Other cases of public predation are evident in higher education. Public universities can charge much lower tuition than private schools because public schools enjoy more state financing. My alma mater of UCLA, for example, spends almost $40,000 per student but charges only $6,522 tuition for in-state students.43 Students generally pay a much smaller percentage of public university’s costs than students at private universities.44 Below-cost pricing sometimes also extends to the smaller operations run by public universities such as bookstores, food handling, and entertainment. These businesses may receive free building space or special tax privileges that allow them to charge artificially low prices with which private vendors simply can’t compete.45
The comparatively low tuition for public universities undoubtedly has a big impact on a student’s choice of school. Between 1965 and 2005, when average tuition at public universities and colleges fell from 22 to 18 percent of the average private tuition, the percentage of students enrolled in public schools rose from 67 to 79 percent.46 This should come as no surprise—the ability to charge below-cost prices thanks to government subsidies gives public schools an enormous advantage over private universities.
In fact, state universities have acquired many formerly private universities after driving, or threatening to drive, the private schools into bankruptcy—examples include George Mason University School of Law, University of Buffalo, University of Houston, and University of Pittsburgh. In the case of the University of Buffalo, the State University of New York reportedly threatened to open up a public university across the street unless the University of Buffalo joined the state system.47
Private firms can’t take over their rivals so easily due to antitrust regulations. These regulations create a real difficulty for private predation—a big company may drive a competitor out of business, but the latter’s factory and other key assets are often left standing. Some new entrant can easily step in, purchase these assets at greatly discounted prices, and restart the competition. Then, the predator will face a new competitor with lower costs than its former rival had. State-owned firms, in contrast, are exempt from many antitrust rules, and this makes it easier for them to buy up a victim’s assets and forestall the entrance of new competitors.
Post offices worldwide are notorious for adopting predatory tactics against private competitors. Post offices systematically use their profits from operations where they have a government-protected monopoly to subsidize money-losing operations in sectors where they face private competition.48 In 2001, the European Commission found the German post office, Deutsche Post AG, to be illegally cross-subsidizing its parcel business with funds from its first class mail monopoly.49 In 2005, the Danish, Spanish, and French post offices were fined for engaging in similar practices.50
The U.S. Postal Service engages in the same kind of chicanery. When the postal service raised first-class mail to thirty-three cents in January 1999, it simultaneously reduced the price of domestic overnight express mail from $15.00 to $13.70, even though it was already losing money at $15.00. The price, which was lowered in response to increasingly successful competition in overnight delivery from FedEx and UPS Overnight, remained below $15.00 for the next seven years.51 Clearly the postal service was not seeking to drive its competitors out of business with this maneuver. But expanding its market share through below-cost pricing is still predation nonetheless.
There are almost endless examples of predatory practices by state-owned companies and services. One peculiar predator is the U.S. Forest Service, which requires lumber companies to bid on lumber that is profitable to cut as well as lumber that is unprofitable. Making companies bid on lumber that includes unprofitable trees reduces the amount the firms will pay and lowers the forest service’s income. Why would the forest service do that? The key, once again, is that we’re dealing with a state company that does not operate on the profit motive—the forest service’s revenue must be turned over to the Treasury Department. But requiring that unprofitable lumber and profitable lumber be bid on together increases the total amount cut. This, in turn, increases the demand for the forest service to build more roads and provide other services—activities that justify the forest service’s budget.52
Even a venerable government institution such as NASA is not above engaging in predation. For many years, one of the greatest obstacles to the private sector in space was the competition it faced from NASA’s below-cost pricing of space-shuttle flights.53 It may seem strange that NASA would charge private companies so little to launch their satellites into space. After all, a private company that enjoyed a near-monopoly like NASA does would typically charge high, monopoly prices for such a service. But, as a government-owned firm, NASA is not primarily interested in profits. To the contrary, it historically has charged below-cost prices in order to prevent private companies from competing in the market. NASA may not show a lot of concern for profits, but it likes to keep its near-monopoly on American shuttle launches, which sustains the agency’s prestige.
Interestingly, the U.S. government has accused the Chinese government’s space program of engaging in predation and even forced that program to change its pricing policies before it would allow U.S. firms to use Chinese satellite launch services.54 Despite the propensity of U.S. government agencies to engage in predation themselves, these kinds of accusations against foreigners are not rare. In fact, the U.S. government accuses foreign government-run institutions of predatory practices even more frequently than it levels accusations against privately owned firms.
