Bring Back the Guild System?
Among critics of the market on both left and right, we occasionally hear it proposed that something like the old guild system, which operated during much of the Middle Ages and beyond, be re-established throughout the economy. Under this system, each occupation had its own guild, to which all employers and employees in that occupation belonged. The guild regulated such aspects of business as prices, wages, hours of operation, and product quality. In this way, one shop was prevented from underselling another. Cooperation rather than competition was the rule, and the result was occupational stability: there was a niche for everyone in a given line of work.
The guild system possesses a superficial plausibility, which gives it what attractiveness it may have. But consider how a guild system must work in practice. The logic of the guild is such that certain people who wish to enter a particular trade are denied entry. If a particular guild should happen to have a relatively liberal policy of admitting new producers to its craft, it will certainly insist on a minimum price at which all producers will be allowed to sell the good in question, and/or will limit the amount of the good that any given master will be permitted to produce. Whatever the case, the outcome is the same: higher prices and less production than if free entry into the profession, a free-price system, and unrestricted production had been allowed.
Aspects of the guild system have existed in our economy in the past and some continue through the present. Their consequences have been clearly destructive. Perhaps the most obvious example, which is no longer in effect (and in fact lasted only two years) is the National Recovery Administration, established by the New Deal's National Industrial Recovery Act in 1933. President Roosevelt believed that business competition had to be restricted in order to tame the alleged problem of "overproduction" and to spread among as many firms as possible what consumer demand existed.
There is no need here to attempt to explain FDR's economic reasoning, if such an explanation is even possible. Speaking of the President's acquaintance with economics, biographer John T. Flynn noted that "it is entirely possible that no one knew less about that subject than Roosevelt." What is important is that these economic fallacies would have terrible consequences. The President's faulty grasp of what had caused the Depression led him to introduce a system whose operation was quite similar to the old guild structure, with the explicit intention of reducing competition.
Under the NRA, each industry was invited to establish a production code, which would set minimum wages, minimum prices, and a variety of other regulations to be observed by the firms in that industry. (A system not entirely dissimilar had been established in Mussolini's Italy.) Note that the code established minimum prices. All sellers would have to sell their products for at least the prescribed minimum. This meant a dramatic reduction in the intensity of economic competition, since with an established minimum price in effect it was not really possible to undersell one's competitors.
The great New York Times editorial writer Henry Hazlitt had no illusions about the NRA:
[T]he American consumer is to become the victim of a series of trades and industries which, in the name of "fair competition," will be in effect monopolies, consisting of units that agree not to make too serious an effort to undersell each other; restricting production, fixing prices—doing everything, in fact, that monopolies are formed to do. . . . Instead of a relatively flexible system with some power of adjustment to fluid world economic conditions we shall have an inadjustable structure constantly attempting—at the cost of stagnant business and employment—to resist these conditions.
This description actually sounds rather like what the admirers of the guilds consider the ideal economic arrangement. It gave the force of law to producers' collusion with regard to minimum prices and wages, hours of operation, amount of output, and still other factors. This way, there would be less competition among producers. This is nothing other than the guild system in modern form.
But it was a complete disaster, both logically and in practice. First, although such a system would indeed raise prices, such an outcome obviously defeated the program's other aim of increasing wages, since a rise in prices must reduce the real value of wages (that is, what those wages can buy). Second, in practice the program produced such an outcry among sensible people that the U.S. Senate finally managed to force FDR into appointing a commission to investigate the NRA. Its report, issued in 1934, described the agency as "harmful, monopolistic, oppressive, grotesque, invasive, fictitious, ghastly, anomalous, preposterous, irresponsible, savage, wolfish." The act establishing it was declared unconstitutional the following year.
So much for the NRA. But a great deal of the guild mentality remains in the U.S. economy, and can be seen in the behavior of such organizations as the American Medical Association, the American Bar Association, and others. Very often, such bodies lobby the government to institute stiff requirements in order to acquire a license to practice, and to place obstacles in the path of anyone else who might want to provide medical, legal, or other services. Milton Friedman suggests what is often really at work in such agitation:
The justification offered is always the same: to protect the consumer. However, the reason is demonstrated by observing who lobbies at the state legislature for the imposition or strengthening of licensure. The lobbyists are invariably representatives of the occupation in question rather than of the customers. True enough, plumbers presumably know better than anyone else what their customers need to be protected against. However, it is hard to regard altruistic concern for their customers as the primary motive behind their determined efforts to get legal power to decide who may be a plumber.
