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--Robert D. $utton [March, 1999] At least 16 deaths have been attributed to listeria-tainted hot dogs and lunch meat. Who is responsible for this? Is it Sara Lee Corp., the company that sold the meat--or the FDA and USDA, whose inspectors pronounced the meat safe? The greater blame must fall on the regulatory agencies�not for screwing up (no one is omniscient, after all!) but for existing to begin with. To be sure, this conclusion flies in the face of "conventional wisdom." It is widely believed that businessmen, because they are "greedy," would sell unsafe products if the government didn't step in and force them to meet certain "minimum standards." Yes, businessmen are profit-maximizers, but this does not mean they will sell unsafe products. On the contrary, it is precisely the reason they won't. Businessmen want to keep their current customers, and they want to attract new ones. In the long-run, both goals require a reputation for consistent quality. In addition, a company's reputation is one of the main determinants of its market value: when one company "buys out" another, what is being bought is not just the company, but the trust that company has cultivated with its customers. Such long run incentives are what drive businesses to pursue quality. There are also significant short-run incentives to avoid selling unsafe products. The most obvious is the desire to avoid the financial strain and humiliation of lawsuits and massive recalls.1 An even more powerful deterrant is the loss of consumer trust. For this means not merely a short-term, drastic decline in business, but a long, uphill battle to regain the lost customer base. On a free market, unsafe products don't pay--not even in the short-run. (As evidence, witness that very few people, even half a decade after the e. coli outbreak, would even consider eating at Jack in the Box.) The causes of unsafe products can be grouped into two categories: intentional and unintentional. The first category, also known as fraud, is highly improbable in a truly free economy. Consider the hypothetical case of Al, who intends to enter some market quickly, "fleece the public" with fraudulent goods, and then run off. The first thing Al will realize is that he needs to get people to trust him before he can defraud them. He's new, a relative unknown, so it will take him years of consistent, quality service before he can amass a sizable market share. If Al is just a con-man, with no particular business talent, he will not be able to meet this requirement. If he is business savvy and has been turning a profit (and isn't going to die within the next week), then it will almost certainly pay him more to continue the business and receive a decent regular income, than to throw it all away for a one-time, slightly-higher-than-normal payment.2 If Al had enough sense to make it this far, it does not seem plausible that he would be stupid enough to "kill the goose who lays the golden eggs." Even without assuming the basic decency and reasonableness of most people (without which no society could last long!), deliberate fraud will probably be a negligible source of unsafe products in a free society. Most of the shoddiness will more likely be from unintentional causes (carelessness, ignorance, accidents, etc.). But again, competition ensures that those most likely to screw up are least likely to wind up in the position where they can inflict the most serious damage. To be sure, businesses are capable of accidents and oversights--but so are elected officials and their appointed bureaucrats. Human fallibility is a fact of our existence, not a "market failure" that some government agency can "fix." The most we can hope to do is to maximize the incentives to prevent accidents from happening in the first place, or--when they happen anyway--from happening again. This is what laissez-faire and the competition for reputation accomplish. To the extent that an economy is regulated by the government, its incentive structure undergoes a noticable change: businessmen. Businessmen, however, have a much greater incentive than bureaucrats to first uncover health risks (in competitors� products), and then to report these to the public (the consumers) as quickly as possible. At the same time, since they are spending their OWN money, and since no one can be forced to accept their findings, they are much less likely than the FDA to go around "crying wolf." On the flip side, they have every selfish incentive to have their own products tested and declared safe by private research organizations. The essential difference between this and the FDA is that private research groups could not prevent a product from being marketed. Thus, consumers would have the CHOICE of whether to trust the research groups�or take a chance and buy an unapproved product. This is ultimately how the competition for reputation leads to ever increasing consumer safety while limiting frivolous lawsuits and preserving consumer choice�all without government regulations. (For those who would raise the issue of "accountibility," businessmen are actually more accountable to individuals than bureaucrats. Businessmen get their positions through pleasing customers--whom they must continue to please if they wish to keep those positions. Bureaucrats