Predation often proves easy for government-owned companies because they benefit directly from the act of predation itself. A private predator suffers badly when it slashes prices below cost, even as sales rise. But this is not the case with a public firm that values sales and employment over profits. In fact, predation is so harmful to private companies that they don’t actually want to do it; they are only really successful if they can scare away potential competitors through the threat of predation. If the threat is credible, then a firm doesn’t actually have to follow through with it. But who is more likely to make a convincing bluff? A private company, which is geared toward maximizing profits and would lose a lot of money during a predation campaign? Or a public firm, which is not so concerned by lost profits, and which would actually benefit from predation by expanding output or market share? The evidence indicates that predation rarely occurs by private companies.55 Government predation, however, is very easy to find.56
The Modern Guild System
State intervention in the economy can take many forms other than direct government spending or the operation of state-owned companies. For example, the government establishes all kinds of regulations that govern private business. These rules are often presented as necessary measures to make the market more “fair.” But a close look at one major type of regulation—state licensing of professionals—reveals how some of these laws not only hinder free competition, but are deliberately designed to do so.
Licensing of professionals is a practice that has existed for a very long time. For instance, Medieval European guilds made young apprentices work for years—sometimes over a decade—at low pay before they were allowed to practice their craft on their own.57 If a skilled worker didn’t go through the official training, he wasn’t allowed to practice the craft. Looking at similar guild practices during his own day, Adam Smith, the father of economics, concluded that guilds existed largely to restrict the number of people entering a profession in order to keep wages high.58
This was already the case during the Middle Ages. Medieval guilds did not exist primarily to guarantee product quality, as guild leaders argued. Such guarantees were only really useful in cases where a product’s quality was difficult to evaluate before purchasing it, such as medicine. But the longest apprenticeships were in professions in which it was easy to immediately judge the quality of the product. For example, in thirteenth-century Paris, apprenticeships lasted ten years for making iron buckles, tables, and button
s, while in Genoa it took eleven years to be certified as a chest maker. Rigidly enforced guild statutes dictated the length of Parisian apprenticeships, their pay (rarely any), and whether meals and lodging were included. These rules were partly designed to keep masters from enticing away each other’s apprentices by offering better conditions—in other words, they aimed to hinder the creation of a free market in labor.59
The same dynamics are perpetuated today in many state-run programs for licensing professionals. To become a licensed professional, states typically require a person to fulfill various education requirements mandated by professional associations. But are these requirements really necessary? Why can’t an aspiring professional get a license simply by passing a rigorous licensing test with practical components? If a student spends years educating himself and then aces his bar exam, is he really less qualified to be a lawyer than someone who studied in law school classes? He may not be, but a self-educated lawyer would be barred from the profession nonetheless—aspiring lawyers are required to spend two-and-a-half years in school. Oftentimes ambitious students are even prohibited from taking a heavier course load and finishing early.
Onerous education requirements exist for many other professions. For example, most states require optometry students to study at an accredited school for at least six terms of eight months each before they can take either the national or state certification exams.60 Likewise, medical students must receive at least three-and-a-half years of schooling. 61 Medical schools, like law schools, lose their accreditation if they grant degrees faster than the rules allow.
Thirty-nine states exclude new barbers from the profession unless they attend a barbering school, usually for at least nine months.62 Becoming a cosmetologist typically takes even longer.63 Similar regulations exist for professions as diverse as addiction counselors, dental hygienists, electrologists, interior designers, morticians, nail technicians, nurses, and polygraph examiners.64 Students who went to class may still be disqualified from practicing their trade if their class attendance was unsatisfactory; twenty-two states require 100 percent class attendance rates just to get a real estate license.65
Contrast these rules with those governing the acquisition of Ph.D.s. Here there are no state-imposed restrictions or minimum time limits for completing the course of study. A few amazing students finish their coursework and dissertations in just a few years, but most need a much longer time. In economics, students take an average of five-and-a-half years to complete a Ph.D., with 1 percent finishing in less than three years. On the other hand, the slowest 10 percent take eight years or longer, with some taking over twenty years.66
Thus, Ph.D. candidates are allowed to prove their energy and competency by completing their degrees quickly. This becomes a strong selling point to potential employers, who look favorably on such highly motivated job applicants. In academia, I frequently heard professors boasting among themselves as to who was able to complete their program fastest. It is a simple and obvious sign that a student is smart and dedicated.
This explains why universities don’t require Ph.D. candidates to take some minimum amount of time to complete their degrees, as is the case with so many licensing professions. Such requirements would make it impossible for some of the best candidates to prove their worth by finishing their classes and dissertations quickly. The smartest students would be discouraged from working fast, while slower students would not be affected.
Let’s take another look at the real estate profession. The real estate agent’s exam centers on relatively straightforward questions involving basic mathematical calculations or real estate law. Many people could pass the test after briefly studying on their own, but this is prohibited by class requirements for aspiring real estate agents. What is the impact of these requirements? Some very smart people are discouraged from joining the profession. They could easily pass the licensing exam, but they won’t do it if they first have to sit through nine months of classes, as required in Pennsylvania.
