Freeman

ARTICLE

We Would Be Wise To . . .

JULY 01, 1986 by DALE M. HAYWOOD

Dr. Haywood teaches economics at Northwood Institute, Midland, Michigan,

How best to supply the goods and services consumers value most.

During the past several decades, government has become a primary provider of education, mass transit, fire protection, garbage collection, road repair, and park maintenance. We may have been lulled into thinking that government is the best provider for such services. What’s more we may have almost unconsciously come to believe that government can be the only provider of some of these goods and services.

But does government perform these economic roles as we assume it does? In those instances where government is doing the jobs, is it doing them at the lowest possible cost?

To answer our questions, we will examine two government-provided services: restaurant food preparation standards and air traffic safety. These services affect us all. They are also representative of most other government-supplied goods and services.

Federal, state, and local governments traditionally have sought to insure that employees in restaurants and other public eating places prepare and serve food at least as hygienically as the codes require. Governments employ a swarm of inspectors to enforce their complex web of regulations. Underlying this regulation/inspection system is the premise that if there were no regulations and inspectors, unscrupulous restaurateurs would harm unwary customers by preparing and serving food under unsanitary conditions. In theory, the regulation/inspection arrangement insures that this won’t happen.

There is some evidence, however, that this is not the actual practice.

The Mirage. After years of complaints by owners of small businesses in Chicago of the day-to-day corruption they endured, The Chicago Sun-Times decided to investigate. The Better Government Association joined with the Sun-Times in its investigation. The strategy these two organizations chose was to buy a bar and restaurant and run it themselves. The newspaper’s reporters became “waiters.” Its photographers became “plumbers,” who periodically visited the restaurant to make “repairs.” They called their restaurant Mirage.

The Sun-Times people deliberately created health and safety hazards-and waited to see what would happen.


In four months of operation, they found themselves encountering:

• Payoffs of $10 to $100 grabbed by city inspectors who ignore health and safety hazards when the price is right.

• Shakedowns by state liquor inspectors who demand whatever is in a tavern’s cash register for their silence about liquor violations.

• Tax fraud by accountants who conspire with taverns to cheat on state and federal taxes in a practice so widespread it may be costing Illinois $20 to $50 million in sales taxes alone.

• Misconduct and negligence by public employees who loaf on the job, use city equipment for private gain and routinely demand cash under the table for what should be public services.

• Illegal kickbacks, tax skimming and offers of political fixes from jukebox and pinball machine operators—including one former policeman who alone may be failing to report a half million dollars a year in taxable income.

City inspectors marched through the Mirage, hands out and eyes averted, ignoring city code violations for $10, $50, $100 on the side. It was the payoff parade come to call (Detroit Free Press, January 15, 1978).

Yes, there probably are some unscrupulous restaurateurs. But the Sun-Times’ experience with the Mirage proves that there are some unscrupulous health and safety inspectors, too. Such experiences may quite rightly cause us to doubt if any of governments’ regulation/inspection systems do in fact accomplish what many of us assume they accomplish.

Is another layer of regulations and inspectors the answer? That’s doubtful. Almost certainly there would be some dishonest inspectors among this group also. So a second group of “policemen” to police the first group of “policemen” probably wouldn’t get us closer to our goal of hygienically prepared food in public eating places—or to any of the other goals of governments’ regulation/inspection systems.

Indeed, one can’t help but wonder which is the more dangerous situation: (A) patronizing a restaurant with no suspicion about its sanitation practices because you believe that governments’ regulations and inspectors are looking out for you, when in fact they are not, or (B) patronizing all restaurants with skepticism, because there is no effort by government to protect you. Mightn’t consumers with attitude A be the more vulnerable?

Voluntary Market Responses

So how are we going to realize our goal of healthful food preparation in public eating places? Let’s consider some voluntary, free market responses to John Q. Public’s demand for safe restaurant food.

Bill Knapp’s. Bill Knapp’s is a chain of sixty restaurants that serve moderately priced food. The restaurants are located primarily in Michigan and Ohio. The owners of this chain have responded in various ways to the concern they believe their customers have for wholesome food. One of those responses is in the physical configuration of the restaurants.