Consider, first, the American Medical Association, which operates in a manner very similar to that of the medieval guilds. The AMA serves to reduce the number of people who can practice medicine, and thereby increases the cost of medical treatment beyond what it would be in a competitive market. According to Clark Havighurst, Duke University Professor of Law, "Professional licensure laws have long made the provision of most personal health services the exclusive province of physicians. Obviously, such regulation limits consumers' options by forcing them to use highly trained, expensive personnel when other types might serve quite well."
Consider Friedman's description of the guild's operations:
One effect of restricting entry into occupations through licensure is to create new disciplines: in medicine, osteopathy and chiropractic are examples. Each of these, in turn, has resorted to licensure to try to restrict its numbers. The AMA has engaged in extensive litigation charging chiropractors and osteopaths with the unlicensed practice of medicine, in an attempt to restrict them to as narrow an area as possible. Chiropractors and osteopaths in turn charge other practitioners with the unlicensed practice of chiropractic and osteopathy.
Doubtless most members of the AMA believe that such requirements work to the consumer's benefit by protecting him from substandard medical care, but this only shows the extent to which interest groups subconsciously conflate their own interests with those of society as a whole. Mancur Olson cautions people to "note that the examinations are almost always imposed only on entrants. If the limits [on entry into the field] were mainly motivated by the interest of patients, older physicians would also be required to pass periodic qualifying examinations to demonstrate that they have kept their medical knowledge up to date." The fact is, studies find that nonphysician providers of medical care, such as midwives, nurses, and chiropractors, "can perform many health and medical services traditionally performed by physicians—with comparable health outcomes, lower costs, and high patient satisfaction."
Government regulations on the chiropractic profession, lay midwifery, and on the freedom of nurse practitioners to offer services within their competence, all of which make perfect sense from the point of view of the medical guild that lobbied for them, make no sense at all from the point of view of consumer wishes (as repeatedly expressed in polling data) or from economic considerations. In many cases, such people can provide health services far more cheaply than can licensed physicians (or, in the case of chiropractors, can provide services that licensed physicians do not provide at all), but consumers are prevented from making their own decisions regarding their medical care. Given the logic of the guild structure, no one has the right to be surprised to find that the AMA has put so much effort into undermining its professional opposition.
Private certification boards, providing certification to physicians who meet certain standards, would of course be welcome and extremely likely in a society without state-imposed licensing requirements. Lacking a coercive element, such boards would be limited to providing information to consumers of health care services and would be unable to use their position to transform the entire profession into a guild or cartel able to crush all competition. As economist George Reisman explains:
[T]he members of the various state medical licensing boards around the country could constitute themselves into private certification agencies and give or withhold their seal of approval to individual medical practitioners on any basis they wished. They would simply lack the power to make the absence of their particular seal of approval the basis of fining or imprisoning anyone who chose to practice medicine without it. The consumers of medical care, who presently retain the right to judge the qualifications of the state governors and legislators who are responsible for the appointment of the members of the medical licensing boards, would decide for themselves the value of certification by this or that organization. . . . Indeed, if ordinary men and women are to be allowed to vote in elections in which their votes ultimately determine the most complex matters of foreign and domestic policy, and thus where their decisions affect not only their own lives and those of their immediate families but also the lives of everyone else in the country, then surely they are entitled to the responsibility of determining matters pertaining exclusively to their own well-being.
Reisman further observes that if government regulations allowed only automobiles less than five years old on the roads, there would certainly be an overall increase in the quality of automobiles on the roads. But a great many perfectly serviceable automobiles would thereby become unavailable for use at all. The main victims of such alleged largesse would be, as usual, the poor.
The legal profession in the United States is also akin to a guild—or, what is the same thing, a cartel. Everyone knows that legal services are expensive, but few realize that the barriers to entry erected by what is in effect a lawyers' guild bear much of the responsibility. Thanks to the lobbying of bar associations, the only people who may enter the legal profession are those who possess a license from the state, which is available only to those able to afford the extraordinarily costly path of law school and the bar exam. The outcome is the desired one: fewer lawyers, and therefore higher fees.
As with the medical profession, where costs could be dramatically reduced by allowing medical personnel below the rank of physician to perform routine work, paralegals are more than capable of performing a variety of legal tasks, but the guild reserves them for lawyers only. That means people wind up paying more—a lot more—for basic legal services. In 1987, the chairman of the Legal Services Corporation, W. Clark Durant, made an extraordinary address to the American Bar Association in which he suggested that his agency be abolished and that all barriers to competition in the market be removed. One day later, the president of the ABA was calling for Durant's resignation.
