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Dec 23, 2015

Adam Smith on Public Policy: Occupational Licensing

Adam Smith was concerned with the negative effects of occupational licensing, especially on the poor.

Recent Left Smithian scholarship has rightly highlighted Smith’s concern for the poor. Ignoring how Smith talked about the poor misses a key aspect of his thought: the poor benefit tremendously from free exchange and the division of labor. Smith saw markets, not government aid, as the primary means of bettering the condition of the poor. When Smith discusses the necessary expenses of the sovereign, he makes no mention of aid programs for the poor. Coase captures Smith’s insight when he writes: “The great advantage of the market is that it is able to use the strength of self-interest to offset the weakness and partiality of benevolence, so that those who are unknown, unattractive, or unimportant, will have their wants served.” Markets are superior to aid because they do not rely on unpredictable benevolence. Markets give common laborers the means to buy wool coats, to enjoy more of the “necessities and conveniences” of life, and to make an honest living for themselves.

Smith strongly condemns various restrictions on the working poor that exclude them from participating in markets. Smith acknowledges that some inequalities will exist in markets, even with “perfect liberty.” But he also argues that “the policy of Europe, by not leaving things at perfect liberty, occasions other inequalities of much greater importance.” One particularly harmful practice was “incorporated trade,” or what we would call occupational licensing. Most European countries created inequality and distorted markets by restricting who could practice various trades. In England, for example, Smith highlights apprenticeship requirements for weavers, hatters, smiths, tailors, etc. These requirements evolved out of guild practices to raise their wages by restricting competition.

Smith condemns these apprenticeship restrictions for raising prices and for reducing quantity and quality. But his most ferocious attack focuses on how apprenticeship laws harm the poor man:

The property which every man has in his own labour, as it is the original foundation of all other property, so it is the most sacred and inviolable. The patrimony of a poor man lies in the strength and dexterity of his hands; and to hinder him from employing this strength and dexterity in what manner he thinks proper without injury to his neighbour, is a plain violation of this most sacred property. It is a manifest encroachment upon the just liberty both of the workman, and of those who might be disposed to employ him….The affected anxiety of the law-giver lest they should employ an improper person, is evidently as impertinent as it is oppressive.

Although the poor have few assets, they always have their labor. Restricting them from freely exercising their labor is manifestly harmful and unjust. Policies that prevent them from participating in the market create more inequality.

Smith also condemns other laws restricting freedom and opportunity for the poor. In England there were several restrictions on poor people being able to move from one parish to another in search of job opportunities or higher pay. Often you had to get permission from the parish you were leaving as well as from the parish you were moving to. Restrictions on the movement of labor, Smith argued, resulted in widely varying wage rates. Furthermore, “To remove a man who has committed no misdemeanour from the parish where he chuses to reside, is an evident violation of natural liberty and justice.”

Smith makes several important observations about how countries transitioned from agricultural feudalism to commercial society. The transition changed social relationships as much as it did economic ones. The distribution of power and independence among people in society shifted significantly. Under the feudal system, serfs were completely dependent on their landlords. They paid high taxes, were liable for military service, and were subject to the landlord’s arbitrary rule. Traveling between fiefdoms, or leaving them entirely, was very difficult to do.

That changed as landlords began to fritter away their holdings. Before the rise of commercialization, Smith argues, landlords had few opportunities to spend their wealth on personal consumption. Instead, they usually maintained large retinues of servants who were entirely dependent on their master for subsistence. But as trading increased, many new avenues of personal consumption became available. Landlords, taking advantage of these new expensive goods, spent their money on tradesmen rather than on personal servants. “Having sold their birth-right…for trinkets and baubles, fitter to be the play-things of children than the serious pursuits of men, [great proprietors] became as insignificant as any substantial burgher or tradesman in a city.” The result was a huge increase in independence among the poor and middle classes. Because these proprietors were also “no longer capable of interrupting the regular execution of justice,” people no longer had to live under the patronage or the arbitrary rule of a landlord. Smith concludes that “commerce and manufactures gradually introduced order and good government, and with them, the liberty and security of individuals.” This change was particularly evident and beneficial for the poor.

Like many classical liberals and libertarians, Smith was keenly interested in the welfare of the poor. But he realized that advancing their cause meant removing restrictions and barriers to their free movement and to the free exercise of their labor. In his day, commercial society was characterized by increasing independence of the whims of a landlord or noble—especially for the poorest people. But Smith would be troubled by our modern approach to poverty. Today “social welfare” programs that give poor people food, housing, medication, job training, or even education create new forms of dependence. They merely substitute government bureaucrats and politicians for landlords and nobles. The real problem is that the poor are prevented from pursuing many of these goods on their own by occupational licensing and other regulations. Smith would suggest removing violations of the poor’s “sacred property” and letting them improve their own condition.

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