Healing Our World:
The Other Piece of the Puzzle
Healing Our World:The Other Piece of the Puzzle
The Other Piece of the Puzzle
The previous chapter explained how wealth is created by
individuals acting alone or in concert while working at an occupation or
job. Wealth is virtually infinite, yet we commonly hear that the means to
that end- jobs- are limited. Let's examine how this seeming contradiction
has been created by aggression -through-government. The immigrants created a niche for themselves in the marketplace
ecosystem by offering employers who would take a chance on them a greater-than-usual
share of the jointly created wealth. By helping their employer, they also
helped themselves. Instead of paying for expensive schooling to learn new
skills, they got on-the-job training by accepting, for a time, lower wages
than the experienced, American-born workers. Once they learned the language,
trade, and customs, they could create much more wealth than before. The
immigrants were either given a greater share of the jointly created wealth
by their employers, or they took their experience and moved on. Sometimes
they opened their own shop, sometimes they went to an employer with greater
appreciation for their newfound expertise. Some eventually became quite
wealthy. In offering to serve their first employers well, they ultimately
served themselves. My peers thought I was crazy working for "slave wages." A few years later, they changed their minds. The experience I gained, plus the recommendations of my mentors, turned out to be quite valuable. These intangibles gave me an edge over those with comparable formal education when I applied for more advanced positions. Offering my first employers a good deal resulted in later employers offering me a good deal. Letting myself be "exploited" was one of the smartest career moves I ever made. The balance of the marketplace ecosystem evolves naturally. Workers without experience who are willing to create a low-wage job can gain the necessary experience and skills to create more wealth. Almost everyone is able to create some wealth, so everyone can find a starting niche. As expertise evolves, so does the niche- one way or the other. In serving their first employer well, unskilled workers serve themselves. Usually, an employer will reward workers as their capacity to create more wealth increases. By providing an improved work space, more benefits, and/or increased wages, employers provide positive feedback, appealing to the employees' own self-interest to create even greater wealth. More wealth creation means more profit for the employer and the employee to split. By helping each other, they help themselves. Both serve their own interest best by making sure that their partner in creating wealth is taken care of. Unenlightened employers who don't reward their workers for increased productivity lose them to employers who do. Employers who choose employees on the basis of color or sex or anything other than ability to create wealth find that their shop creates less wealth than it could. Less wealth means less profit for the employer and employee to share. Lower profits provide the employers with negative feedback. Discrimination on any basis other than productivity is costly. Employers reap as they sow. We can observe this "yin-yang," or balance, of the ecosystem within the marketplace right in our own community. Our fictitious neighbor George decides to hire a neighborhood youth, Elaine, to paint his house because of her willingness to work for a very nominal sum. Elaine created a job by giving her employer a better deal than the other teens in the neighborhood. Had Elaine not made such an offer, George would have let the house go unpainted for another few years. The creation of wealth in the form of a well-kept house would have been delayed. By offering to serve George well, Elaine also helped beautify her neighborhood. In the process, Elaine helped herself as well. In the fall, Elaine asked George to put in a good word
for her with the corner grocer. As a result of George's glowing recommendation,
Elaine was hired instead of other youths with no one to vouch for them.
The following summer, Elaine's references from the grocer helped her get
a temporary job with a nearby factory. When Elaine graduated from high school,
she was offered a well-paying job by a local banker. Elaine was chosen because
her former employers could vouch for her conscientious performance. Her
friends, who had mocked her as she worked for a "pittance," were
rejected because they had no experience. By serving her employers well,
Elaine also served herself. Even if we successfully intimidated George, he might decide not to hire Elaine, rather than pay her more than he wished to. Without George's recommendation, Elaine might never get the grocery job. Without experience at the grocer's, Elaine might not be picked to work at the factory. Without these part-time jobs, Elaine would not have the experience so valued by the bank. Our attempt to protect Elaine from George's exploitation by using aggression would probably backfire and hurt the person we most wish to help. The marketplace ecosystem operates in our neighborhood if we let it work its magic. We wisely refrain from threatening our neighbors when they are interacting and contracting with each other without using force or fraud. The individuals, after all, know their situation better than we do. Exactly the same principles apply in the national work force, but somehow we see it differently. We view low wages as evidence of employer "stinginess" instead of schooling with pay for the unskilled. We try to correct the behavior of these selfish others by voting to force employers to pay a minimum wage- at gunpoint, if necessary. Through our government, we become aggressors, the first party to threaten violence. Our aggression yields the same results on a national scale as it does in our neighborhood. For example, in the chair factory where George works, employees are paid at different levels ($4 or $5 per hour) depending on their experience. If the minimum wage is raised to $5 per hour, several things could happen. If the employer pays the least experienced people $5 per hour, he will have to raise the price of the chairs. The people who were earning $5 will probably complain because they are being paid the same wage as the novices. The employer will have to give them a raise too. The price of the chairs goes even higher. Fewer people can now afford to buy the chairs, so the factory will cut back production. Workers will be laid off; the least experienced will be the first to go. Instead of earning $4 per hour, some of the inexperienced workers will be unemployed, while others will be making $5 per hour. Some employers will be able to replace the unskilled workers with machines that cost $4.50 per hour instead of the $5 now mandated by law. The workers from the factory that makes the new machines are very skilled and already make well above the minimum wage. They now have extra orders for machines, so their factory must hire more skilled labor. At the chair factory, some of the more experienced workers make $5 per hour, while some of the unskilled workers are unemployed and make nothing. The machine factory hires more skilled labor. Other employers might simply eliminate part or all of the job that the people earning $4 per hour once did. Maybe their job was to paint the chairs; now finishing is left to the buyer. More unskilled employees are laid off. Some employers will not be able to use any of these options. There may be no substitute for the unskilled labor and no way to raise prices without losing too many customers. To comply with the law, these employers may cut back on other employee benefits, such as health insurance, vacation time, etc. The unskilled workers make $5 per hour, but lose some benefits that may have been worth more to them than the wage increase. If none of these options are available, employers may have to forgo some of their profits. To avoid cutting their profits, these employers may close their factories and either retire or switch to a business that needs only skilled workers. In either case, the employees will be laid off. The skilled workers will have an easier time becoming employed again, because they are needed in places such as the machine factory that is expanding because of the demand for labor-saving devices. The unskilled workers will find themselves in less demand and will have more difficulty. Each employer will react differently to the minimum wage increase, but the result is always the same. Fewer inexperienced employees will have a job. Instead of making $4 per hour, some will make $5 per hour, and others will make nothing. The best of the low-paid workers get a raise, but the most disadvantaged are forbidden to create what wealth they can. If we support minimum wage laws, we destroy jobs, especially those that would have gone to the unskilled or disadvantaged. By using aggression, we limit wealth by destroying the jobs that create it. No wonder welfare to the newly unemployed increases when the mandated minimum wage goes up! (1) The Poor Get Poorer: Discrimination Against the Disadvantaged The same thing happens in the United States. Minimum wage laws hurt the very people they are supposed to help. Many disadvantaged workers are black; the most unskilled blacks are, of course, the young. As the percentage of jobs covered by minimum wage laws has increased (Figure 3.1A), black teenage unemployment has increased much more than white unemployment (Figure 3.1B). What is particularly distressing is that black teenage unemployment was almost identical to white unemployment before the 1950s! By trying to help the disadvantaged with aggression, we've hurt them more than the selfish employers ever did! The inexperienced are not the only victims. The elderly and handicapped are adversely affected as well. This was vividly brought home to me in the mid-1980s while renovating low-income housing in the city of Kalamazoo. A young, unskilled man, who was partially disabled, had been watching our progress and asked if he could do some cleaning and yard work for $2 per hour. He was willing to accept such low wages because he could walk to the work site. He also hoped I might be able to give him a recommendation so others would "give him a chance." I explained to him that minimum wage laws prevented me from hiring him for anything less than $3.35. We both knew that I could hire an able-bodied person at that rate who would do more work per hour. We both would have been satisfied to settle on $2 per hour, but we were forbidden by law from doing so. Had we gone ahead, government enforcement agents could have "fined" me (i.e., taken my created wealth) at gunpoint, if necessary. Figure 3.1 Temporal Relationship Between Increases in Maximum Wage and Decreases in Black Youth Unemployment 
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Every 10% increase in minimum wage makes the worker 2% worse off because companies must offset increased cost with reductions in other parts of the "payment bundle" such as hours, bonuses, etc. - Albert Wessels, MINIMUM WAGES: ARE WORKERS REALLY BETTER OFF?
