The favor seekers “are acting not out of greed or depravity,” Rauch writes, “but out of the impulse to survive in the world as they find it. Good intentions, or at least honest intentions, breed collective ruin.”33 Responding to complaints from lawmakers that so many businessmen and politicians were lobbying the Federal Communications Commission, the economist Ronald Coase replied, “That this should be happening is hardly surprising.” He added that “when rights, worth millions of dollars, are awarded to one businessman and denied to others, it is no wonder if some applicants become overanxious and attempt to use whatever influence they have (political and otherwise), particularly as they can never be sure what pressure the other applicants may be exerting.”34
One of the most famous examples is the mohair subsidy. Virtually nobody benefits from the mohair subsidy—implemented over sixty years ago—save producers of mohair, and yet it survives. It survives because the mohair lobby cares only about one thing, while the public cares about many, much more important things.
In fairness, the mohair subsidy—like the sugar subsidy and countless others—is primarily an indictment of Congress. But at least Congress is elected. The bureaucracy, which on its own terms is supposed to be walled off from special interests, is even more susceptible to special pleading, precisely because it is shielded from voters. A congressman who relentlessly provides earmarks or other favors for donors can be booted from office. But what of a bureaucrat?
Yes, a government official who takes a bribe can be fired, and it even occasionally happens. But that kind of corruption is trivial. The real corruption, the corruption that more directly stems from human nature, is when the regulator becomes so parasitically connected to that which he regulates that he cannot break the connection. Most public choice economists tend to call this “regulatory capture.” There are many different kinds of regulatory capture, and it goes by many different names in the fields of economics and political science. The late, great political scientist James Q. Wilson, who preferred the term “client politics,” argued in Bureaucracy: What Government Agencies Do and Why They Do It that it “occurs when most or all of the benefits of a program go to some single, reasonably small interest (and industry, profession, or locality) but most or all of the costs will be borne by a large number of people (for example, all taxpayers).”35
I have no objection to the term “regulatory capture,” but I think the term “guild economics” is the most apt to highlight the true nature of what most concerns me. In medieval economies, as we’ve seen, political and economic interests were invested in existing economic arrangements. Innovation was an enemy because it unsettled not just the economic order but the social order as well. The key instrument undergirding guild economics was the granting of special rights or privileges by the crown. Now, as then, these grants often go by the term “license.”
Rulers, in Europe, Asia, and the Middle East, granted licenses to virtually every kind of manufacture, trade, and craft. It was one of the king’s (and queen’s, emperor’s, czar’s, sultan’s…) many prerogative powers. Sometimes these licenses were as much cultural or even theological. “Licensure is a special case of a much more general and exceedingly widespread phenomenon, namely, edicts that individuals may not engage in particular economic activities except under conditions laid down by a constituted authority of the state,” writes Milton Friedman. “Medieval guilds were a particular example of an explicit system for specifying which individuals should be permitted to follow particular pursuits. The Indian caste system is another example. To a considerable extent in the caste system, to a lesser extent in the guilds, the restrictions were enforced by general social customs rather than explicitly by government.”36
In Europe, guilds formed around these rights and privileges, and entrepreneurs could face a wide range of punishments, including death, for violating them. Guilds and the ruling nobility both benefited from this system and worked together for its perpetuation. The growth of “modern” commercial baking and ale brewing in England led to the ale and bread “assizes”: statutes and roving courts assigned with enforcing them. From a progressive perspective, this was the beginning of the noble government tradition of assuring minimal safety and quality standards for food.
But as medieval historian James Davis shows, they were in reality a “de facto licensing system. In effect, the lords or corporations were exacting a percentage of the traders’ profits.” Many saw this as a “customary right,” or what the Mafia would call “a piece of the action.” The thirteenth-century “Seneschaucy”—office of the steward—advised that “without warrant from the lord no baking or brewing ought to take place on any manor,” and in many places, particularly in the thirteenth and fourteenth centuries, lords explicitly gave actual licenses or imposed tolls for brewing.37
“During the fourteenth and fifteenth centuries in Germany even the urban poets of each little town were organized into guilds,” notes Deirdre McCloskey. “Even in Scotland the corporation of Glasgow, to avoid competition, denied a young James Watt license to set up a workshop—he was driven, happily, to apply to the university, and there invented the separate condenser.
