Licensing

You can imagine the perfect competition as a farmers market. Everybody can grow anything. They use what they produce, and they sell the rest. Stock exchanges are similar, when traders can actually sell and buy both commodities and medical research equity. This ensures that interest rates are the lowest possible. Investments and the workforce that accompany them are directed, where they generate most income and GDP growth. What allows this is that everybody can open a trading account to invest their savings.

The other structure that we see working is a circular vertical chain of monopolies, and oligopolies. Semiconductors, mobile operating system platforms, application stores have very strong positions with powers almost like monopolies in their respective industries. Such syndicate-like structures have a unique characteristic. The veto power.

Copyright© Miklos Szegedi, 2023.

The circle works only if each participant does its best. If a semiconductor manufacturer vetoes the project, you cannot find another one to substitute. Such circles are vertically integrated oligopolies. Such constructs increase prices like monopolies to maximize their income. They have strong cash reserves that can be used to buy new competition, raising the barrier softly to reach their economic size.

Such a veto is sometimes beneficial, like in case of EU governments, where a single veto can prevent the exploitation of minorities. Veto limits the supply of policies giving more space to private enterprise.

Low prices of perfect competition is sometimes a problem. Governments introduce licensing to raise standards. This allows charging reasonable prices, and to set a minimum wage. Licensing also allows lawyers, realtors, and medical professionals to finance their initial investment in education.

Licensing also builds a soft enforcement strategy below criminal standards. Malpractice may result in losing the local license, but a professional may continue elsewhere. It acts as a valve against government power.

Licensing is usually enacted to satisfy local supply in industries where long term data is available. It is typical in one to one servicing industries like lawyers or doctors. Their income becomes predictable allowing issuing loans and mortgages easier.

It is not just the stable credit scores, it is also the stable tax revenues that make licensing and similar policies lucrative to governments. Higher prices generate higher income and a stable flow of income taxes and sales and use taxes. It also acts as the tool for governments to ensure basic services.

Problems arise when licensing allows too big income gaps. Parts of the society may fall out of basic services like education or healthcare. Citizens stick to their own solutions or alternatives as a result. If you cannot sell your product as butter in the grocery store due to regulatory limitations, you will position it as a cheaper brand like breakfast spread.

More licensing lowers overall GDP as a result. It may also limit salaries in the long term resulting in inefficiencies and corruption to get projects done. Burnout and lack of options may lower the number of licensed professionals reducing service quality.

Licensing may be abused to enforce tribalism or discrimination. Good licensing standards require publicly registered license numbers and reporting standards like for sale signs.

Licensing can also be enforced by customers. A maker of Kobe beef for forty years may retire soon. They teach new employees their know-how. However, the process was also built through decades of experimentation.

Younger beef makers will still see the urge to try the same things, increasing prices and lowering product quality from time to time. We see such generational changes today with the retirement of the baby boom generation. It can lead to quality and efficiency issues causing inflation temporarily.

Limited licensing allows economies at scale like manufacturing, or cloud services. Simpler employment requirements still ensure that prices, salaries are higher ensuring a strong tax revenue base. Scale economies lead to prosperity by companies training their own staff quickly and being flexible in hiring, firing, and ensuring free enterprise.

Free enterprise allows the economy to grow, when it has the potential to grow. It also spreads quality and differentiated products. A variety of such goods increases well-being and living standards. Craftsmanship of small businesses, and fluctuation of demand requires flexible standards.

Regions with strong licensing standards like the EU have not seen a real productivity growth for decades. Licensing on the other hand is better for industries of strong supply chains that ensure trust and product quality.