...a 20 percent increase [in minimum wage] makes approximately 81 percent of South Carolina workers worse off than before the change. - James Heckman and Guilherme Sedlacek, REPORT OF THE MINIMUM WAGE STUDY COMMISSION
The minimum wage law is one of the major causes of spiraling unemployment among young blacks. - Walter Williams, THE STATE AGAINST BLACKS
A rising minimum wage broadens the income gap between blacks and whites, leaving black families proportionately further behind than ever. - Robert Meyer and David Wise, REPORT OF THE MINIMUM WAGE STUDY COMMISSION
Past studies by and large confirm the prediction that higher minimum wages reduce employment opportunities and raise unemployment, particularly for teenagers, minorities, and other low-skilled workers. - Masanori Hashimoto, MINIMUM WAGES AND ON-THE-JOB TRAINING
...low income workers as a group are the major victims of minimum wage legislation. - Keith B. Leffler, ECONOMICS OF LEGAL MINIMUM WAGES
...the responsiveness of labor supply to wage changes seems to be greater among the disabled than among the nondisabled... - Andrew Kohen, REPORT OF THE MINIMUM WAGE STUDY COMMISSION
One of the most serious effects of minimum-wage legislation is the impairment of on-the-job-training for young workers. - Masanori Hashimoto, MINIMUM WAGES AND ON-THE-JOB TRAINING
...the minimum wage must reduce total income available to all members of society taken as a whole. - Sherwin Rosen, REPORT OF THE MINIMUM WAGE STUDY COMMISSION
One of the most significant things that I saw in the South-and I saw it everywhere-was the way in which white people were torn between their feelings of race prejudice and their downright economic needs. - Ray Stannard Baker, Pulitzer Prize journalist and author.
The effectiveness of a competitive market is in no way dependent upon the goodwill or honesty of its transactors. - Thomas Sowell, THE ECONOMICS OF POLITICS AND RACE: AN INTERNAL PERSPECTIVE |
The Marketplace Ecosystem: Honoring Our Neighbor's Choice The natural balance of the marketplace ecosystem also determined whether or not new ventures would stay in business. Business people who pleased their customers with better service and/or low prices got referrals and repeat business. Profit was a direct reflection of how well they served their neighbors. If they charged their customers excessively, other entrepreneurs began providing the product for a lower price, voluntarily accepting less profit to attract more customers, and ultimately more profit. Greedy competitors lost consumers. Profit and loss gave the tradespeople feedback that told them when they were- and were not- serving others adequately. Service providers reaped as they sowed. The customers voted daily with their purchasing dollars to supply this feedback. They directly regulated the marketplace ecosystem, keeping it in balance without aggression. The customer was the final authority. The customer was king. If our fictitious neighbor George thought his employer was exploiting him, George might decide to create wealth by going into business for himself. We'd never dream of stopping George at gunpoint from providing service to willing customers because he hadn't gotten our permission to do so. The business that George and his customers voluntarily agree to transact is up to them. We simply honor our neighbor's choice. We know that trying to tell George- at gunpoint- what he can and cannot do is likely to destroy any feelings of concern and trust that George may have for us. Brotherly love seems to dissolve when looking down a gun barrel. Of course, if we "start it," George will probably fight back. Perhaps he'll call the local sheriff and have us arrested. Perhaps he'll retaliate with sufficient force to make us unlikely (or unable) to threaten him again. "Starting it" is a prescription for warfare, whether we're adults or children. If we prevent George from creating wealth for himself,
how would he survive? Chances are that he would feel justified in stealing
the wealth we create, perpetuating the conflict between us. Just as our
interference with George and his willing customers would wreak havoc with
our neighborhood, so would the same actions create animosity and beget poverty
in our city, state, and nation. Licensing laws instructed the government enforcement agents to stop, at gunpoint, if necessary, individuals from providing a service to a willing customer unless they have permission from a licensing board. By requiring high licensing fees, written examinations for manual occupations, and excessive schooling or apprenticeships, licensing boards were able to exclude blacks and other disadvantaged minorities. Blacks were almost entirely forced from the trades, even the specialties in which they had been well represented. U.S. citizenship was frequently required to exclude new immigrants as well. (2) While minimum wage laws prevented the disadvantaged from getting that first job, licensing laws prevented them from starting their own businesses. Prevented from being an employer or an employee, disadvantaged individuals frequently found themselves unable to legally create wealth for themselves and their loved ones. In New York City, for example, would-be taxi drivers must
purchase a "medallion," or license, before they can legally carry
customers. The number of medallions is limited and has not been increased
since 1937. A new driver must purchase a medallion from someone who is retiring.
In 1986, these medallions were selling for more than $100,000.3 Many people
who have a car and would be capable of creating wealth for themselves and
their loved ones are forbidden, by law, to do so, because they can't afford
the medallion. Those who are prosperous enough to purchase one must charge
their customers more to make up for the extra expense. Thus, the first requirement
for a successful cab driver in New York City is not pleasing the customer.
Having money or the ability to borrow it is more important. Customers are
no longer king. By 1979, these "gypsy" operatives were believed to be more numerous than the number of medallion holders.4 As long as they stayed in the ghetto areas, the government enforcement agents looked the other way. When the gypsy cabs came into the better areas, however, medallion holders insisted that the government enforcement agents prevent the gypsy drivers from servicing customers- at gunpoint, if necessary. (5) We can learn several important lessons from the New York experience. First, the gypsy drivers were almost exclusively minorities, mostly black and Puerto Rican, (6) yet they were able to create a substantial amount of wealth, even in their impoverished areas, by providing a desperately needed service. When we don't interfere with the marketplace ecosystem, even the ghetto residents are able to create a significant amount of wealth. Second, the licensing requirements excluded the disadvantaged from creating wealth in the better areas of town where more profit was possible. The aggression of licensing laws simply made the rich richer
and the poor poorer. Because many of the poor were minorities, these licensing
laws were, in fact, discriminatory. Finally, the customers suffered as well.
In the better areas of the city, they paid more for taxi service, because
the licensing laws increased the cost of doing business and limited the
number of drivers to select from. The would-be customers in the ghetto frequently
had no service at all! Other Examples Licensing laws dealing with day care have severely impaired the ability of women with young families to create wealth. As mothers enter the work force, they select a child-care provider that best suits their standards and their pocketbook. Mothers who have no other marketable skills can create wealth by caring for the children of working mothers. Unfortunately for everyone, these natural child-care providers are often forbidden by law from providing this service, because they cannot afford to remodel their homes to meet licensing restrictions, pay for licensing fees, or deal effectively with the red tape required to get government permission to provide day care. (8) We've supported this aggression to protect young children from unsafe and unscrupulous day-care providers. Obviously, most parents are better equipped than anyone else to evaluate the quality of care their child receives. Parents who are not competent or interested enough in their child's care to do so usually pose a much greater threat to their children than a sloppy day-care operator could! Our efforts are redundant at best. At worst, licensing laws harm the very people they are meant to help. Licenses to operate day-care centers are not always easy to get. Some have been denied because the yard was deemed to be several feet too short! One center had to replace its four smoke detectors with a five-detector interconnecting system, at a cost of $2,000. A prospective day-care operator had to remove a wall because the door was 36 inches wide instead of 38! (9) The women who succeed in upgrading their homes and working their way through the red tape (57 forms in Washington, D.C.) (10) must charge more for their services to make a profit. In North Carolina, 25% of the cost of day care is due to licensing-by-aggression. (11) Some women, faced with these increased costs, can no longer afford to work outside the home. When they try to create wealth with a home business, licensing laws again hamper them. If they attempt to cut or even braid the hair of willing clients without getting several years of training to obtain a license, law enforcement agents will stop them, at gunpoint, if necessary. (12) In Chicago, hooking up a home computer to one owned by a business is illegal. (13) In Massachusetts, no goods and services can be produced in the home for a business located elsewhere. (14) Even in areas where home businesses are permitted, no employees may be allowed. (15) Through my years as a landlady, I've watched my low-income
tenants struggle with the aggression of licensing laws. Those who take in
sewing or operate day care in their apartments live in fear that one day
the government will stop them from creating wealth without a license. What
callousness to demand that others get our permission before being allowed
to put food in their children's mouths and a roof over their heads! Home businesses have low overhead and so provide another avenue for the disadvantaged or part-time worker to create wealth. Because the overhead is low, products are frequently priced lower than similar items manufactured by skilled factory labor, giving consumers an option they wouldn't otherwise have. Although customers are pleased, factory workers are not. Many licensing laws are supported by skilled workers who want to keep the disadvantaged from offering to serve the customer better than they are willing to.(16) Does this mean that skilled workers or union members are selfish others who deserve our wrath? Not at all! Those who propose licensing laws have seen our willingness to sanction aggression-through-government for "a good cause." Perhaps the last time we used aggression, skilled workers were its victims. In a system of aggression, we simply take turns being winners or losers. Instead of cooperative win-win scenarios, we perpetrate a win-lose game in which we are constantly at each others' throats. The skilled workers do not use aggression themselves. Like
the proverbial serpent in the Garden of Eden, they tempt us to practice
aggression against our neighbors for their benefit. They only kindle the
flames of poverty and strife. We choose to smother the flame by refusing
to direct our government enforcement agents to do their bidding or we fan
it with our acquiescence. Without our consent, the skilled workers (and
the serpent) are powerless. The choice- and the responsibility- belongs
to us. The Ladder of Affluence (Figure 4.1) illustrates this process. If our parents are on the upper rungs of the Ladder of Affluence, they probably have enough wealth to put us through college or professional training so that our first job is several rungs up on the Ladder. Disadvantaged individuals, however, have to start at the bottom and work their way up. Training jobs at low pay and home businesses are the first rungs of the Ladder. Minimum wage and licensing laws destroy the lower rungs, giving the disadvantaged less opportunity than ever. Instead of being paid a low wage while getting training and experience, the disadvantaged must pay for training or an expensive license. Instead of having the opportunity to work their way up the Ladder of Affluence, they cannot get started. They are excluded from climbing the Ladder at all! If they wish to survive, they must rely on the charity of others or use aggression to wrest wealth from those legally permitted to create it. How can we claim to care for the disadvantaged if we are willing to put them in this position? Those who manage to get that first job in spite of these handicaps find that the marketplace ecosystem cannot effectively protect them from exploitation. For example, when licensing laws excluded blacks from the trades, these would-be entrepreneurs swelled the ranks of those seeking employment. Employers had the upper hand when the former slaves were no longer permitted to start their own businesses. By supporting aggression, we put blacks and other disadvantaged groups at the mercy of prejudiced employers. The disadvantaged workers were sacrificed for the benefit of consumers who received no net benefit at all! |