One paralegal in Portland, Oregon, decided that enough was enough. Robin Smith, who worked for several years in a large law office, had grown tired of lawyers charging exorbitant fees that their clients could barely afford, all for work that she herself had done. She opened her own business, People's Paralegal, Inc., where she and her colleagues offered basic legal services, such as the drafting of common legal documents, at lower prices.
Not surprisingly, however, the guild went into action. People's Paralegal found itself on the receiving end of a lawsuit by—who else?—the Oregon State Bar, accusing the firm of violating Oregon's prohibition on the "unauthorized practice of law." (Thanks to bar association lobbying, every state but Arizona has such a law.) People's Paralegal was shut down, and even ordered to pay the legal fees incurred by the Oregon State Bar when litigating them out of business! This is the ineluctable outcome of the guild mentality. A privileged few reap abnormally high salaries while the vast majority are made poorer by higher fees—and if anyone should attempt to give consumers an alternative to this kind of exploitation, the guild springs into action to quash the challenge. An entire society organized along these lines is scarcely conceivable, but that is what the guild system amounts to, romantic illusions notwithstanding.
Lesser examples abound. During the 1990s, 15-year-old Monique Landers of Kansas opened her own African hair-braiding business. Upon returning from a visit to New York, where she was honored as one of five outstanding high school entrepreneurs, she was informed that the state licensing board of Kansas was shutting her down. Not because of customer complaints, but because of the guild mentality of already existing establishments, which typically use mandatory licensure by the state as a way of limiting competition. She was told that she could stay in business if she spent a year at a licensed cosmetology school, but few of them teach the particular skill she already possessed, and none of them would admit her prior to her seventeenth birthday. "The Board won't let me earn my own money, and won't let kids like me learn to take care of ourselves," she said. "I think owning your own business is a way of being free."
Miss Landers' case is absolutely typical. In The State Against Blacks, Walter Williams provides a lengthy catalogue of occupational licensure laws and other barriers whose effect is to place overwhelming obstacles in front of those who wish to enter an industry. The New York taxicab industry is the classic example. To operate a taxi in New York City, a potential driver needs a medallion from the city. Of course, in a free market such a medallion would cost precisely nothing. But in the market as rigged in favor of the taxi guild, these medallions cost in the hundreds of thousands of dollars. It is impossible to measure how many jobs are destroyed by this kind of behavior, or how much higher taxi fares are for hapless city residents. But again, this restrictionist policy is precisely the kind of antisocial behavior that the infrastructure and indeed the very logic of the guild encourage.
Agriculture provides perhaps the most disgraceful example of what the guild mentality amounts to in reality. (Although proponents of the guild systems do not generally have farmers' guilds in mind, my point is to show where the logic of the guild system, in whatever section of the economy, must inevitably lead.) The federal government's assistance to farmers has often amounted to encouraging them to destroy (or not plant in the first place) huge stocks of crops, in order to increase their selling prices. This, in effect, is what a guild would do, though the guild would more likely keep supplies down and prices up by allowing fewer people entry into the guild in the first place, and/or requiring existing guild members to adhere to a production quota.
The costs and consequences of such an antisocial policy are staggering, and are all the more insidious because, as usual, the beneficiaries of these policies are clear and visible, while the victims are dispersed and largely unaware that an organized cabal is taking advantage of them. Here again we see the importance of Henry Hazlitt's lesson: the need to be aware of the long-term consequences for all groups, rather than the short-term gains of one group, that a given policy must produce. How many Americans realize that the price they have to pay for sugar—and, for that matter, all foods containing sugar as an ingredient—is much higher than necessary as a result of a government program?
Indeed, for most of the twentieth century the price of sugar to Americans was 500 percent higher than the world price, thanks to government price supports. This is certainly a boon to sugar producers, who receive an average of $235,000 a year from the policy. But it costs consumers well over $3 billion per year, and it puts all American industries that use sugar at a competitive disadvantage vis-à-vis foreign producers who are not forced to pay such an inflated price for sugar. This latter point is always overlooked by opponents of free trade, who in their zeal to protect jobs in Industry X from foreign competition neglect altogether the destructive effects that their preferential policy for Industry X has for Industries A, B, and C that use X as an input in the production of their own products. Job losses in those industries, though, will hardly ever be attributed to the tariff or other privileges shown to Industry X. Meanwhile, the government can point with pride to the jobs it has "saved." What is seen and what is not seen indeed!