“Without permission from the guild you could not innovate in producing cloth and were unlikely to evade the monopoly unless you could set up your factory, as in England, out in the countryside,” she continues. “If you wish nowadays to set up a new pharmacy in Holland you must apply to a town committee—composed of other, local pharmacists. Guess how many pharmacies there are in Holland.”38
This is the purest form of regulatory capture and guild economics: when the members of the industry themselves become the regulator. Such systems are ubiquitous and continuous from at least the thirteenth century straight through to today. The acclaimed legal scholar Walter Gellhorn pioneered the study of occupational licensing in his book Individual Freedom and Governmental Restraints. “Seventy-five per cent of the occupational licensing boards at work in this country today are composed exclusively of licensed practitioners in the respective occupations,” he wrote…in 1956.39
The problem has only gotten worse in recent years. In the 1950s, less than 5 percent of workers were required to obtain official permission from the government, i.e., a license, to work. Today, 29 percent of U.S. workers need a license to earn a paycheck in their desired fields.40 A government study conducted by the Obama administration found that the surge in occupational licensing “has been one of the more important economic trends of the past few decades. Today, one-quarter of U.S. workers must have a State license to do their jobs, a five-fold increase since the 1950s. Including Federal and local licenses, an even higher share of the workforce now has a license.” To the administration’s credit, it concluded that “by making it harder to enter a profession, licensing can reduce employment opportunities, lower wages for excluded workers, and increase costs for consumers.”41
The perniciousness of occupational licensing is most acute in its capacity to keep millions of low-skilled, entry-level, and uneducated workers from entering the workforce. The Institute for Justice has been a heroic champion documenting and fighting this trend. Perhaps the most notorious example it has cast a light on is professional hair braiding for black women. Natural hair braiding requires no special chemicals, no scissors, heat, or any dangerous equipment of any kind. It is a skill that is traditionally passed from mothers to daughters. And yet thirteen states still require a cosmetology license to sell the service. Such a license takes up to 2,100 hours in “coursework” and up to $20,000 dollars in fees. Fourteen other states require a somewhat less onerous license for hair braiding.42
But this is just the tip of the iceberg. The Institute for Justice has a massive database of low-income professions that have set up guild protections barring carpenters, barbers, manicurists, makeup artists, milk samplers, fishers, fire-alarm installers, and many other professions that historically reward a good work ethic and provide a path to a m
iddle-class life for low-income workers.43 One needn’t be a libertarian purist on the subject to nonetheless be outraged by the general trend. Perhaps it is necessary for exterminators to have some state-sanctioned training, but do they really need four years of education (or two years working under another licensee), as required by the state of Tennessee?44
Contrary to the misperceptions of some, most businesses do not see it as in their interest to do bad work. An employer wants skilled employees and in most cases can be trusted to train them as required. Employers understand the importance of word-of-mouth referrals and professional reputation better than most. McDonald’s trains inexperienced workers to handle food for millions of customers. Do we really believe that the safety of Big Macs would be dramatically improved by requiring teenagers to take a state-mandated course? Moreover, thanks to the advent of Internet rating systems—Yelp, Google, etc.—not to mention the ubiquity of informal reviews on social media—Facebook, Twitter, etc.—it is easier than ever for consumers to hold businesses accountable.