Take care of your customers and take care of your people and the market will take care of you. - Tom Peters and Nancy Austin, A PASSION FOR EXCELLENCE
Wealth comes from successful individual efforts to please one's fellow man... that's what competition is all about: "outpleasing" your competitors to win over the consumers. - Walter Williams, ALL IT TAKES IS GUTS
DAY CARE LAWS LIMIT PRIVATE-HOME CENTERS THAT PARENTS LIKE BEST. For about 17 years, Susan Suddath kept other parents' children in her home... The state of Maryland... told her she would have to reduce the number of children, or close down... her basement was too low in one place. Almost 6 feet tall herself, Mrs. Suddath assured the inspector she would be the tallest person in the room. But he couldn't bend the law. - The Wall Street Journal, October 26, 1982
...Northrup cited an Eagle Comptronics Company incident where a group of women, who also were single parents, contracted to assemble electronic components in their homes. The State Labor Department, he said, closed them down under the anti-labor law, so the work is now contracted out of the country and the women, who were supporting themselves and their families, now are on welfare. - Ithaca Journal, September 11, 1982
The more laws and restrictions there are, the poorer people become. - Lao-tsu, TAO TE CHING |
As aggression is used to limit the creation of wealth by the disadvantaged and to augment the income of the advantaged, the gap between rich and poor widens. Since the disadvantaged create less wealth than they otherwise would, the society as a whole is poorer. Now we can begin to understand why the distribution of wealth is most even in countries with the highest GNP per capita (e.g., Switzerland and the United States). (17) Countries can decrease poverty and uneven wealth distribution by abandoning the aggression that restricts the creation of wealth by the disadvantaged. Many disadvantaged Europeans immigrated to the United States because aggression-through-government in their homeland forbade them to create wealth for themselves and their loved ones. They wished to go where their children would not have to beg for permission to create wealth. Today, their descendants find themselves in the same trap, which they have helped to create by refusing to honor their neighbor's choice. This situation is tolerated, even encouraged, by the well-to-do in the belief that widening the gap between themselves and the disadvantaged makes them winners. People in the trades saw their incomes rise as their licensing laws forced blacks out of business after the Civil War. Licensing laws prevent ambitious, unskilled workers from offering customers a better deal than highly paid union members could. Aggression appears to serve these special interest groups well. However, this gain is largely an illusion as Figure 4.2 shows. When we look closely, we see that aggression is a lose-lose proposition for everyone!
As licensing laws and minimum wage laws forbid the disadvantaged from creating wealth, the Pie shrinks accordingly. Our Piece (the goods and services our money can buy) is proportionately diminished. Because those who lobby for and enforce these laws create no new wealth themselves, the Pie shrinks once again, making our Piece smaller as well. As skilled workers, we may see our Piece of the Pie increase relative to everyone else's with these changes, but the absolute size of our Piece is smaller than it otherwise would have been. We cannot buy wealth that does not exist, no matter how much money we have relative to everyone else. Even with the extra dollars, we have much less purchasing power than we would have had in the absence of aggression. The enforcement agents who keep the disadvantaged from producing wealth produce none of their own. Consequently, they must take some of ours in the form of taxes. Our diminished Piece shrinks further. To survive, those who are not legally permitted to create wealth demand that the law enforcement agents take some of ours- at gunpoint, if necessary- as taxes to provide welfare. Our Piece of the Pie shrinks accordingly. Both the employed and the unemployed battle to control the force of law to gain an advantage. Each group attempts to have the guns of the law enforcement agents pointed at the other, taking turns being victims and aggressors. This is not brotherly love; this is war! The only difference between this war and conventional ones is that both sides take turns "capturing" the only weapon - the government. Because each side occasionally "wins," both have the illusion of gain. The cost of the weaponry of aggression (lobbying, limiting the creation of wealth, supporting those who create no wealth) is so high that both sides lose in the long run. Hostility is created and wealth is not; other fallout occurs
as well. Against the background of chronic unemployment, a belief emerges
among the advantaged that some people are simply not competent enough to
ensure their own survival. The disadvantaged, trapped by aggression and
told that only more aggression-through-government can save them, begin to
believe in their own impotence. While one segment of society justifies its
aggressive actions on the basis of its own alleged superiority, another
segment cringes with loss of self-esteem. Approximately 80% of all new jobs are created by small businesses. (18) Destroying small businesses through the aggression of licensing laws is the fastest way to destroy jobs. As small businesses are thwarted, large companies dominate. As jobs are destroyed, employers get the upper hand. As people become even poorer, dependence replaces self-sufficiency. If small businesses were not stopped at gunpoint from creating goods and services, consumers would have more options and lower prices. No one would need to support enforcement agents, lobbyists, or the unemployed. Available wealth would be increased greatly and everyone's piece of the pie would be correspondingly larger. If we truly wish to narrow the gap between rich and poor, while increasing the wealth of all, the most effective thing we can do is to say "No!" to the aggression of minimum wage and licensing laws. Instead of interfering in the voluntary transactions of others, we simply honor our neighbor's choice! It's that simple! What do we do about those who would exploit or discriminate against the disadvantaged? When no physical force, fraud, or theft is involved, we simply let them reap as they sow. Employers who treat their employees poorly will lose them to the many other opportunities available when the marketplace ecosystem is free from the aggression of minimum wage and licensing laws. Employees who stay with an unenlightened employer are either happy where they are or they aren't sure how to make a move. If we want to help them, we can encourage them to apply elsewhere, show them how to improve their skills, or hire them ourselves. Such actions require us to get personally involved with the disadvantaged and to truly show our concern and care. Surely, action of this type bespeaks brotherly love more than pointing guns at selfish employers! In working with the disadvantaged in this way, I have discovered that they frequently prefer a steady, safe job with low pay to the rigors of job hunting, interviewing, and the uncertainties that come with a new position.Some choose to accept low pay for jobs they are overqualified for in return for a low-stress, supportive environment. Those who really want to get ahead usually know what they need to do. A common belief in our society is that aggression can be used to rectify destructive social attitudes, such as prejudice and discrimination. Many people supported minimum wage laws because they were supposed to help, rather than hurt, the disadvantaged. As we've seen, such aggression hurts those it was intended to help. Some licensing laws were supposed to protect the consumer rather than the worker in areas where a mistake can be life-threatening, such as electrical or medical work. In the next chapter, we'll see again that aggression, as usual, harms the very people it is supposed to help. |
We've tolerated, even encouraged, the aggression of some licensing laws. We believe that they protect us from selfish others who would otherwise give us low-quality service, especially when a mistake can be deadly. The available evidence, however, suggests that our aggression in the form of licensing laws hurts us, rather than helps. Quality is most often compromised, not improved, by licensing laws. To understand how this happens, let's review what we know about the impact of licensing laws. Licensing always lowers the number of service providers by imposing extra requirements, such as citizenship, schooling, monetary payments, or apprenticeship for those wishing to create wealth. In the previous chapter, we saw how licensing limited the number of taxi drivers and home child-care providers while increasing the prices charged by those still legally permitted to create wealth in those professions. Studies show that whenever the number of service providers goes down, more people, especially the disadvantaged, either do without the service or do it themselves. For example, when the number of plumbers decreases because of licensing laws, retail sales of plumbing parts go up as people attempt to make their own repairs. Dental hygiene is poorer in states with the most restrictive licensing requirements for dentists, because fewer people can afford regular checkups. For the same reason, the incidence of blindness increases in areas with the most stringent licensing for optometrists. Accidental electrocutions go up when licensing requirements for electricians increase. (1) Licensing laws intended to protect us can- and do- kill. By limiting availability, licensing laws lower the overall amount of quality service delivered. The negative impact of decreasing availability far outweighs any increase in quality that may occur, as the above studies indicate. Evidently, few people attempt to do work for which they are totally unqualified. Licensing laws prevent many more people who have some qualifications from performing simple services at affordable prices. The observation that licensing laws lower the overall quality of services delivered takes on a very personal meaning when we realize that one of the most highly regulated (licensed) sectors of our economy is the health care network. For most of us, state-of-the-art knowledge of how to stay
well and get well will be the primary factor in determining how long and
how well we live. Licensing limits the availability of a service, thereby
lowering the overall quality delivered. Thus, we would expect our health
care to be of substantially lower quality than it could be in the marketplace
ecosystem undisturbed by our aggression. Let's examine two major aspects
of health care regulation- licensing of physicians and pharmaceuticals -