Here is a personal example. I have taught at major universities such as the University of Chicago Law School, the University of Pennsylvania’s Wharton Business School, and Rice University. I have taught all levels of students from freshmen to Ph.D. candidates. But in my academic career, I discovered that there is one thing I cannot do: I can’t teach public high school students. It’s not that the students are incapable of following the lecture or that I wouldn’t enjoy the work; for the last few years, I have occasionally guest lectured for a statistics class at my sons’ high school. The problem is this: I am banned from getting a full-time job teaching in public high schools because I have not taken the required number of years of “teacher training” courses.
Most states require either an undergraduate degree in education or two to three years of training classes before a person can be certified as a public school teacher. These regulations discourage a lot of capable people from entering the profession. For this reason, some states such as Arkansas now allow public school teachers to work toward their teacher’s certificate on the job. This is especially encouraged among science and math teachers, of whom there are real shortages. Misty Hern, a private school teacher with a degree in biological sciences, shows how the disincentive of class requirements discourages qualified teachers from working at public schools. Ms. Hern told the Arkansas Democrat-Gazette that she’d like to earn the higher salaries paid in public schools, but the class requirements kept her from entering the sector. However, she was willing to consider applying to a public school under Arkansas’ new on-the-job teacher education program. “If I went back to school to get my teaching degree, it would take three years and a lot more money,” she noted.67
I interviewed a group of administrators at professional schools, including law and medicine, as to why their students are required to take a certain amount of time to get through school.68 Most respondents replied either that it is an arbitrary requirement, or that the American Bar Association or the American Medical Association mandates it. A few argued that a time requirement is needed because classes have to be taken in a certain order. One wonders, then, why such a rule is necessary for professionals ranging from lawyers to barbers, but not for Ph.D.-credentialed specialists like economists and scientists. Taking classes out of order may increase the difficulty of the coursework, but if a hardworking student taking extra classes each semester ends his schooling with a B average, shouldn’t we assume he has mastered the material just as well as a student taking fewer classes each semester who earns the same grades?
Some administrators defended class requirements by insisting that certain skills are difficult to test, especially in medicine. Here’s their argument: clinical, surgical, and laboratory skills are difficult to evaluate through written exams. True, practical skills are appraised during the licensing process through a range of tests that cover everything from diagnostic skills to bedside manners.69 Still, these skills are better evaluated by observing the prospective physician over a long period of time in a classroom setting.
This argument, however, does not justify limits on how quickly a student can finish his course load; it only puts forward a plausible case for mandatory classes for aspiring healthcare professionals. But this is an exception that does not apply to most other professions that use time requirements to regulate entry into the field. What, for example, prevents licensing boards from adequately testing would-be barbers’ hair cutting abilities or realtors’ understanding of interest calculations and real estate law? The fact that these restrictions exist for a wide variety of licensed occupations suggests that difficulties in testing skills are not the primary explanation for minimum time requirements in occupational licensing regulations.
So why do professional associations adopt rules that effectively prevent some of the smartest and ablest people from entering a profession and thereby lower the average quality of new entrants? If Adam Smith is right and the point of making those entering a profession take a long time is to reduce their numbers
and thereby maintain higher wages, why not just make the licensing exams more difficult? This course of action would eliminate the weakest qualified candidates, while eradicating the long schooling requirements that discourage bright, hard-working aspirants who can quickly learn professional skills.
The real justification for minimum time limits in school for aspiring professionals is that current professionals don’t want too much new competition. Professionals need to admit enough new entrants to their field in order to secure the profession’s interest. But allowing too many new entrants would create competition that could depress wages. By mandating minimum time limits in school, current professionals allow new entrants in a way that discourages many of the highest quality candidates who would provide the most competition for themselves.70
Unfortunately, state governments perpetuate this state of affairs by adopting licensing and accreditation processes that include mandatory minimum times in school. While these rules help prop up the salaries of current professionals, the professions overall would greatly benefit from a little more free competition.
Smoking Bans—Light ’Em Up
All these contrasting examples of private market creativity and government inefficiency do not imply that government intervention in the economy is always undesirable. There are some areas in which businesses will impose unjust costs on others that can only be controlled by the government. One of the best examples of this is the regulation of pollution.
Environmental problems arise because the costs of polluters’ actions are passed on to other people.71 The classic case is the “common pool” or “overfishing” problem. Fishermen tend to overfish an area until the fishery is depleted. If one fisherman lets a fish go so that it can spawn, there is no guarantee that another fisherman won’t catch that same fish. But this problem is eliminated in privately-owned fisheries like private lakes or fish farms. If a fishery is running low on fish, the owner can leave fish to spawn knowing that no one else will catch them.
Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don't Page 11
