October 13, 2009

The Professions Considered as Pitchers of Icy Refreshing Lemonade

Attention conservation notice: Idle economic musings of a non-economist. Sparked by recent developments, but if you're interested in that you'd be better off elsewhere.

The usual libertarian story about professional licensing requirements — e.g., requiring someone who wants to practice medicine to go to medical school and pass exams, on pain of fines or jail — is that these are simply professionals conspiring in restraint of trade. Licensing simply erects a barrier to entry into the market for medical services, restricting supply and driving up price. Eliminate it, they say, and supply will expand and prices fall.

This presumes, however, that the demand for unlicensed professionals will be equal to the demand for licensed ones. It seems to me very easy to tell a "market for lemons" story here: someone in the market for professional services generally knows very little about how skilled various potential providers actually are. The sellers, however, generally know a lot about their own skill level, or at least more than the potential clients do. (There are no doubt exceptions, such as sincere quacks and the Dunning-Kreuger effect, but I don't think matters for the story.) This is the classic asymmetric information problem from Akerlof, with the usual result: the skilled providers demand more, but the clients have no way of telling them from the unskilled ones, so the only equilibrium is for only unskilled providers to be on the market and for trade to be depressed, or indeed absent. By putting a floor on the incompetence of professionals, licensing requirements stop the unraveling of the market and increase demand. They get us out of the market for lemons.

This occurred to me the other day, but it's obvious enough that I'm sure someone wrote it up long ago; where? (And did I read it and forget about it?)

(After-notes: 1. Of course, having told the story I have no idea if it's true of actual markets for professional services; learning that would require rather delicate empirical investigations. Checking the restraint-of-trade fable from Milton Friedman would, naturally, require those same investigations. 2. This doesn't rationalize why professions should be so largely self-governing, nor does it rule out the idea that some licensing requirements are counter-productive barriers to entry. 3. Replacing professional certification with some sort of market-based entity telling consumers about the quality of professional service-sellers won't work, for all the usual reasons that competitive markets are incapable of adequately providing information — to say nothing of the difficulty of telling whether the raters know what they're talking about. 4. Universities are accredited because students and parents would otherwise be in a market for lemons. Universities themselves, however, can tell how skilled those selling academic services are — or at least they're supposed to have that ability. 5. I should re-read Phil Agre on the professionalization of everything and see if it holds up.)

The Dismal Science

Posted at October 13, 2009 22:26 | permanent link

Three-Toed Sloth