to see if we have chosen a cure that is worse than the disease. Americans were in a quandary. They wished to continue to honor their neighbor's choice but didn't know how to deter aggressors. Had they understood the other piece of the puzzle- the power of having aggressors compensate their victims- as described in Chapter 13 (The Other Piece of the Puzzle), the balance of the marketplace ecosystem would have been rapidly restored. Unfortunately, even today the powerful impact of this second principle of non-aggression is not recognized or understood. In Part III (As We Forgive Those Who Trespass Against Us: How We Create Strife in a World of Harmony), we'll learn more about this principle and how its application would have defused the practice of medical fraud. For now, however, let's focus on the high price Americans paid by choosing to fight aggression by becoming aggressors themselves. By the early 1900s, every state had agreed to the aggression of physician licensing. To obtain a license, healers had to meet the requirements of the licensing board. Without permission to practice, they would be stopped- at gunpoint, if necessary- from treating patients who still wanted their services. If our neighbors didn't choose as the licensing board did, their choices would no longer be honored, even if the unlicensed healer could cure them! (3) The consumer was no longer king; the licensing boards were. The licensing boards in each state soon began refusing licenses to health professionals who had not been trained at one of the "approved" medical schools. Only half of the existing medical schools were approved, so most of the others had to close their doors by 1920.4 By 1932, almost half the medical school applicants had to be turned away.5 Those who apprenticed, went to unapproved schools, or developed their own therapies were stopped- at gunpoint, if necessary- from healing.6 As a result, the number of medical doctors per 100,000 people dropped from 157 in 1900 to 125 by 1929. (7) Specialists, such as midwives, were usually forbidden to practice unless they had a full-fledged medical degree. (8) As medical knowledge expanded, a smaller number of physicians were available to perform an ever-widening range of services, so that the shortage created by licensing became even more pronounced. Just as more people die of electrocution when licensing requirements restrict the number of electricians, the decreased number of physicians in the early part of this century almost certainly resulted in poorer health care, especially for the disadvantaged.9 Until 1970, the physician to population ratio remained below what it had been in the early 1900s!7 By 1985, this figure had risen to 230 per 100,000,10 but the time required for each patient had dramatically increased as well because of a more extensive array of procedures, preventative annual physicals, and more involved diagnostic procedures. Naturally, with more work and fewer physicians, the price of medical care soared. One measure of the doctor shortage is the average work week, estimated at 60 hours for practicing physicians and 80 hours for those in training. (11) Because of their fewer numbers, physicians today tend to see a whirlwind of patients in their long working hours. A transplant surgeon with whom I was collaborating once asked why I had elected research instead of medicine. My reply, only half-joking, was that I was unable to function competently after 48 hours without sleep. He admitted in all seriousness that one needed such an ability to get through hospital training and to practice in the more demanding specialties such as his own. Such a long workweek can result in serious oversights. My own mother, in her late fifties, went to her doctor with a small breast lump. The doctor, although aware that five of her relatives had died of cancer, did not even order a mammogram. Embarrassed by the professional brushoff, my mother did not confide in anyone until the tumor was unmistakable - and had just begun to metastasize (spread). A few short years later, my mother drew her last breath. The saddest part of this story is that it is not unique.
My mother's best friend and my own ex-mother-in-law had almost identical
experiences and met the same premature fate. Another friend survived a rapidly
growing oral cancer only because his dentist insisted on its removal in
spite of his physician's advice to "wait and see." Some Californians think so. In 1990, they attempted to
pass a law stopping the hospital physician- at gunpoint, if necessary- from
working longer than 80 hours a week! (13) More aggression is not the answer,
however. Shortages and erratic care are only the tip of the proverbial iceberg. Quality care is compromised in ways other than restricting the number of physicians. By determining who can practice, the M.D.-dominated licensing boards define what constitutes legitimate medicine. In 1938, students of homeopathic, osteopathic, and chiropractic medical schools could no longer qualify for licensing as medical doctors.14 Hospitals or medical schools that dared to employ them risked losing their approved status. Since licensing required internship from an approved hospital, loss of this status caused loss of students and interns necessary to run the hospital. (15) M.D.s who associated with the "cultists," shared facilities with them, or referred patients to them would be judged "unethical," thereby risking their own professional standing. (16) Relying on the advice of licensed M.D.s, insurance companies sometimes denied reimbursements to alternative practitioners, making their service much less affordable. (17) Alternative practitioners were frequently denied other privileges as well.18 So blatant were these discriminatory practices that in 1987 the American Medical Association (AMA) was found guilty under the antitrust laws of having "conspired to destroy the profession of chiropractic in the United States" by using the political power afforded them by licensing laws. (19) Were we being protected from "quacks" by licensing laws that suppressed alternative therapies? My own experience suggests just the opposite. After suffering back pain for several years and having several M.D.s advise me to take muscle relaxants and live with the discomfort, a coworker recommended an osteopath who had helped him with a similar problem. My spine had been locked in an unnatural position, probably as a result of an accident that had occurred some years before. The osteopath was able to relieve the tension with a gentle adjustment. Although spinal manipulation used to be common practice among osteopaths, the chiropractors do most of it today. When my osteopath retired, he turned over his practice to a chiropractor. When an automobile injury resulted in whiplash some time later, I was very grateful to have this alternative therapy. Several studies of workers' compensation records have indicated that chiropractic can be superior to medical treatment with respect to lost work time and expense of care for certain types of injury. (20) Chiropractic manipulation, like surgery and drug therapy, is an important medical specialty. Evidently, the M.D.s have belatedly come to the same conclusion. Some physicians are beginning to learn and practice the spinal manipulation techniques developed by alternative practitioners. (21) In the 1960s, osteopaths were once again permitted to practice in approved hospitals, (22) possibly because the M.D.s had fled to the lucrative medical specialties, leaving a lack of general practitioners. (23) With such tacit admissions that these alternative specialties have a place in medical practice, one wonders how many people suffered needlessly over the past 75 years because licensing laws have suppressed alternative therapies. The suppression of different medical practices by licensing laws can be overt, as with the osteopathic and chiropractic professions described above. The subtle suppression of new therapies may be even more devastating, however. The role of nutrition in health and disease is a good illustration. After 20 years in medical research, seeking causes and cures, I've seen how difficult it is to give laboratory animals our most troublesome diseases. For example, when studying the protective effects of prostaglandins on alcoholic liver disease, an M.D. collaborator suggested that we use a dietdeficient in key nutrients to produce a similar syndrome in rats.24 A great deal of evidence suggests that alcohol damages the liver by inducing nutritional deficiencies. (25) Most of our peers, however, believed that a single study had conclusively shown that baboons fed a supposedly adequate diet could still develop liver damage when given alcohol. (26) The control animals gained weight during the years of the study, while the baboons getting alcohol did not. Nevertheless, few physician-researchers realized that the failure of the baboons to thrive suggested that the diet was not adequate. The laboratory that performed this study demonstrated many years later that lecithin, a component of many foodstuffs, was able to partially prevent the alcohol-induced damage and maintain normal weight! (27) Such minimal awareness of nutritional basics is probably due to the poor training doctors receive in this area. Indeed, in 1990, only 34 of the accredited medical schools required a course devoted exclusively to nutrition. (28) Cardiovascular disease, which kills more people in the United States than any other ailment, is thought to be intimately linked with diet and lifestyle. We obviously need more doctors trained in nutrition, but licensing laws have prevented us from having significant choices other than those the medical monopoly lets us have. The damage done by licensing laws is augmented further by the aggression of taxation, which is used to provide funding for medical research. Instead of allowing individuals to target the wealth they create toward the medical research that appeals to them, we have directed our government enforcement agents to confiscate it- at gunpoint, if necessary- in the form of taxes. Research proposals are evaluated by committees composed of established scientists and physicians. Having served on such committees, I have seen why innovative ideas that do not fit main-stream thinking never get funded. Each evaluator gives the proposal a score; even a single low rating is enough to prevent funding. Research in osteopathy or chiropractic, therefore, receives little funding. Research in therapeutic nutrition is also severely limited. Even Linus Pauling, winner of the Nobel Prize for chemistry and for peace, has had difficulty obtaining federal funding for his research on the use of Vitamin C to treat cancer. (29) Medicine is not as definitive as most people think. Less than 25% of medical procedures have been demonstrated to be useful in controlled clinical trials. (30) Such trials are time-consuming and expensive, and physicians are hesitant to withhold any therapy that might be beneficial just for the study's sake. This is why surgery involving coronary bypass, the most frequently performed major surgery in the United States, has only recently been shown to be worthwhile, and then only in a select group of heart patients. (31) As a result, many people over the years have undergone needless pain, expense, and risk by having an unnecessary bypass. To some extent this situation is unavoidable, since rigorous proof of a procedure's efficacy takes time, which some patients do not have. However, through the licensing process, certain types of unproven procedures (e.g., surgery) are permitted, while others are arbitrarily banned as quackery. Such unscientific selection has often led to the comical situation of yesterday's quackery becoming tomorrow's cure! Medicine is still in its infancy; there is much that we
do not know. Like it or not, we are human guinea pigs for medical doctors
and alternative practitioners alike. The aggression of licensing laws limits
our options without protecting us from unproven cures. Licensing of physicians was largely a result of lobbying by the AMA. This is not at all unusual: licensing laws are usually requested, not by consumers complaining about the quality of service, but by the professionals themselves! Indeed, professional organizations are frequently founded with the sole purpose of lobbying for licensing laws. (33) Why would service providers desire licensing laws designed to regulate them? Legislators turn to established service providers to determine what requirements new entrants must satisfy. Not surprisingly, the established practitioners suggest giving licenses to those already in practice, setting high standards for new entrants, and denying approval to practitioners who use different techniques from theirs. Most physicians supported such measures in the belief that the quality of health care would be improved. After all, the surgical and pharmaceutical therapies of modern medicine have indeed contributed to the 25-year increase in life expectancy gained in this century. (34) Nevertheless, some of the AMA leadership appeared to be well aware that fewer physicians meant higher income for those allowed to practice. (35) Evidence suggests that the pass-fail rate of qualifying examinations may even be adjusted by the licensing boards to keep numbers of service providers (including physicians) low. (36) Choice is diminished, and fees rise accordingly. Since the AMA controls the licensing boards, it can influence the behavior of practicing physicians by threatening to revoke their licenses. Medical doctors giving discounts have been censured by the AMA to keep physicians' incomes high. (37) When acupuncture was introduced into the United States, the AMA attempted to restrict its use to licensed medical doctors. (38) Other practices that are just as adequately and more economically performed by paraprofessionals have been grounds for turf battles. (39) Should we then blame the negative effects of physician
licensing on those selfish others who set AMA policy? Of course not! The
AMA leaders simply observed our willingness to use aggression-through-government
for a good cause. Perhaps the last time we used aggression, the M.D.s were
the victims. Like the serpent in the proverbial Garden of Eden, the AMA
tempted us to use aggression against our neighbors. They only provided us
with the spark the suggestion- of aggression. We fanned the flame into a
raging inferno by instructing our government to enforce the decisions of
the AMA-dominated licensing board. We were ready to deny our neighbor George
access to the medical service of his choice because of our belief that better
service for ourselves would result. We were content to have practitioners
who did not follow the dictates of the licensing boards labeled as quacks
even if their clients wanted their particular mode of healing. We yielded
to the temptation to benefit ourselves by initiating force against others.
