Freeman

ARTICLE

Another View of Consumerism

OCTOBER 01, 1977 by DENNIS BECHARA

Mr. Bechara recently earned a master’s degree in Labor Law at the University of Pennsylvania and will be returning to his native Puerto Rico to practice law there.

The consumer protection movement¹ is becoming another of those "sacred cows" which is above criticism. And that is an alarming develop­ment, inasmuch as the movement does not serve the best interests of consumers.

Stripped to its essence, the con­sumer protection movement is sim­ply another manifestation of the anti-capitalist mentality. It is one more way of "reforming" the free market and curbing the actions of entrepreneurs whose interests sup­posedly are contrary to those of consumers. In that sense, this move­ment resembles so many others which are grounded in a basic mis­trust of the free enterprise system. And it is altogether proper to in­quire just how far the consumerist would go. Why should he stop at prescribing standards of quality? From his point of view, we consum­ers may be better protected under a totally planned economy—one in which only the products the plan­ners deem good for us would be pro­duced, and everything else would be prohibited.

The American experiment with Prohibition closely parallels today’s consumer protection movement. The Prohibitionists were convinced that people should not drink. Not content simply to stop their own drinking, they would use the coercive power of the law to stop others as well. The irony, of course, was that drinking alcohol as such was not prohibited; rather, the manufacture, sale, and transportation of alcohol was banned. Ludwig von Mises explained it as follows:

The idea was that people indulge in the vice of drinking only because un­scrupulous businessmen prevail upon them. It was, however, manifest that the objective of prohibition was to encroach upon the individuals’ freedom to spend their dollars and to enjoy their lives according to their own fashion. The re­strictions imposed upon business were only subservient to this ultimate end.2

Viewed in this light, one may begin to examine the direct and in­direct consequences of consumerism.

Consumers Do Not Have a Common Interest

As we approach the problem, we must recognize a fact often over­looked: consumers do not have a monolithic common interest. Some consumers may value quality above all else, while others value low prices. The beauty of the market system is that the consumers, through their economic voting power, show the producers which types of products they prefer. Thus, if consumers want low-quality prod­ucts, these are the ones the market will offer. If there is a segment of the population willing to pay a higher price for better products, the market also will provide the products to satisfy such a demand.

Some of the consumer advocates contend, however, that the con­sumer is simply told to buy what­ever goods are produced, on a take it-or-leave-it basis. Hypothetically, it may be that some producers offer their products in such a way or try to create a demand for their products; but in the long run this type of activity cannot survive. If producers insist on offering unwanted prod­ucts, they must not be surprised when their sales drop. Even if man­ufacturers succeed initially in "creating" a demand for products, there are two possible consequences. Either the consumers will realize that they did not want such a pro­duct and cease buying it, in which case only those that produce what pleases the consumers most will be rewarded; or the consumers will be persuaded that the product is good, and will continue to patronize such a producer until a competitor pro­duces the product more efficiently.

Those who think that manufac­turers create a demand for unneces­sary products do not realize that a new product, successfully marketed, was desired by the consumers, as proven by the long-run survival of the product. The fact that the "Edsel" and "Corfam" were market fail­ures is argument against those who believe that consumers have little to say about the long-run mar­ketability of a given product.

Also, how do these critics distin­guish among the successful prod­ucts, those that are genuinely de­sired by the consumers and those that have been "forced" on the con­sumers by the sellers? The plain fact is that they cannot make any rea­sonable distinction. For if they could make such distinction, and if they were serious about the so-called plight of the consumer, they simply would dictate to industry those products which could or could not be produced.

The Value of Competition

Perhaps the main virtue of the market system which is being ig­nored by consumerists is the value of competition. If a producer is try­ing to sell a product which does not quite satisfy consumer desires, the profit motive will lead competitors to improve the product. And even if a producer succeeds in satisfying consumers, his high profit margin will serve as a magnet that will attract other producers into that particular field, with the consumer being the ultimate beneficiary of such a system.