get their positions through pleasing politicians--who get their positions through promising to voters and delivering to special interests. Whatever his millions, a CEO is still more accountable to customers than a bureaucrat protected by layers of bureaucratic fat.) The main evil of government regulations is that they serve to undermine the advantages of�and thus, the incentive to compete for�reputation, which ends up hurting consumers. Why should a company attempt to establish a long history of quality service�when a thousand years of excellence won�t free it from government-mandated suspicion? Why should a company seek the favorable independent judgment of consumers�when their judgment is (in theory, but not in practice!) made unnecessary by "minimum standards"? In short, why look for consumer approval when all that counts is "FDA approval"? At their very BEST, government regulations replace the profit-motive with the fear of punishment as the protector of consumers (despite centuries of evidence that the dollar is a much better incentive than the whip). This is assuming objective standards and honest inspectors�a very na�ve assumption. The government�s "minimum standards" are often quite arbitrary. How can one determine "minimum standards"�by what objective criteria? Minimum standards--by whose standard of living? Moreover, who should be the final authority on a product�s quality: a bureaucrat making (ideally, though rarely) educated guesses�or the inexhaustible empirical data provided by millions of consumers over a period of years in a free market? Which of these two sources would YOU trust more? At the same time, government inspectors are not above bribery. In some cases, it is cheaper for a company to bribe an official than meet the "minimum standards." (This, ironically, allows companies to acquire an UNEARNED reputation�which is both a danger to na�ve consumers, and an injustice to honest companies.) In other cases, standards are so non-objective that a business's life or death is literally determined by the subjective whim of some bureaucrat. In such cases, businesses find it necessary to grease a few palms. This necessity is heightened by the fact that inspectors must denounce a few products to justify their JOBS�there�s nothing to stop them (short of creating ANOTHER regulatory agency to watch THEM) from taking "personal gifts" into account when choosing sacrificial goats. (The objection may be raised that competitors and consumer guides can also be bribed. This objection overlooks the fact that a business would need to offer ALL its competitors a sum of money larger than they would get from taking its market share. It also neglects the fact that consumer guides are more severely damaged than any other company by even the mere suggestion of corruption. Finally, there are usually more potential private groups than bureaucrats who would have to be bribed. The above is a demonstration of how corruption is actually weeded out in a free market. And even if it isn't, the consumers are still free to inspect the food they buy, and reach their own conclusions.) But even if officials were honest, and standards objective, government regulation and minimum standards would STILL be a disservice to many people. If companies actually met these standards, they would obviously have to charge more for their products (assuming they didn�t go into business to lose money). Consumers would thus be forced to pay for a certain level of safety they did not desire or�in the case of the poor�could not afford. Ask any poor man, and he will tell you that stale bread is better than NO bread�by what right can bureaucrats force him to starve, on the grounds that the food isn�t "safe enough"? By what right can bureaucrats force individuals to deal with each other on any terms other than those they voluntarily agree to? Regulatory agencies and government-imposed minimum standards are indeed a practical absurdity�and a legal monstrosity. In America, men are (supposed to be) "innocent until proven guilty." To prosecute a man for a crime, there must first be evidence establishing both the existence of the crime and the man�s connection to it. The FDA doesn�t see any need for evidence, however. Businesses are regularly asked to prove (somehow) the NON-existence of a violation�which is impossible (one cannot, short of an omniscient process of elimination, prove that something does NOT exist). It is ironic that many of those who decry the "witchhunts" perpetrated against politicians, do not seem to mind the far greater injustices suffered by private individuals.
Notes
1 And I will add that lawsuits and returns do not require special liability and recall laws. To remain competitive, businesses usually end up guaranteeing the quality and safety of their products, and offering a return policy to back up that guarantee. For every defective product, the company must either honor its return policy, or be sued for fraud.
The larger one-time pay-off obviously comes from "cutting corners." However, there are definite limits to how many (and which) corners can be cut. In general, the more corners are cut, the more likely are a product's defects to be detected before many (perhaps any) people have bought it. And the less time the scam-artist has to disappear before the you-know-what hits the fan. |