An industry that depends on the good graces—i.e., the concentrated benefits—of a regulatory agency will inevitably and unavoidably commit itself to parasitically attaching itself to that agency. The guilds supported the king because the king supported them. It can also work the other way around. “A regulatory apparatus is a parasite that can grow larger than its host industry and become in turn a host itself, with the industry reduced to parasitism, dependent on the subsidies and protections of the very government body that initially sapped its strength,” George Gilder observed.45
Consider the taxi industry. In New York City, the taxicab business was hugely profitable because yellow cabs were granted a monopoly by the government. Yellow cabs even got a very medieval-looking official seal called a medallion. For decades, taxi medallions outperformed the Dow Jones Industrial Average, and even gold.
The reason they were so valuable? The city of New York froze the number of medallions and essentially held it constant as the population of New York—and the number of visiting tourists—exploded. Government-imposed scarcity was an enormous boon to the taxicab guild. In 2013 the total value of taxi medallions and related assets in New York City was $16.6 billion. (In Chicago it was $2.5 billion.)46 Such cartels—basically another word for guilds—maintained their monopolies in city after city. Then something changed—in a word, Uber. The company, along with other ridesharing innovators like Lyft, challenged the guild, for the most part successfully. For the first time in living memory, the price of a taxicab medallion is steadily declining, with little chance of recovering.
The example is worth sharing for three reasons. First, it’s a pristine example of how guild economics is a conspiracy against the public. Second, it’s an important example of how innovation, which can create losers, nonetheless is a net benefit for society—not just passengers, but also the thousands of drivers who were needlessly locked out of a profession for no good reason (back to that in a moment). And last, it demonstrates how quickly a parasitic bureaucracy—in this case the New York City Taxi & Limousine Commission—can become a host to a suddenly parasitic industry. Before the introduction of ridesharing, the commissions fed off the taxi industry. But when their host was threatened, the host became the parasite, running to the commissions to protect it from competition. The taxi industry is a notable example, not because this happened, but because it, for the most part, didn’t succeed.
While that may offer a glimmer of hope about the beneficial changes that come with the creative destruction of the so-called gig economy, that hope fades when one realizes that such examples are few and far between. For every successful “disrupter” that puts a crack in the façade of the regulatory state, allowing us to see what might lie on the other side, there are a dozen examples of how that façade is getting thicker and more impenetrable.
At least in the medieval guilds it was understood that giving an inexperienced worker an apprenticeship—i.e., a shot at learning a trade—was something of great value. The wage, if there even was one, was trivial compared to the opportunity to learn how to be a blacksmith, mason, or tanner. That was the path to prosperity. First jobs, particularly for unskilled non-college-educated young workers, play the same role. If you work hard and learn the business at, say, McDonald’s, you will likely be promoted to assistant manager before the year is out. That is invaluable experience. Raising the minimum wage above what employers can bear or to the level where hiring an iPad makes more sense is immoral, because it is tantamount to taxing entry-level jobs. If there is anything more settled in economics than the proposition that taxing an activity reduces that activity, I don’t know what it is. To say that the minimum wage should be a “living wage” is to tell employers they must pay inexperienced workers above their value, and that is unsustainable.
Today the most powerful constituency lobbying for minimum wage hikes is the most obvious modern incarnation of medieval guilds: labor unions. Some unions favor hikes because they have contracts tied to the minimum wage. If it goes up, so do their far more generous wages. But there are more insidious reasons why unions are pushing the minimum wage. In California, for example, the Service Employees International Union and other unions lobbied for, and got, a “carve out” in the minimum wage law that allows union members to get paid less than the minimum wage. As the Los Angeles Times recounts, “Critics see such provisions as a cynical collusion between politicians and big-city labor interests. By making unions the ‘low-cost option’ for businesses seeking to avoid paying better wages, they assert, the exemptions are designed to drive up union membership—and revenue from dues—at the expense of workers.”47 The critics are right. The goal of labor unions has always been to do what is best for their members. But their first priority must be to have members in the first place.
