trace back to medieval guilds. Restricting entry into any craft or profession lay at the core of the whole guild system, and that has carried over to the modern era.
For any given demand for skilled-trade labor, the fewer trained people, the better the wages. If the economy is booming, a limited labor supply fosters power to seek wage increases. If the economy is slow, it minimizes downward pressure on wages and unemployment.

But what is optimal for a union is not necessarily optimal for society. It is good for society that technical colleges be responsive to the changing skills needed in a dynamic economy. It is not good, however, for them to determine exactly where supply and demand should meet and at what wage rate, particularly at the behest of a group with a financial ax to grind.

Moreover, members of white-collar professions are just as avid in restricting competition as any labor union. The American Medical Association and associations of medical specialists have long exerted subtle but very real pressure to limit the number of doctors and specialists turned out in a year. Licensing requirements and codes of ethics for other professions may protect the public from unqualified practitioners, but often limit competition, too.”

Restrictive practices are common and have long been so. The medieval Guilds, craft trades and professional associations run in a long line of continuity in conspiring to restrict inductees into their trades or to allow them to get jobs. This is usually done under some pretext or other, such as to ensure they are properly trained, or to maintain quality and safety standards.

Subjecting potential recruits to long apprenticeships, including for skilled trades that can be taught in months not years, is a hang-over from the medieval past. The first universities were modelled on the medieval apprenticeship system of seven years – a duration that still has remnants in Europe in some countries, where students attended university for seven years, with a variation they could attend more than one university during their course. The four-year undergraduate degree, plus three years for a doctorate is also an echo of that distant past.

What colleges teach, the duration of their courses, their admission procedures and their examination systems should be the business of the colleges and not those of outside interests, especially not unions or employers, who have a real interest in restrictions of the supply of their members’ or in substantial increases in the supply of employees with skills sets that match their needs. Both these centres of influence may hold and express a point of view but that is how it should be treated –as a point of view.

University faculty also have restrictive practice, though it is not often presented as such. It’s called tenure which restricts supply by filling jobs for life and thus keeping out newcomers. It’s what self-interested people do that has malign affects of labour markets – a case against the oft misquoted and misapplied metaphor of ‘an invisible hand’.

Now protectionists and practitioners of restrictive practice to raise the price of their labour and charge more than they may be worth know that their case would be bolstered by claiming that their actions are for the benefit of society and hiding the plain fact that it has malign consequences of others. That’s why they love Adam Smith, Chicago version, not the man from Kirkcaldy. Smith was never fooled by them. Neither should you.


Post a Comment

<< Home