The responsibility belongs to us. Most medical schools that catered to the working class
by providing flexible training regimens, such as night school and apprenticeship,
were closed. (41) Without the ability to work while they trained, aspiring
physicians from the lower classes found themselves unable to afford the
schooling or the time. Although the plight of the poor is most visible, the aggression
of medical licensing laws hurts everyone. The greatest loss- the creation
of wealth by economical, accessible, innovative medical therapies- is an
invisible one. When we watch our loved ones die from "incurable"
diseases, we pay dearly because of our refusal to honor our neighbor's choice! Quality practitioners of many professions have realized that people will do without a service if they can't readily evaluate it, especially if a poor choice is associated with a high risk of injury. Therefore, enlightened service providers often seek voluntary certification or a "Seal of Approval" from a professional or consumers' organization. For example, the AMA might rate practitioners by a variety of criteria, giving "certification" or ratings to those who met their standards. If their ratings are appropriate, consumers will turn to them for guidance. Professionals seeking certification would happily pay a hefty fee for a certification that meant more business. The AMA would profit when it expanded, rather than limited, its membership! Truly, it's a win-win world! However, the AMA would have to be careful not to certify carelessly. Otherwise, consumers would no longer give it credence, and professionals would seek another certifying organization that consumers trusted. This natural regulation by the marketplace ecosystem increases the number of service providers in areas that use certification when compared to places without certification or with the aggression of licensing laws.1 Since the number of practitioners appears to be the primary determinant of how much quality service is actually delivered, voluntary certification should increase the availability of quality health care. Even if this were the only benefit derived from abandoning the aggression of licensing laws, our national health would be greatly enhanced. However, more quality care is only the beginning. The skyrocketing costs of health care would plummet without the aggression of licensing. Today, health care professionals spend much of their time involved in activities that fail to use their skills fully. For example, numerous studies have shown that nurses and other non-physicians are able to diagnose and treat common conditions as competently as licensed medical doctors. (42) The fees charged by these non-physician professionals would be more than they receive today, but less than those charged by a physician today. Pediatric nurses, for example, are able to give proper medical care to approximately two-thirds of all childhood cases, referring the remainder to physicians. (43) Nurses and other non-physician medical personnel can competently decide whether a respiratory ailment is a cold, an infection, or a more serious problem that needs a doctor's attention. (44) Nurses and other medical personnel could economically run clinics to monitor blood pressure, serum cholesterol, and glucose tolerance and could provide feedback to patients as they alter their lifestyles. Even minor surgery, such as suturing superficial wounds, can be competently performed by trained non-physicians. As an undergraduate, I met a man recently back from Vietnam
who hoped to go to medical school once he graduated from college. Because
the army never had enough physicians available for the large numbers of
wounded, he often found himself performing emergency surgery in an attempt
to save soldiers otherwise doomed to bleed to death. This individual was
obviously quite capable of creating wealth by assisting in a hospital operating
or emergency room, or by suturing superficial wounds. However, until he
completed medical school, he was unable to use the skills he had. Many veterinary
or laboratory personnel are competent surgeons but are currently forbidden
by law to perform even the simplest procedures on people. If these skilled individuals were able to assist surgeons or treat uncomplicated cases, the cost of routine medical care would godown. Lower cost would make health care more accessible, especially to the poor, thereby increasing the overall amount of quality care delivered. Quality would be maintained, because less skilled practitioners could refer difficult cases to those with more training. Instead of being overburdened with routine care, medical doctors could focus on pushing back the frontiers of medicine. They could still enjoy hefty fees for state-of-the-art medical skills, while routine medical services would be provided more economically by non-physician practitioners. Hospitals and medical centers could hire individuals for their skills, regardless of where, when, and how they received their education. Training for medical practitioners of all kinds would be as diverse as potential job niches. Individuals could once again apprentice, attend part-time medical schools, or develop their own therapies. Not only would traditional care become more readily available at a lower cost, but new paradigms of healing would be readily available. People whose conditions warranted treatment by a non-traditional medical practitioner would be able to accept the risks and benefits of doing so. Such individuals would voluntarily provide a valuable service to us all as they helped to determine the value of each new treatment. Such people might be putting themselves at risk as they try new therapies. However, we all acknowledge that life is not risk free. Between 40,000 to 50,000 people are killed each year in automobile accidents, (12) yet we do not outlaw driving. Everyone decides whether the benefits of driving outweigh the risks. We should honor our neighbor's choice of new medical therapies as well. By saying "No!" to the aggression of licensing
laws, we increase the overall health care quality by increasing availability,
decreasing price, encouraging innovation, and allowingfull use of each individual's
skills. How we benefit when we honor our neighbor's choice! It's truly a
win-win world! In the next chapter, as we explore the harm done by licensing products instead of people, we'll find that we can measure the costs in thousands upon thousands of lives! |
...mainly the research refutes the claim that licensing protects the public. - Stanley Gross, Professor of Psychology, Indiana State University
...most of the evidence suggests that licensing has, at best, a neutral effect on quality and may even cause harm to the consumers. - S. David Young, RULE OF EXPERTS
The higher entry standards imposed by licensing laws reduce the supply of professional services... The poor are net losers, because the availability of low-cost service has been reduced. In essence, the poor subsidize the information research costs of the rich. - S. David Young, THE RULE OF EXPERTS
...restricting the practice of what is called medicine and confining it... to a particular group, who in the main have to conform to the prevailing orthodoxy, is certain to reduce the amount of experimentation that goes on and hence to reduce the rate of growth and knowledge in the area. - Milton Friedman, Nobel Prize winner, Economics
...by proper orthomolecular measures, mostly nutritional, it is possible for people to extend the length of the period of both life and well-being by about 25 years. - Linus Pauling, Nobel Prize winner, Chemistry
Phony "youth cures"... includes products to soften the skin, to "make the person feel young again," to remove brown spots and cellulite. Of course, there is no product that will work in this way any more than there is a product known to medical science that retards baldness or helps grown hair back on a bald scalp. - CONGRESSIONAL REPORT ON QUACKERY, 1982
Upjohn has introduced Rogaine... as the "first prescription medication proven effective for male pattern baldness." - Scrip, 1986
...state licensing boards, particularly for medicine, but also for other professions, have instead become first and foremost devices for protecting the monopolistic position of the professionals. - Marie Haus, REGULATING THE PROFESSIONS
...an oversupply of doctors threatens... perhaps there is need for professional birth control. - Journal of the American Medical Association, 1932
As you increase the cost of the license to practice medicine, you increase the price at which the medical service must be sold and you correspondingly decrease the number of people who can afford to buy the service. - William Allen Pusey, AMA President, 1927
The proportion and absolute number of women physicians was greater in 1910 than in 1950. - Stanley J. Gross, Professor of Psychology, Indiana State
...the study of medical history indicates that quacks flourish whenever physicians are scarce or when their remedies are ineffective. Licensing laws may actually worsen this problem by artificially restricting the supply of practitioners. - S. David Young, THE RULE OF EXPERTS
Certification provides all the information of licensure while offering a wider choice set. - Keith B. Leffler, Journal of Law & Economics |