Again, I think unions play an important and legitimate role in society. But, as with any other institution, their role goes from positive to pernicious once they enlist the state to achieve their ends. When that happens, unions become guilds and, in some extreme cases, indistinguishable from hereditary aristocracies. For instance, throughout much of Mexico, either by law, custom, or both, teachers unions enforce the rule that teaching jobs can be inherited (or sold). In Oaxaca, Dissent magazine reports, “36 percent of teachers have directly inherited their position from a close family member, as have nearly half the teachers who start their careers each year.” This has created a kind of medieval black market where titles can be sold. “The scions of former teachers who do not wish to follow in their parents’ footsteps can sell their places to the highest bidder.”48 When the government has tried to reform the practice, the militant teachers’ guild has gone on strike, sometimes violently. “Throughout history,” one striking teacher told the Houston Chronicle in 2008, “the sons of carpenters have become carpenters. Even politicians’ children become politicians. Why shouldn’t our children have the same right?”49
In this context, “sclerosis” is just another word for corruption, rot, decay, or entropy. In a natural environment, sclerosis (and its attendant symptoms) is one of the more natural ways in which humans and other animals die. I am not fond of metaphors that suggest society is an organism, but in this case it is apt. Guild economics is a sign of entropy and decay for the body politic. Such sclerosis has helped hasten the demise of empires from ancient Rome to the Soviet Union.
And the same force is eating away at much of the European Union and the United States. The World Bank tallies statistics on how long it takes to conduct business in various countries. In 2006, it took an average of 819 days to enforce a contract in Greece. In 2016 that number reached 1,580 days. At the beginning of Barack Obama’s administration in 2009, it took 59 days in the United States to get a construction permit. In 2016, it took 81. Over the same period, the time it took to enforce a contract climbed from 300 days to 420 days. The cost of registering property (as a percentage of property value) has gone up
nearly fivefold, from 0.5 percent to 2.4 percent.50 New business formation—historically the source of most big job gains—has been cratering.51 Regulations of the financial industry have served to protect the biggest banks, while the smaller community banks are being drowned in compliance costs they cannot afford.
There are reams of examples, statistics, and horror stories about what is happening to the national economy as corporatism and guild economics take hold. But there’s a broader and simpler point to be made about what is happening to our society. “Class,” explains Daniel Bell, “in the final sense, denotes not a specific group of persons, but a system that has institutionalized the ground rules for acquiring, holding, and transferring differential power and its attendant privileges.”52 James Burnham, one of the pioneers in the study of the new class, argued that there is a “historical law, with no apparent exceptions so far known, that all social and economic groups of any size strive to improve their relative position with respect to power and privilege in society.”53
Think of the upper middle class and the truly affluent. They have consciously and unconsciously, through both the state and the culture, strived to make society more complex. Charles Murray and Richard J. Herrnstein, in their woefully maligned and misunderstood book The Bell Curve: Intelligence and Class Structure in American Life, argued that the Jeffersonian project of creating a meritocratic society where only native ability, virtue, and perseverance determine success has backfired. A “cognitive elite”—an aristocracy of good test takers—has emerged, and they, like any class, were rewriting the rules of the game for their own benefit.54
Even if you do not subscribe to their larger argument, this key point seems irrefutable. The upper class in this country is making the rules of the game more complex. And the problem with can be simply stated: Complexity is a subsidy. The more complex government makes society, the more it rewards those with the resources to deal with that complexity, and the more it punishes those who do not. Judge Richard Posner made a remarkable confession upon his retirement from the bench. “About six months ago,” Judge Posner told the New York Times in September of 2017, “I awoke from a slumber of 35 years.” He “suddenly realized,” in the words of the Times, “that people without lawyers are mistreated by the legal system.”55 He went on to explain that poor and poorly educated people had real grievances but the legal system had erected a system that was attentive to people with expensive lawyers and treated people with no lawyers at all as “trash.” Posner is a strange creature, but can anyone not see how this insight speaks to far larger social patterns?
Suicide of the West: How the Rebirth of Tribalism, Populism, Nationalism, and Identity Politics Is Destroying American Democracy Page 24