The activists in the consumerist movement are contending, in effect, that consumers have poor taste. The further implication, of course, is that consumers simply lack suffi­cient intellectual capacity to decide the good or ill of a product; that consumers will buy products they do not need. Such a simplistic version of the realities of the market place is a dangerous doctrine. The imposi­tion of product quality standards denies consumers the economic lib­erty to purchase products of lower quality. As Frank Knight said:

A large part of the critic’s strictures on the existing system come down to pro­tests against the individual wanting what he wants instead of what is good for him, of which the critic is to be the judge; and the critic does not feel himself called upon even to outline any standards other than his own preferences upon a basis of which judgment is to be passed.3

According to Bertel M. Sparks, the real question is whether or not people are to be free to make mis­takes.’ Are we to allow people to buy products that are not really good for them or are we to eliminate the freedom to make mistakes? It should be recalled that our freedom is based on our desire to be free to try, free to succeed, and equally free to fail. Thus, we are dealing with a pro­foundly difficult philosophical prob­lem.

It should be clear that when we talk about the consumer activist, we are not referring to the rightful ac­tions a consumer is entitled to take when he buys a product that is faulty, or when his product creates damages to a third person.

Caveat Emptor

The rule of caveat emptor has been increasingly expanded by judi­cial interpretation, making the exis­tence of consumer activists unneces­sary. Caveat emptor, as Professor Sparks defines it, "is nothing more than a doctrine that the seller will not be held responsible for promises he did not make or purport to make in any manner whatever."5 Other­wise, the rule has been expanded to the point that a seller generally is liable for any damages caused either in the manufacture or in the sale of the product which reasonably may be expected to take place. Thus, a manufacturer is obligated to exer­cise due care in the design and man­ufacture of his products, and he is liable to the ultimate consumer, either on a negligence standard or on a strict liability theory.

Likewise, the seller is under duty to give warnings to the consumer of any unreasonable risks or dangers involved in the use of the product. The seller is entitled to have his directions heeded, and as a general rule, he is not responsible if the product is used for a purpose other than its intended use. At the same time, the seller is not responsible for obvious risks of which the consumer should take notice. For instance, we know that a knife cuts, so the dan­ger should be obvious to all. Thus, if a person cuts himself while using a knife that is manufactured well, it would be unreasonable to hold the manufacturer or the seller liable for this.

The law of products liability is a very complicated field, full of con­flicting cases. It is not the purpose of this essay to summarize such an aspect of the law. For the interested reader, there are other sources which present a more comprehen­sive coverage of the problem.6 The purpose of mentioning these general propositions is to show that, as a matter of law, the manufacturer is already in a position of owing certain duties, not only to his custom­ers, but sometimes even to third parties when his product causes damages that one reasonably could have foreseen.

Thus, the consumer activists are to a certain extent acting beyond these requirements of the law. They are pursuing policies which are not merely directed at remedying dam­ages that sellers may cause, but they are going beyond that to begin standardizing all products to con­form to the norms which they be­lieve are the only valid ones.

Standardization of Products

But it must be recognized that if we are to require standardization of products, this will have a very nega­tive effect on competition. Govern­ment regulation of the economy in general tends to have this effect. For example, as Louis M. Kohlmeier mentions:

There is evidence that government regulation of commercial airline trans­portation, which began with the purpose of assuring flying consumers the most frequent and the most reasonably priced possible service, now has become gov­ernment protection of the biggest air­lines, meaning overpriced and not-so frequent airline service.7

Thus, it is entirely conceivable that some sellers may favor laws that require product standards be­cause these laws will protect such sellers from the effects of competition which may provide lower-cost or lower-quality products.8 Of course, it is precisely the poor who suffer the most from the effects of regulation, since they would have to buy higher-priced goods as a result of regulation. Alchian and Allen men­tion an example of the effects of regulation on the consumer which is curious because the product from which the consumers were being protected is now widespread and universally accepted. This is what they say:

Until about 1950, margarine could not be sold in some states—ostensibly be­cause it was considered a "low quality" substitute for butter. And in many areas it could not be sold except as a white spread—even though butter is some­times artificially colored and flavored. The publicly espoused rationale was that margarine is inferior and consumers would be misled. In fact, however, the laws protected milk producers from new market competition—as is evidenced by the fact that major milk-producing states had the strongest bans on margarine. Even mayonnaise was at one time similarly protected from competition from the "inferior" (and cheaper) substitute, salad dressing.9