A Matter of Life and Death When we deal with our community, state, and nation, however, our attitude is entirely different. Somehow, we think that forcing our choice on others becomes transformed into benevolence. For example, we support laws that stop manufacturers- at gunpoint, if necessary-from selling medicine that has not been licensed or approved by the Food and Drug Administration (FDA). We refuse to honor our neighbor's choice; instead, we instruct our FDA to make up their minds for them at gunpoint, if necessary. The effect is the same as if we used such aggression against George. Life-saving medicines are ripped out of the hands of our fellow Americans-literally! AIDS and the Drug Lag Many AIDS victims didn't feel that they had time to wait until all the testing was done. Since they were the ones most affected by a decision-right or wrong-they thought we should honor their choice. Unfortunately for the AIDS patients, our laws dictated otherwise. As the Customs officials confiscated their new hope at gunpoint, the true impact of our aggression was unveiled. Our food and drug laws can kill if they delay life-saving therapies from reaching terminally ill individuals. The spectacle of the AIDS victims being denied drugs that might be beneficial to them has helped us to see the results of our aggression clearly. FDA Commissioner Frank Young courageously began allowing individuals under a doctor's care to import medications from other countries for personal use. (3) Many of these pharmaceuticals are not sold here be-cause of the "drug lag" our laws have created. Thus, the United States gets most new medications long after they are available in other countries, because our licensing laws are the most aggressive in the world. The FDA requires manufacturers to perform many years of testing, with costs estimated at $200 million. (4) The manufacturer ships truckloads of data to the FDA, which then takes an average of two and a half years to decide if enough testing has been done. (5) Meanwhile, people whose lives might hang in the balance are prohibited-at gunpoint, if necessary-from buying the new drug. Like all licensing laws, regulations governing our pharmaceuticals decrease the availability of new drugs and increase their cost greatly. We all want the medicine we take to be tested thoroughly
to be sure it's safe and effective. We also want breakthrough therapies
as soon as possible to alleviate pain and suffering. Testing takes time
and delays the availability of a new medicinal drug. If we wait for testing,
we may suffer (or even die) for lack of treatment. If we don't wait for
testing, we may take a cure that's worse than the disease. How do we decide
what's best? Much of the drug toxicity observed in those days dealt with side effects that were not predictable from state-of-the-art knowledge. For example, we now know that some drugs are perfectly safe when given once or twice, but can be quite toxic if taken often. Earlier in this century, however, the frequency of this effect was not appreciated. As a result, more than 100 people who repeatedly used local antiseptics containing silver salts developed a blue-gray caste to their skin. (10) Thallium, a component of rat killer, was successfully used to treat ringworm. When applied routinely as a depilatory cream, however, at least 32 women died of its toxic effects. (11) Because of such incidents, multiple doses of modern pharma-ceuticals are tested in animals before recommending even a single dose to humans. Unfortunately, drug toxicity cannot always be predicted by animal testing. Animals can be unaffected by drugs that can cause devasta-ting side effects in people. Dinitrophenol, used as a diet pill in the early 1930s, caused cataracts in 177 women, but none in the test animals. (12) In the early 1930s, amidopyrine killed 1,600 people in the United States, while the Spanish, with different genetic ancestry, were unaffected. (13) Because of a genetic sensitivity, paraphenylenediamine caused blindness in (1) out of every 120 women who colored their eyelashes with Lash Lure. (14) These idiosyncratic effects are not seen in animal studies and are not readily predictable even today. The bottom line is that there is no such thing as a drug that is safe for everyone. Even life-saving penicillin has killed those who were allergic to it. The risk of experiencing an unpredictable side effect has to be weighed against the benefits each individual hopes to get. Before the aggression of FDA licensing laws, every individual did exactly that, and let others do the same. Individuals honored their neighbor's choice. Some people were willing to take more risks than others; some did not like the idea of taking any drugs at all. Each person took responsibility for his or her choice and honored the choices of others. Most manufacturers realized that killing the customer was bad for business, and did safety testing before marketing their drugs. Careful manufacturers wooed the public and increased profits by advertising that "We have never yet had reported a case of sudden death following the use of our Antitoxin," or that their products had been tested and approved by various outside laboratories. (15) Brand name loyalty rewarded the drug manufacturer who always gave the customer what was promised. Manufacturers reaped as they sowed. Producers of questionable products simply had too few customers to stay in business. (16) However, a few manufacturers were not so careful. Elixir Sulfanilamide was the most tragic example of this. It contained a safe drug, dissolved in an unsafe solvent, which was not tested before its sale in 1937. As a result, 107 people died. (17) The AMA had not granted the Elixir its Seal of Approval;18 the marketplace ecosystem protected those who cautiously awaited further testing, while honoring the choice of those who believed the risk of taking a product that had not been independently evaluated was warranted. This incident showed Americans how important a critical evaluation of pharmaceuticals could be. Had the marketplace ecosystem been kept free from aggression, the AMA and other independent evaluators probably would have extended their drug evaluations in the wake of the Elixir Sulfanilamide tragedy. Charging manufacturers a fee for examining their products could have funded such a system. Careful consumers could choose to buy only approved products. Manufacturers who fraudulently misrepresented their products
should have been required to compensate victims or their families as described
in Chapter 13 (The Other Piece of the Puzzle). Such compensation
would not only help to undo the damage, but it would deter future aggression.
Even in the case of death, a monetary settlement to the victim's family
is better than no restitution at all! Unfortunately, Americans took another
tactic. They decided to try to deter aggressors by becoming aggressors themselves.
In doing so, they created a cure worse than the disease. While other countries did not react to the thalidomide tragedy by changing their licensing laws substantially, Congress gave the FDA a mandate to use more aggression. Manufacturers had to complete extensive human tests to demonstrate that their drugs were effective. (23) Naturally, manufacturers already did such tests, but not the elaborate way that the FDA demanded. Longer and larger studies had to be undertaken. Foreign testing was only infrequently considered acceptable to the FDA, forcing manufacturers to repeat studies that had been done elsewhere. In the meantime, manufacturers would be stopped-at gunpoint, if necessary-from selling such drugs. Did these additional tests save us from drugs that were ineffective? Apparently not! Studies suggest that consumer waste from purchasing ineffective drugs changed little after the additional studies were mandated in 1962. (24) Evidently, patients and physicians are usually able to tell if a drug has the desired effects and will stop using it if it doesn't work. Companies desiring the positive feedback of profit quickly find that they must please their customers. Did the 1962 regulations save us from more side effects? Apparently not: the percentage of newly approved drugs taken off the market in the United States was the same as in Great Britain, which did not substantially change its licensing procedures in the immediate aftermath of thalidomide. (25) Paying with Our Lives Our aggression, applied to this single drug, cost at least 30,000 American lives. Britain also practices the aggression of licensing laws, but to a lesser extent than the United States. Thousands more lives might have been saved if no aggression were present at all.
As a researcher in a major pharmaceutical firm, I have been intimately involved with the licensing laws governing the marketing of therapeutic drugs. Some of my work dealt with the natural prostaglandin hormones or their synthetic analogs, which could partially prevent the deleterious effects of various toxins on the liver. (29) More than 100,000 people die each year from alcoholic liver disease for which bed rest and abstinence are the only, and often ineffective, treatments. I approached management with a win-win idea: test whether prostaglandins added to alcoholic beverages would lessen the chance of alcoholic liver disease. My employer would profit while it helped to prevent illness and death. Unfortunately, the FDA would never permit such a thing, for it would appear as if we were encouraging people to drink. A major distiller was reputed to have tried to add vitamin B-1 to alcoholic beverages with the same end in mind and was met with a negative reception by the regulatory agencies. (30) We might be able to develop the prostaglandin as a pill to be taken daily by the drinker, but it would require a prescription; people who were ashamed to tell their doctor they drank a lot might forgo the medication. If we decided to go ahead, we still had to do the studies that the FDA required to show that it worked with 95% certainty. Since alcoholic liver disease takes years to develop and probably many years to cure, we would have to study hundreds of individuals over several years. Not only would this be costly, but heavy drinkers don't always take their medicine regularly. To ensure that we had enough individuals who actually got the prostaglandin, we'd need even more study participants. Furthermore, we weren't sure exactly how to measure our progress, other than waiting for people to die, because no other drugs had been successful in alleviating this damage. We might collect data for years only to find out that we had only enough patients to show that it worked with only 80% certainty-not good enough for the FDA. Meanwhile, our patent would be close to expiration. Without patent protection, we could not re-cover the cost of all these studies. Generic manufacturers would undersell us because they would not need to recover the gargantuan cost of testing. The win-win situation evaporated with the aggression of licensing laws, since we could not legally sell the prostaglandin as a drug that might work. My employer lost only a source of profit; people with alcoholic liver disease continue to lose their lives, perhaps needlessly. Unfortunately, this story is not unique. Aspirin deforms
the unborn young of almost every animal species but humans (31) and could
not be marketed today if it had to go through FDA evaluations as a new drug!
