Every enterprise imaginable — dry cleaning, trucking, beauty parlor, grocery store, and on and on — is today under the thumb of the politician. ….

For those who already have capital, experience and education, the numberless “barriers to entry” erected by the state [ie - licensing, regulatory requirements] can be overcome, but to the under-capitalized poor, often with little experience and scant education, these barriers are virtually insurmountable. The illegal immigrant selling oranges at the off-ramp of the Los Angeles freeway is a truer capitalist than those businessmen who are constantly running to government for this-or-that favor or restriction.

Regulation is a necessary evil, but onerous or punitive regulation is a worse evil in that it distorts natural relations and market activity, typically to the greatest detriment of the “under-capitalized poor.”

[T]he barriers are more complex today than they were then. For example, suppose a person in a poor area saw the need for a low-cost barber shop. One might suppose that with a few hours practice, a $15 set of clippers, a chair and a willing customer, he could go into business. Then, if her were industrious, and were truly able to provide a service of value to his neighbors, he would prosper. Perhaps one day he could open a bigger shop and hire two of his relatives. That is the way things are supposed to be in a “land of opportunity.” But that is not the way things are. In California, this is what the law says he must do.

The first step for an aspiring barber is a barber’s license granted by the state Board of Barber Examiners. But this requires either two years as an apprentice working for someone else or 1500 hours (!) at a state-licensed barber school at a cost upwards of $3,500. … Then, it costs $50 to register for the state test. And then, if the test is passed, there’s another $50 for the two-year state license. But there’s still more, for the new shop must now be inspected and approved by the Board — for another $50. Then, a city business license ($106.43 in Los Angeles). …

Now, assuming he were still in business, suppose the new proprietor hires an assistant. Deductions, contributions and fees must be accurately computed and paid. Just for starters there’s Worker’s Compensation and unemployment insurance (around 1.3% of the first $7,000 in wages) paid for by the employer. Then, in California there’s something called the Employee Training Tax, 0.1% of the first $7,000. Then there is a Federal Unemployment Tax, $56 per year per employee.

Now come the payroll deductions. State Disability Insurance (SDI) is 15% of the first $31,767 in wages. Then there’s State Withholding Tax (variable). Then come the federal calculations which include Withholding plus Social Security/Medicare (7.65% matched by the employer).

The paperwork for all this represents a severe burden even to people with a fair degree of schooling; to the person with only a meager education and perhaps only a scant familiarity with the mysteries of bookkeeping, these artificial barriers to business survival are simply overwhelming. But there is still more: most states enforce — or try to enforce — minimum price schedules. But a poverty area shop forced to charge these inflated rates would go out of business in a week!

The barriers to entry for the would-be businessman barber are vast, and illustrate a key point: regulation is often merely code for political power and control under the auspices of ensuring “public health and safety.” Regulation is often used — sometimes purposefully, often inadvertently, as a method of insulating existing corporate interests from competition.

Take last year’s decision to give the FDA power to regulate tobacco. Who has come out on top so far? Marlboro. Why? Flush with cash, and with an army of lobbyists, they successfully convinced the FDA to ban flavored tobacco cigarettes on the grounds that they appealed to children.

A big maker of flavored cigarettes (a competitor) was Djarum, an Indonesian company that has been effectively illiminated from the U.S. market by this subtlely protectionist regulation.

And most interestingly, Marlboro’s menthol flavored cigarettes were exempted from the flavored tobacco ban. Critics have dubbed this change in law the “Marlboro Monopoly act of 2009.” (Blacks represent a large percent of menthol sales, and a ban including menthols would have dealt a heavy blow to Marlboro’s market share.)

The question should be always asked, prior to agreeing to new regulatory barriers: Who stands to gain, and who stands to lose, and why?

Continuing with a final excerpt from The Incredible Bread Machine:

A competitor expained the real issue: [upstart competitors] are “a threat to those of us who are licensed and went through the normal channels.”

How often is required licensing meant as a public safety tool, or really just a industry method of insulation? It’s never explained why, for instance, barbers could obtain a license (and receive, say, a tax credit for doing so), if they chose to, while other barbers could choose to forgo licensing and perhaps suffer a resulting loss in business.

In the same way businesses promote acceptance of Visa/MasterCard with window stickers, a business could promote licensing similarly, and the choice of whether to patronize an unlicensed shop could be left to the consumer.

***

Take-Away Thoughts: Bureaucracy and regulatory systems function well and tend to genuinely serve the public interest best when they prize efficiency over process. The problem is that efficiency is most often the result of adopting an entrepreneurial/innovation-minded attitude, whereas bureaucracy is best suited for management and functionary purposes.

The weaknesses of bureaucracy and regulation can be mitigated only so long as entrepreneurial/innovative leadership (in this instance, political) approaches are taken to how that system is meant to function, and whether it’s designed to promote market actions (as addressed in the above example) or whether it’s focus is mainly punitive.

Related Reading: John Stossel: Whose Body Is It?