Another author, Charlotte Twight, has written on the inherent dangers of product quality laws. She stated that many of these laws ban "putrid," "decomposed" or "filthy" products without defining just what those terms really mean. Thus, the laws are charged with tremendous subjective judgments, with the inevitable result that the government will attain enormous powers over the economy. Political considerations also will be impor­tant in determining which products may or may not be allowed, thus placing the behavior of the economy one step further removed from the consumers, who are supposed to be the real beneficiaries of such a system of regulation.10

The Consumer Product Safety Act of 197211 and the agency which the Act establishes, have the power to set product quality standards on a large set of consumer products. Al­though there are many products which the Act does not cover, many of these in turn are covered under other laws." The Act delegates to the Consumer Product Safety Commission such powers as to set the actual product standards and to ban "hazardous" products. Thus, this Act confirms the point Charlotte Twight had stressed, the inherent subjectiv­ity of any such standards.

Who Shall Decide?

The real issue which such legisla­tion presents is whether we want the consumers to direct production or whether we want a bureaucratic agency to authorize or to prohibit production. And a second issue concerns the actual costs involved in such regulation.

We must recognize that the con­sumers will pay in three different ways for the "benefits" of regulation.

First of all, as taxpayers, we will have to support the bureaucratic agencies that deal with consumer related issues. Let us not be de­ceived by the actual number of such agencies. As an American Enter­prise Institute study showed, in 1969 there were 413 units of the federal government taking care of 938 consumer related activities." This means that by paying higher taxes the consumers have that much less to spend or to invest as they choose.

The costs are not limited merely to supporting another bureaucracy. The net effect, of course, is to divert capital from the private (voluntary) sector of the economy to the public (coercive) sector. This inevitably will reduce production. The consum­ers also will be faced with higher prices for the products which the bureaucracy is regulating, due to more expensive production methods and the costs of complying with the governmental regulations.

Alternative Opportunities

Perhaps the highest cost is in the banning of alternatives from the market. The consumers would have fewer products to choose from, as any lower-quality products that would not meet quality standards would be off the market. If we were dealing with another form of civil liberty, such as free speech, there would have to be a compelling state interest that would justify such an abrogation of a right. It is unfortu­nate that many people do not regard free choice in the economy as a fundamental right. Even more detri­mental is that this choice may be limited by what is deemed to be "in the public interest."

It is fitting to close the case with a quotation from Ludwig von Mises that concerns the fallacy of the presently-created dichotomy be­tween political and economic rights. Once we are aware that our freedom is indivisible, we shall begin to see through such movements as the consumerist one, the inevitable con­sequence of which is the further elimination of our freedom.

The idea that political freedom can be preserved in the absence of economic freedom, and vice versa, is an illusion. Political freedom is the corollary of economic freedom. It is no accident that the age of capitalism became also the age of government by the people. If individ­uals are not free to buy and to sell on the market, they turn into virtual slaves dependent on the good graces of the omnipotent government, whatever the wording of the constitution may be.14

 

—FOOTNOTES—

1Defined by Max E. Brunk in The Freeman, February 1973, as "a movement of third-party activists who champion causes which appear to them to be beneficial to consumers in general."

2Ludwig von Mises, Human Action (Chicago: Henry Regnery Co., 3rd ed., 1966), p. 733.

3Frank Knight, Risk, Uncertainty and Profit (Boston: Houghton, Mifflin Co., 1921), p. 182.

4"Caveat Emptor: The Consumer’s Badge of Authority," The Freeman, June 1975.

5lbid., p. 327.

6William L. Prosser, Law of Torts (St. Paul: West Publishing Co., 4th ed., 1971), chapter 17.

7Louis M. Kohlmeier, Jr., The Regulators (New York: Harper & Row, 1969), p. 6.

8Alchian and Allen, University Economics (Belmont: Wadsworth Publishing Co., 2d ed., 1967), p. 335.

9lbid.

¹ºCharlotte Twight, America ‘s Emerging Fascist Economy (New Rochelle: Arlington House Publishers, 1975), pp. 114-115.

1115 U.S.C.A. sections 2051-2081 (1972).

12For example drugs, which are covered under the Federal Food, Drug and Cosmetic Act.

¹³"The Proposed Agency for Consumer Ad­vocacy" (Washington, D.C.: American Enter­prise Institute for Public Policy Research, 1975).

14Ludwig von Mises, Planning for Freedom (South Holland: Libertarian Press, 3rd ed. 1974), p. 38.  

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October 1977

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