Penicillin, digitalis, and fluroxene might have met a similar fate, (32)
costing thousands upon thousands of lives. Many more lives have probably
been lost by the aggression of licensing laws than have been saved. We chose the aggressive means of licensing laws, which led us to health care poverty. Just as physician licensing limits the number of practitioners, and thereby lowers the quality of care delivered, so too does licensing of drugs lower the availability and raise the cost of life-saving pharmaceuticals. A two-year delay in a cancer therapy that reduces mortality by only 10% would cost about 66,000 American lives (33)-many, many more than have died from all the drug toxicity in this century. The great loss of life caused by the delay of the single drug, propranolol, was a tragic, real-life example of the fruits of aggression. Before licensing laws, the largest example of manufacturer neglect was the unnecessary deaths of 107 people taking Elixir Sulfanilamide. The marketplace ecosystem, when free from aggression, is the best consumer protection of all. Just as physician licensing created a cartel that excludes innovators and keeps fees high, so too do large pharmaceutical firms profit at the expense of the small ones. The increasing cost of development imposed by our aggressive regulations puts the smaller firms at a disadvantage. (34) As requirements increase, mergers become necessary and the number of firms decreases. A few large firms dominate the industry when newcomers are excluded by the high cost of satisfying the FDA. The price of each drug that is marketed reflects these incredible costs. The advantage of the large pharmaceutical firms is largely an illusion, however. Their taxes are increased to pay the salaries of the law enforcement agents, who produce no new wealth. Creation of wealth is compromised as the health of the nation deteriorates. Even if the large manufacturers have a bigger piece of the Wealth Pie, its absolute size is less than it would be without aggression. Nobody wins. The real tragedy affects everyone, including those in the
pharmaceutical cartel and the FDA itself. When our loved ones are dying
of "incurable" diseases, we all pay the ultimate price for our
aggression. Perhaps we should consider a better way. If the aggression of licensing laws ended, patients and their physicians could buy whichever drugs they felt might be helpful, regardless of the stage of testing. Since they could not competently evaluate every drug for themselves, they would probably rely on a professional or consumer's group for a status report on pharmaceuticals they were considering. Patients and physicians could choose to defer to one of these "authorities," but none could force adherence to their verdict. Such advisory groups operated in this country before the introduction of the licensing laws. The AMA's Seal of Approval Program and Consumers' Research actually tested pharmaceuticals and cosmetics in their own laboratories instead of simply reviewing manufacturer testing, as the FDA does now. Elixir Sulfanilamide had not been approved by the AMA; (18) patients and/or their doctors who waited for the Seal of Approval before purchasing new drugs were protected from its lethal effects. The marketplace ecosystem protected them without aggression and without denying access to life-saving pharmaceuticals that they may have chosen before AMA approval. Modern testing or evaluation groups might be funded by concerned citizens such as the Women's Clubs of the past, operate for the benefit of its members as the AMA and Consumers' Research did, charge the manufacturer an evaluation fee, or provide information to individuals for a small charge. The positive feedback of profit would encourage testing by several groups. We would have independent evaluations, rather than an examination of the manufacturer's data by the FDA alone. An example of modern day independent drug evaluations is the Medical Letter on Drugs and Therapeutics, whose revenue is derived totally from subscriptions to doctors, medical students, pharmacists, and pharmaceutical companies. (35) By reversing the aggression of licensing laws (i.e., deregulation), we would enjoy a much wider range of safe and effective therapeutic drugs than we do today. However, the benefits of deregulation can be sabotaged by the aggression of fraud. Drug companies that attempt to deceive consumers by falsely claiming that they have certification or seals of approval perturb the natural balance of the marketplace ecosystem. In Chapter 13 (The Other Piece of the Puzzle), we'll learn how the second principle of non-aggression-righting our wrongs-restores the balance while deterring future aggression. Before examining this concept in detail, however, we need to explore more fully the problems that our own aggression creates. |
We're not prepared to march into people's homes like the Gestapo and take drugs away from desperately ill people. - Frank Young, former FDA Commissioner
...the penalties imposed by the marketplace on sellers of ineffective drugs before 1962... have left little room for improvement by a regulatory agency. - Sam Peltzman, REGULATION OF PHARMACEUTICAL INNOVATION: THE 1962 AMENDMENTS
...the U.S. system of approval, in spite of greater restrictiveness and insistence on detail, has not proved markedly superior in the prevention of marketing drugs that are subsequently discontinued in light of safety questions. - Olav Bakke et al., Center for the Study of Drug Development, University of Rochester, N.Y.
...rarely, if ever, has Congress held a hearing to look into the failure of FDA to approve a new entity; but is has held hundreds of hearings alleging that the FDA has done something wrong by approving a drug... The failure to approve an important new drug can be as detrimental to the public health as the approval of a potentially bad drug. - Alexander Schmidt, former FDA Commissioner
...according to George Hitchings, co-winner of the 1988 Nobel prize in medicine, FDA's five-year delay in approving the anti-bacterial drug Septra cost 80,000 lives. - Sam Kazman, Competitive Enterprise Institute
...the pattern of intervention into science from a combination of local, state, and federal sources has moved from reasonable control to something close to chaotic strangulation. - Donald Kennedy, former FDA Commissioner
If even one new drug of the stature of penicillin or digitalis has been unjustifiably banished to a company's back shelf because of excessively stringent regulatory requirements, that event will have harmed more people than all the toxicity that has occurred in the history of modern drug development. - William Wardell, Professor, University of Rochester, N.Y.
...economic studies have been virtually unanimous... FDA regulation certainly cannot be proved "safe and effective"-thereby flunking its own approval criterion. - Dale Gieringer, Wall Street Journal |
In the last few chapters, we've seen how the aggression of licensing laws restricts the number of service providers. The disadvantaged individual, no longer able to get medical training through night school or apprenticeship, finds obtaining a medical license arduous, if not impossible. Small pharmaceutical firms find it increasingly difficult to meet the costs of FDA requirements. Well-to-do individuals and businesses move toward a monopoly on wealth creation. This aggression-through-government has other fallout too.
The rich not only get richer, they also have more power over our choices
-and our lives. In trying to control selfish others, we find ourselves controlled
by those hired to protect us! Like a fly caught in the spider's web, further
aggression only entraps us more. When we add a layer of aggression in the form of licensing
laws or regulations, some goods and services are outlawed by the licensing
agencies. As a result, First Layer goods and services are not as broad and
wide as the Base. Prices go up as availability goes down. Consumers' choices
are limited to licensed items or those they can provide themselves. Licensing is exclusive when all but a single monopoly provider is stopped-at gunpoint, if necessary-from serving consumers. When this Second Layer of aggression is added to the First, costs go up further as the choice of goods and services becomes even narrower. Consumers must buy the monopoly service, do without, or provide their own. Utilities are the most common example of Second Layer aggression. Later in this chapter, we'll see how giving utilities an exclusive monopoly has created our energy dependency. With every layer of aggression, those privileged by the licensing laws gain more control over our choices. A Third Layer of aggression is added to the Pyramid when those people who don't use the Second Layer monopoly service are forced-at gunpoint, if necessary- to subsidize those who do. Usually, such services are provided by a government department rather than a private firm. Part of their cost is subsidized by the taxpayer. Public services usually cost twice as much as those provided by a private firm, for reasons we'll explore shortly. Even if consumers choose to do without or provide their own service, they must still subsidize the mono-poly! The most devastating effect of Third Layer aggression, its environmental impact, is detailed in the next chapter. The Fourth Layer of aggression is added to the Pyramid
when consumers are forced- at gunpoint, if necessary- to use the
subsidized monopoly service. Doing without or providing their own is no
longer an option. With every layer of aggression, consumers have fewer choices
until finally they have no choice at all! Chapters 9 (Banking on Aggression)
and 10 (Learning Lessons Our Schools Can't Teach) show how our
desire to control others creates the Pyramid of Power, giving others control
over every aspect of our lives! In spite of its prominence, Standard Oil was unable to raise prices without encouraging fledgling competitors to lure customers away by selling for less. The marketplace ecosystem, free from the aggression of licensing laws, protected the consumer from being overcharged. Rockefeller tried to organize independent oil refiners to keep the price of oil high (9) in much the same way that Southern landowners had colluded to pay slave wages to blacks after the Civil War. Just as some landowners found they could profit by paying their workers a little more than anyone else, refiners who lowered their prices were able to attract more business. Without the help of government enforcement to make the oil refiners cooperate, Rockefeller found that the marketplace ecosystem, when free from aggression, regulated his attempts to exploit his customers. Having failed to fix prices, Rockefeller tried to buy out his competitors. Since he did not have the help of government to force them to sell, he had to make them an offer they would not refuse. Encouraged by Rockefeller's story of rags to riches, young hopefuls tried to gain part of the giant's market share by offering to take less profit so customers would be attracted by their lower prices. Naturally, many consumers were willing to take a chance on a new refiner that offered them a better deal than Standard Oil would. Barely four years after attaining 90% of the market, Standard Oil's competitors had doubled their volume.8 In 1884, almost 100 refineries were processing 23% of the crude. (10) Competition also began to stiffen on the international front. In 1882, Standard refined 85% of the world's oil; by 1888, Russian oil had cut Standard's world market share to 53%. (11) In the early 