Since 1937, as much as 40 percent of all oranges grown annually in the U.S. have, by law, been destroyed, fed to livestock, or exported in order to raise domestic prices. Quotas on peanuts—which, again, have exactly the effect on peanut production that a guild restricting entry into the field would have—effectively double the price of peanuts and peanut butter. Dairy subsidies are more outrageous still, with every dairy cow in America subsidized to the tune of $700 per year—"an amount greater than the income of half the world's population," Professor Eric Schansberg points out. All this inefficiency and destruction of wealth impoverishes society as a whole, and hurts the neediest the most. We will never know the full cost of these policies, since many of their costs include jobs never created and businesses never started. Let us be serious: is this really how we'd like our entire economy to be run?
All of these examples of genuine exploitation amount to one of many reasons that free-market economists hold the beliefs that they do. The greater the scope of state activity, the greater the potential for each pressure group to use the state apparatus for its own enrichment, at the expense of the rest of society. Since the benefits that accrue to such pressure groups from their political agitation are sizable and concentrated, while their costs are dispersed and hidden, the tendency over time is for more and more of this kind of activity to go on at the expense of the ordinary person.
Even if someone did make the connection between the higher prices he has to pay for peanuts and the government's restrictionist peanut policy, the amount of his individual loss is low enough that he has next to no incentive to devote himself to lobbying for its repeal. The relatively few beneficiaries, on the other hand, since they benefit so handsomely, have every reason to devote energy and resources to the maintenance of the policy. The great nineteenth-century political economist Frederic Bastiat called all this looting "legal plunder," and who can blame him?
Since guilds operate to restrict competition and price cutting, we must expect that the monopoly power of the guilds will have consequences analogous to those of the government favoritism we have just examined. Through a variety of methods, the federal government has granted special privileges to certain industries. In one way or another, these privileges dramatically limit competition—just what the guild system is supposed to do. No one has a right to expect that their effects would be any different if implemented by guilds.
John T. Flynn.  1998. The Roosevelt Myth, 50th anniv. ed. San Francisco, Ca.: Fox & Wilkes. P. 116.
Thomas J. DiLorenzo. 2001. “Franklin Delano Roosevelt’s New Deal: From Fascism to Pork-Barrel Politics,” in Reassessing the Presidency, ed. John V. Denson Auburn, Ala.: Ludwig von Mises Institute. P. 433.
Ibid., pp. 438–39.
Milton and Rose Friedman. 1979. Free to Choose: A Personal Statement New York: Avon. P. 229. Emphasis in original.
On the AMA, see Llewellyn H. Rockwell, Jr., “Medical Control, Medical Corruption,” Chronicles, June 1994; on the rise of medical licensure, see Ronald Hamowy, “The Early Development of Medical Licensing Laws in the United States, 1875-1900.” 1979,. Journal of Libertarian Studies: 73–119.
Quoted in Sue A. Blevins. “The Medical Monopoly: Protecting Consumers or Limiting Competition?” 1995. Cato Policy Analysis No. 246, December 15, 1995.
Friedman and Friedman. Free to Choose, pp. 229–30.
Mancur Olson. 1982. The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities New Haven, Conn.: Yale University Press. P. 66.
Sue A. Blevins. “The Medical Monopoly."
George Reisman, 1994. The Real Right to Medical Care Versus Socialized Medicine. Laguna Hills, Calif.: Jefferson School. P. 32; cf. on this overall argument Murray N. Rothbard, 1970. Power and Market: Government and the Economy (Kansas City, Kan.: Sheed Andrews and McMeel. Pp. 206–08 (but esp. p. 208); Ludwig von Mises, 1952. Planning for Freedom (South Holland, Ill.: Libertarian Press. Pp. 42–43.
Reisman, The Real Right to Medical Care. Pp. 31–32.
George C. Leef. “The Lawyer Cartel.” The Free Market, November 1998.
D. Eric Schansberg. 1996. Poor Policy: How Government Harms the Poor. Boulder, Colo.: Westview Press. P. 67.
Walter Williams. 1982. The State Against Blacks. New York: McGraw-Hill; see also Stigler, “Toward a General Theory of Regulation.” Pp. 13–17.
James T. Bennett and Thomas J. DiLorenzo. 1992. Official Lies: How Government Misleads Us. Alexandria, Va.: Groom Books. P. 111.
Schansberg, Poor Policy. P. 44.
Ibid., p. 48.