Occupational Licensing and Capitalism Perfected

Once again, Bloodhound has a fantastic post up on a topic that is tangential to much of a theme I’ve been hammering since I started this blog. Greg Swann tells the story of an unfortunate eBay merchant who is being threatened with legal penalties for “auctioneering without a license”. Read the whole thing — it’s worth the time.

Greg’s point is that licensing laws are bad — they don’t protect the consumer, but the licensees:

But there are consumers who need protecting, right? Oh, you bet:

D&J Virtual Consignment had 11,000 feedback comments on eBay and 14 were negative, Pletz said, giving her a 99.9 percent satisfaction rating.

Ebay is not just perfect Capitalism, it is Capitalism Perfected — everything that has always been implicit in free-market commercial transactions made utterly transparent by means of database management. If you are looking for the complete and irrefutable refutation of Das Kapital, you’ll find it not on but in the form of Ebay.com.

So where’s the beef?

Amoros, the state spokeswoman, said investigations were a “complaint-driven” process but those complaints are confidential.

Uh huh.

It is only possible to for you to defend occupational licensing laws by ignoring the palpable harm they do to actual consumers — higher prices for lower quality goods and services. But even then, don’t get downwind of yourself. This stuff stinks.

As a non-practicing attorney, I know what Greg speaks of firsthand. The work of a first year attorney is something that most chimpanzees that are not brain-dead can do. We’re talking about stuff like deciding where a comma should or shouldn’t go and making photocopies. In most firms, the senior paralegal has forgotten more about the law than the new lawyer has ever known.

Yet, that snot-nosed lawyer commands $175K a year (in NYC) while the paralegal gets by on $50K because the former has that shiny thing the paralegal doesn’t: the license to practice law.

So I agree with Greg overall. However, and c’mon you knew there was a ‘BUT!’ in here somewhere, there is something he’s not taking seriously enough.

Greg is mostly correct (I think) in describing eBay as “Capitalism Perfected”, but he glosses over what makes that really possible: utter transparency made possible by means of database management.

I’m as big a fan of the free market as just about anyone, but even I think there is a role for government in the market. Its critical role is to cover the one enormous weakness of capitalism: access to information.

People (and companies) rarely have the incentive to provide complete and full transparency. I haven’t yet seen a case where complete transparency has redounded to the benefit of the person or company being transparent. Even between husbands and wives, complete transparency might not really be the best policy. I mean, do you really want your wife to know your actual, true, transparent opinion on whether those pants make her look fat?At the same time, for a free market to function, there has to be enough information available for buyers and sellers to make a rational choice. This is not the same thing as saying that buyers and sellers have to be actually informed — merely that the information must be reasonably available. Otherwise, the notion of caveat emptor just doesn’t apply.

If you’re looking for a heart surgeon, wouldn’t the information that Dr. Smith has had 3 of 3,000 patients sue him for malpractice while Dr. Jones has had 400 of 3,000 patients sue him be a relevant piece of data in helping you make your choice? Of course it is. If you had that information, learned it, you can still choose to go with Dr. Jones — but you’re probably going to bargain the price of services down, or negotiate for insurance arrangements, or do something where you benefit as the consumer.

eBay is Capitalism Perfected in a sense because of its reputation management system. While it can be gamed a bit, it’s very, very, very difficult to game it consistently over time with thousands and tens of thousands of interactions. So someone who has a 99.9% satisfaction rating with 11,000 feedback is plainly trustworthy. Applying licensing laws to someone like that does indeed stink, as Greg puts it.

But in the real world, we don’t have the benevolent eBay dictatorship able to track all of the transactions and gather feedback on a person-by-person basis, then presents all of that information in a single, easy-to-use place for the consumer. Trying to get the equivalent of a eBay rating in the real world would take weeks and months of painstaking research — even if the information were actually out there somewhere.
Furthermore, eBay’s transaction regime is pretty one-dimensional: did the seller deliver the item to the winner in a satisfactory way? How do you evaluate the performance of professional services? Is someone a good lawyer because he’s prompt with his responses, considerate of your needs, and a good father, even if he loses every case for you? Is the opposite a good lawyer — he wins every case, but treats you like a piece of crap?

In the real world, I do think there is some justification for a licensing scheme for some professions. Not a lot, but some — and certainly the schemes we have need some real improvement.

In a way, licensing is merely branding with teeth. The purpose of a brand is to engender trust in the consumer by having lived up to the promise of the brand time and again. Licensing extends that concept and gives it some teeth.

If I’m looking for a lawyer, I might not have the time to do what I really should do: sit down with the man, and quiz him on torts, contracts, constitutional law, corporations law, income tax, property tax, federal courts, and the numerous other fields of law to make sure he knows what he’s doing. I should look up all of his past cases to make sure that he hasn’t absconded with client funds, or defrauded clients, or done any one of the really horrid things a lawyer could do. But I just don’t have that kind of time.

So I rely a great deal on his license. If he had absconded with client funds, he would have been disbarred. If he didn’t know a thing about basic black-letter law, he wouldn’t have passed the Bar exam. His license to practice law is a brand that proclaims, “this man knows enough and is ethical enough for you to trust him with your life savings”. Or in some cases, your life itself.

If the licensing scheme is coherent, rational, and rigorous, and it is designed to further consumer benefit, it can be a very important stand-in for the eBay User Reputation system. A great example is the designation of Master Sommelier. Try getting one of those — there are only 1

Now, just because I can defend these licensing schemes does not mean that I can defend all licensing schemes, or for that matter, that I want to defend licensing laws. I could see some jobs where the possibility of harm is so great to the consumer or to society that we need the power of government to prevent anyone who does not have the proper training and ethics from working those jobs without a license. Commercial aircraft pilots come to mind. Even if licensing laws in that case result in protecting the licensee’s turf, the downside of not making sure that someone flying a 747 is properly trained is way, way too big.

For most professional services, however, the licensing laws are a big problem.  There is no coherent benefit to the consumer, and the license itself no longer carries the ‘brand’ that it used to.  In those cases, I think a professional registration program — with much higher, more stringent standards — is far superior.  Rather than prohibiting people from practicing law without a license, why not simply have those who have passed the Bar register with the State Bar Association, and make that data public.

The application to our real estate industry is, I trust, obvious.


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Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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