1900s, natural gas also began to be used as a substitute for kerosene. (12) Without the aggression of licensing laws to prevent competition and innovation, Rocke-feller could keep his monopoly only as long as he served consumers better than anyone else. Obviously, few companies can accomplish this feat for extended periods of time. Of course, being large gave Rockefeller certain advantages. The railroads gave Rockefeller special shipping rates because of the volume and steadiness of his business. Although his competitors objected, the railroads offered the same discounts to any other firm who could give them as much business. (13) No other companies could match the volume of Standard or get the discount. Price wars to undersell competitors were also easier for the industry giant. They were not entirely successful, however. Rockefeller stopped letting the public know when he acquired an independent firm, since some consumers had begun to shun Standard Oil because they did not wish to further the mammoth's influence. (14) Without permission from the American citizenry to use law enforcement agents to stop his competitors - at gunpoint, if necessary - Rockefeller was unable to maintain his monopoly - even if he practiced deception. By 1911, Standard refined only 64% of the available petroleum in contrast to the 90% it refined 32 years earlier. The competition included Gulf, Texaco, Union, Pure, and Shell.15 More and more consumers turned to natural gas and electricity. The marketplace ecosystem, free from the aggression of licensing laws, ensured that Rockefeller could keep his monopoly only as long as he could serve consumers best. Like other natural ecosystems, the marketplace ecosystem is self-regulating. The antitrust conviction in 1911 against Standard Oil, paid for with our tax dollars, was rather redundant. Consumers had already chosen to give a large share of their business to other firms with new technologies, possibly in response to Rockefeller's own unsavory tactics. As Rockefeller's monopoly rose and fell, Bell Telephone, which eventually evolved into AT&T, learned a lesson from Standard Oil. Instead of trying to serve consumers best, Bell asked American consumers to use aggression against its competitors. Before 1894, Bell Telephone's patents protected it from competition by other firms. Its growth averaged 16% per year; annual profits approached 40% of its capital. (16) Bell catered primarily to the business sector and the wealthy. When the patents expired, other companies began providing affordable telephone service to the middle class and rural areas.17 The independents charged less since customers could call only those serviced by the same company. Consumers were evidently pleased to make such a tradeoff; by 1907, some 20,000 independents controlled half of all the new telephone installations. The number of phones zoomed from 266,000 in 1893 to 6.1 million in 1907. The independents matched Bell's monopolyBLOCket share in 14 short years. (16,18) Competition from the independents had caused annual Bell profits to plummet from 40% to 8%16 as many consumers chose the independents who served them best. The marketplace ecosystem was again protecting consumers from monopoly profits. As telephones went from a curiosity to a standard household utility, the independents began developing a plan for sharing each other's lines to avoid duplication and to increase the number of phones each customer could call. (19) The marketplace ecosystem was again working to promote cooperation for the benefit of the consumer, without aggression. Service providers voluntarily sought to give the customer better service because they would, in turn, be rewarded by more business and the positive feedback of profit. Aggression Disrupts the Marketplace Ecosystem Theodore Vail, Bell's new chairman, was determined to regain a monopoly market. He asked Americans to use the aggression of exclusive licensing against the independents that had served them so well. He claimed that competition caused duplication and penalized the customer (i.e., telephone service was a "natural" monopoly). (19) Had this been true, the independents would never have been able to lure customers from the established Bell monopoly in the first place! If our neighbor George asked us to stop - at gunpoint,
if necessary-everyone other than himself who tried to provide services to
willing customers, we'd probably be very suspicious of his motives. Nevertheless,
by 1910, Americans were persuaded to accept Bell's proposal. The government
of each local community would allow only one telephone company to operate
in that region. Other companies would be stopped-at gunpoint, if necessary-from
providing service to willing customers. Since Bell was the largest single
company, it was in the best position to lobby the state utility commissions
effectively and was almost always chosen over the independents. During the depression of the 1930s, AT&T stock continued to pay handsome dividends. (21) If subscribers didn't like subsidizing AT&T's new ventures and investor portfolios, they were not free to choose another telephone company whose prices didn't reflect such extras. People could protest only by not having phone service. Evidently, many people elected to do just that. From 1914 to 1934, annual growth rate slowed to less than 5% compared to 27% between 1894 and 1907 when the marketplace ecosystem was less dominated by aggression. (22) Since there was only one phone per ten people, this lower growth rate probably reflected consumer choice, rather than market saturation. (23) Our aggression cost more than excessive charges for phone service. As the wealth of AT&T increased and its research had an impact on other industries, the Justice Department brought antitrust suits with our tax dollars to keep AT&T out of radio, television, and movies. (24) In addition to paying higher prices, Americans paid taxes to regulate the monopoly (estimated costs of $1.1 billion per year). (25) In the marketplace ecosystem free from aggression, none of these expenses would be necessary. In 1984, an antitrust suit, paid for with our tax dollars, eliminated AT&T's 75-year monopoly in long-distance service. As new long-distance companies served the consumer better for less, rates plummeted 30% over the next five years. (26) The marketplace ecosystem protected consumers well when aggression was outlawed. However, the cost of local service, still monopolized by exclusive licensing, went up 50% during the same period! (27) Seven of the "Baby Bells," which were split off from AT&T by the antitrust ruling, earned 25% more than the top 1,000 U.S. firms in 1987. (28) Why? Local phone companies were allowed to charge extra fees as compensation for loss of AT&T's long distance monopoly! (28) Not only do we pay higher prices to the local phone monopoly, we also pay for its regulation, for antitrust suits to break it up, and compensation for no longer getting monopoly status! Is this consumer protection? Although other companies cannot sell local phone service, they are allowed to bypass AT&T's network by using their own phone lines, microwave routing, or satellite systems. By the late 1980s, more business phones were serviced through private exchanges than by conventional phone lines. (29) Businesses find these systems more economical, suggesting that once again the consumer is being overcharged by the local telephone monopoly. Even the Federal Communications Commission, the government agency in charge of regulating AT&T, bypasses the local phone network! (30) What a shame that the aggression of licensing laws keeps the average consumer from taking advantage of the cost savings of these innovative technologies! The telephone industry is just one example of a natural monopoly that is not so natural after all. If an industry profits by being large, smaller companies will find it in their best interest to merge or cooperate with each other as the independent telephone companies did. The aggression of monopoly licensing is neither necessary nor desirable. When consumers are not allowed to vote with their dollars for the service provider that pleases them the most, customer-pleasing goes down and costs go up. The regulator of the marketplace ecosystem, the consumer, is bypassed. Even when we lower the guns of government just enough to
permit one other choice of service provider, the consumer is empowered.
Quality service costs less. For example, in the few cities that license
two power companies instead of one, prices are lower than regions where
only one company is permitted to provide service. (31) Unfortunately, higher
costs are only a small part of the price we pay for our aggression. Monopoly-by-aggression has contributed greatly to our dependence on fossil fuels. In the early 1900s, for example, several paper companies used cogeneration to produce cheap electricity from steam. These efficient producers were told they would be stopped- at gunpoint, if necessary from selling their electricity because of the monopoly licensing bestowed on public utilities. (34) Small plants using alternative energy sources were also banned. Centralized energy production was best accomplished by
fossil fuels. Utilities had no incentive to conserve on fuel or develop
alternative energy methods because their profit was determined by politicians,
not by the consumers they served. Adding that Second Layer of aggression carries some hefty costs in terms of selection, cost, and environmental quality. As we'll see in the next chapter, however, adding Third Layer aggression makes Second Layer environmental insults look like tender loving care! |
Monopoly: A right granted by a government, giving exclusive control over a specified commercial activity to a single party. - AMERICAN HERITAGE DICTIONARY, 1982.
Bureaucratic Rule of Two: Removal of an activity from the private to the public sector will double its unit cost of production. - Thomas Borcherding, BUDGETS AND BUREAUCRATS: THE SOURCES OF GOVERNMENT GROWTH
We must ever remember we are refining oil for the poor man and he must have it cheap and good. - John D. Rockerfeller
...the richest people in the world are those who've done best at pleasing others, especially the common man... Henry Ford became richer than Bentley; Ford made cars for the common man... The pursuit of profits is the activity most consistent with human needs. - Walter Williams, ALL IT TAKES IS GUTS
...economists have long known that business (that is, non-governmental) monopolies are short-lived. - Peter Drucker, INNOVATION AND ENTREPENEURSHIP
It has been in periods of untidy, tumultuous competition that products have been democratized and have gone through their most rapid rate of growth and innovation. - Peter Samuel, UNNATURAL MONOPOLIES
Firms receive their income, in the final analysis, from serving consumers. The more efficiently and ably the firms anticipate and serve consumer demand, the greater their profits; the less ably, the less their profits... - Murray Rothbard, Professor of Economics, University of Nevada
The dominant fact of American political life at the beginning of this century was that big business led the struggle for the federal regulation of the economy. - Gabriel Kolko, THE TRIUMPH OF CONSERVATISM
Monopoly favors the rich (on the whole) just as competition (on the whole) favors the poor. - George Watson, Journal of Economic Affairs |
In the absence of aggression, everyone creates goods
and services, so that the Wealth Pie and our Piece of it (shading) is as
large as it can be for our current level of knowledge.