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he showed that the price of dental services and the average incomes of dentists were 12 to 15 per cent higher in
non-reciprocity states.
These higher costs might be acceptable if it could be shown that licensing enhances service quality. Most
of the evidence on this issue, however, suggests that licensing has, at best, a neutral effect on quality and may
even harm consumers. By making entry more costly, licensing increases the price of services rendered in the
occupations and decreases the number of people employed in them. The result is a "Cadillac effect", in which
consumers either purchase the services of high-quality practitioners at a high price or purchase no services at
all. Some consumers, therefore, resort to do-it-yourself methods, which in some occupations have led to lower
overall quality and less safety than if there were no licensing. The incidence of rabies is higher, for example,
where there are strict limits on veterinary practice, and as Sidney Carroll and Robert Gaston documented, rates
of electrocution are higher in states with the most restrictive licensing laws for electricians. Apparently, con-
sumers often do their own electrical work in highly restrictive states rather than pay artificially high rates for
professionals, with predictably tragic results. Carroll and Gaston also found, using data on retail sales of plumb-
ing equipment, that plumbing restrictions increase the extent of do-it-yourself work.
Licensing laws have exerted a negative influence in many professions by inhibiting innovations in practice,
training, education, and organization of services. The most prominent examples in recent years are the efforts of
the organized medical profession to inhibit prepaid health plans and of lawyers to ban low-cost legal clinics.
In many fields advances have resulted from the very "crackpots", "quacks" and "outsiders" who have no
standing in the profession and whom licensing seeks to eliminate. Thomas Edison, who had little formal educa-
tion, could not be a licensed engineer under today's guidelines. Likewise, with the current education require-
ment, Mies van der Rohe and Frank Lloyd Wright would not qualify to sit for the architects' certifying exami-
nation. The leaders in the fight to establish inoculation as a cure for smallpox in colonial America were Cotton
Mather and his fellow clergymen; their leading opponents were doctors. As Dennis S. Lees wrote in “Economic
Consequences of the Professions”: "Had retailing been organized like the professions, supermarkets with lower
costs and prices... could never have emerged. Indeed, had the professions been dominant through manufacture
and trade over the past two centuries, we would never have got to the horse-and-buggy stage, let alone beyond
it".
The news is not all bad, however. The consumer movement of the seventies, along with a growing body of
research that questions the social benefits of occupational regulation, has changed public attitudes about licens-
ing. The result has been a slowdown in the growth of new regulation and, in a few isolated cases, the abolition
of entire licensing boards. Some "sunset laws" have been enacted that require state agencies (including licens-
ing boards) periodically to justify their existence or go out of business. Public representation on licensing
boards has also become a popular way of improving accountability. Still, most professional groups have so far
succeeded in thwarting serious deregulation.
PRIVATIZATION
By Madsen Pirie
Privatization is the process by which the production of goods or services is removed from the government
sector of the economy. This has been done in a variety of ways, ranging from the public sale of shares in a pre-
viously state-owned enterprise to the use of private businesses to perform government work under contract.
The leader in this innovative strategy was the Thatcher government of Great Britain from 1979 to 1990.
Previous governments had tried limited denationalization, which is the restoration of nationalized enterprises to
their previous owners, but with limited success. Privatization involved totally new owners. In some cases the
state enterprises that were "privatized" had never been in the private sector.
Governments all over the world were confronted in the seventies by the problems inherent in state owner-
ship. Because state-owned companies have no profit motive, they lack the incentive that private companies
have to produce goods that consumers want and to do so at low cost. An additional problem is that state com-
panies often supply their products and services without direct charges to consumers. Therefore, even if they
want to satisfy consumer demands, they have no way of knowing what consumers want, because consumers
indicate their preferences most clearly by their purchases.
The result is misallocation of resources. Management tends to respond to political, rather than to commer-
cial, pressures. The capital assets of state businesses are often of poor quality because, it is claimed, it is always
easier for governments to attend to more urgent claims on limited resources than the renewal of capital equip-
ment. In the absence of any effective pressure from consumers whose money is taken in taxation, state indus-
tries tend to be dominated by producer interests.
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