Tuesday, February 19, 2008

Thoughts on the Meat Recall and Regulations

The Monday Feb. 18th 2008 Detroit News carries an Associated Press report by AP writer Greg Risling. Evidently the U.S. Dept. of Agriculture (USDA) has recalled 143 million pounds of beef processed at the Westland/Hallmark Meat Co. on the basis of a video showing cruelty to cows who could not stand up. Law forbids the slaughter of 'downer' animals for fear that diseased meat may get into the food supply.

I'm not going to argue the pros and cons of this particular case. My point is that many people will use this incident as evidence to support the idea that we need regulatory agencies like the USDA to keep us safe. I say just the opposite is true. We would be much safer in an unregulated economy where the commodity of safety is provided by the market. In point of fact, the USDA did not protect the consumer in this case. It happened despite the regulatory agencies, despite the fact that a USDA inspector was there for a few hours every day. Why did regulators fail? Because they are not self-interested, they have nothing to gain by doing a great job and nothing to lose by doing a poor one. In a laissez-faire economy, producers would have everything to lose from a bad reputation and everything to gain from a good one.

Government regulations are a violation of peoples' rights first and foremost. Morally they are wrong. They represent the starting of the use of force against producers and consumers by 1. destroying the need of consumers to focus on the reputations of businesses and 2. by encouraging producers to be concerned with following certain rules rather than following reality as dictated by the market. For a good essay on the perils of regulation I recommend Alan Greenspan's 1963 essay "Assault On Integrity" in Ayn Rand's book 'Capitalism: the Unknown Ideal' which can be had in most bookstores or here. Yeah, that Alan Greenspan. His misadventures at the Fed do not detract in any way from the truth of what he wrote in 1963:

"Protection of the consumer by regulation is thus illusory. Rather than isolating the consumer from the dishonest businessman, it is gradually destroying the only reliable protection the consumer has: competition for reputation."

I wondered how this meat incident would be greeted in a laissez-faire economy. First, it would be all over the news wires and tv news programs pretty much as it is now. People would immediately stop buying their meat also as they are now doing. But there would be no regulatory agency to slap the wrists of the CEOs with fines or to lock up a few workers and that would be the end of it. Oh no. Once people lose confidence in the company's reputation for safety, investors would see no future for the company and would pull their money out. In short, the company would face bankruptcy. To save itself, the company would have to mount a massive pr campaign to assure the public it had corrected the errors and installed procedures for keeping 'downer' animals out of the food supply. If no one was made sick or died, it might work. Maybe. But if casualties occurred, the market could be very unforgiving.

Sure, the CEOs could declare bankruptcy, shut down the company and open up under a new name. But they would have to spend years developing a good reputation with the public. And the new company could easily be killed with a few magazine article statements to the effect that "New CEO Mr. Smith was the CEO of ABC company which went bankrupt due to a food safety scandal." If Mr. Smith succeeds in the new company, he will have earned it by establishing a good reputation with the public over time instead of having the aura of respectability bestowed on him instantly by meeting some government requirements. Today, shysters can easily open a company, meet government requirements and under an unearned aura of acceptability, fleece consumers. Without regulations, such hustlers would not be so easily disguised.

It is true that some of the regulations make sense like the one about keeping downer animals out of the food supply. One might wonder where would the impetus for instituting those procedures come from in a completely free society. Well, I can see where banks and insurance companies and competitors and the plain desire for a good reputation would encourage such good behavior. Imagine for example, a company that puts together a short documentary on how it runs its meat business and emphasizes how it keeps downer animals out of the food supply. If this in any way boosts its income, you can be sure that competitors will hasten to put out me-too ads. Don't we see this all the time now? As soon as some money making thing hits the market it is immediately followed by a half dozen copies.

I can't predict exactly how a free market would function. The above are approximations but I think very realistic ones. In closing I'll say that a regulated economy is a dumbed down one and a dumbed down one is an unsafe one.


Galileo Blogs said...

Excellent post.

You use the example of this meat recall to show how regulation is harmful. It violates rights, reduces the value of reputation and thereby interferes with the market for safety. The result is less safety (or even too much safety at too great a cost than market participants want).

The point about the seal of approval for shysters provided by government agencies is a good one. This is true whether it is the meat industry regulated by the FDA or the securities industry regulated by the SEC. Meet the minimum requirements and you get that FDA or SEC seal of approval, which requires a lot less effort than achieving a reputation in the marketplace.

Incidentally, I have met many regulators over the years as a stock analyst covering the electric utility industry. Most of them are not the "sharpest tools in the shed"; they are generally not capable of working in jobs of same rank as the people they regulate. Of course, there are a few bright ones, who often turn out to be activists who leave a mark of destruction in the form of new regulations that outlasts their tenure in office.

When you see regulation "up close and personal" as I have, it only reinforces the truth that regulation destroys. It destroys safety, health and wealth, all of the things it purports to preserve.

Amit Ghate said...

Nice post Mike. I particularly liked the ending sentence.

I think many of your points, notably "Sure, the CEOs could declare bankruptcy, shut down the company and open up under a new name. But they would have to spend years developing a good reputation with the public." also obtain with respect to the Chinese toy situation. In a truly free market, Chinese toys wouldn't just compete on price, there would be a big premium paid for reputation since educated parents would want to be sure that their children's toys were safe. Presumably this would involve new entrants to the market (the Chinese in this example) having to jump through hoops in order to show how their processes are, and will remain, safe; looking for independent third party quality audits and certifications, etc., etc.

However, as it stands now (as Galileo points out) there is just a minimum standard to be met and parents assume that the government is looking out for them -- with the result that they don't make the active judgments necessary to have a truly safe and informed marketplace.

Mike N said...

Amit: Thanks.
I think the toy problem with China that you mention is a good case in point. Parents are lulled into trusting the regulators to protect them, something the regs can't do.

Galileo: Thanks too.
I've not met any regulators myself but did observe a terrible result of one. One plastic company I worked for used to buy vast amounts of ground up telephones from a central warehouse, about 40,000 lbs every two weeks, and reprocess it into their product. This was a top grade ABS plastic that was being reprocessed. Then the gov decided that all telephones had to be made of flame retardent ABS. Well, FR plastic cannot be remelted and reprocessed. So now all that waste plastic was going straight to the landfill. One of those unintended consequences I'm sure. All so some regulator could feel that he did his altruistic duty and made something safer for the helpless masses. Sad.

Joseph Kellard said...


Another great article regarding regulation and the government alphabet agencies is Ayn Rand's "Who Will Protect Us from Our Protectors?" in The Objectivist Newsletter: Vol. 1 No. 5—May, 1962

Joseph Kellard

Mike N said...

Thanks for the reference to the Rand essay but I don't happen to have that one. I started my subscription to the Objectivist in 68. As far as I know, it only exists in the bound volumes now. I have been thinking about buying the ones I missed.