The sixty stores have an identical floor plan. It’s a huge T. Every diner enters at the base of the T. The host then ushers patrons to seating in one of three areas: the base of the T, in a separate dining room that forms the left half of the top of the T, or in another dining room that forms the right half of the top of the T.

The kitchen is located at the junction of the base of the T and the top of the T. And it is largely exposed. Thus, irrespective of which of the three dining areas they are seated in, all guests get a good look at the kitchen en route to their tables.

It’s impossible to say what portion of Bill Knapp’s thirty-eight years of success is due to this kitchen-disclosure feature of the chain’s restaurants. But is seems likely that this device is a significant factor.

The Embers. In Mt. Pleasant, Michigan there is a fine restaurant that’s been satisfying its customers since 1958. It’s called The Embers. At this restaurant, meals are moderately expensive. The owner of The Embers caters to a different segment of the market than Bill Knapp’s.

The ambiance at The Embers contrasts sharply with the atmosphere at Bill Knapp’s. Where at Bill Knapp’s there is an openness, there is an intimacy at The Embers, with its numerous alcoves separating the diners from each other and giving them a sense of privacy. The kitchen is unobtrusive. Management seeks to make the preparation and handling of most of the food about as inconspicuous as possible.

So what’s the free market mechanism protecting diners at The Embers? A simple invitation printed on the menu, an invitation to each guest to inspect the kitchen personally.

My wife and I had patronized The Embers several times. Each time, after reading the invitation to inspect the kitchen, I kept saying, “We ought to do that sometime.” It was on our fourth or fifth visit that I overcame my inertia. As we were exiting, I asked the hostess when we might take the owner up on his invitation. She responded, “How about right now?”

The message in her response was, “We are proud of our kitchen at all times. It’s not something we get in shape only when company is coming.”

We took the on-the-spot tour and were favorably impressed. Obviously, there’s no paying off the “inspector” under this arrangement.

Air Traffic Safety

Let’s consider another economic service we all value, air traffic safety. When commercial aviation was in its infancy, the private, for-profit airlines set up Air Route Traffic Control Centers in major cities in the eastern and northeastern regions of the United States. These facilities, basically control towers, provided a modest degree of air traffic control within a fairly short radius of the cities where they were located. This was a reasonable system for its time.

But when the federal government offered, shortly after the Great Depression, to take over the system and operate it for “free,” the airlines quickly accepted. Since then, the Federal Aviation Administration (FAA) has assumed, among other duties, the major responsibility for air traffic control. In an article in Private Pilot (October 1984), Kevin Murphy reported: “From the rather primitive early efforts at control, air traffic control sprang into the full-fledged, all-encompassing system we have today, with control towers, air route traffic control centers, flight service stations and controlled airspace from top to bottom. No reasonable pilot can argue today that the modern ATC (air traffic control) system does wonders for collision avoidance, but they can argue about one thing: cost.”

Just how costly is the air traffic control we are getting from FAA? Because there are a few privately owned, for-profit firms operating airport control towers in the United States we can answer this question. According to Murphy: “Private operators spend an average of $96,000 a year to staff and maintain a small airport tower, one third of the average FAA cost of $294,000 per year.” Of course, price is just one dimension of an economic good. What about the quality of service provided by private firms such as Barton ATC and Midwest ATC?

“We’re very happy with our control-tower service,” says the manager of the airport in New Iberia, Louisiana. “The folks here always have acted and conducted themselves in a very professional manner. They’re very easy to work with, and their level of performance is very adequate.”

A Frontier Airlines pilot reports, “These are good people to work with. They’ll give you anything you want. I’ve never had a problem with any of them.”

No private firm has a government-guaranteed monopoly at any airport it serves. The manager of the airport in Enid, Oklahoma observes that the threat of being fired is a powerful stimulus to private air traffic controllers: “If controllers . . . don’t do a good job, they won’t be around next year.”

Perhaps a still more significant tribute to the private ATC firms comes from the government itself. In 1983, the federal government sent a team to evaluate the Farmington, New Mexico tower operated by Midwest ATC. The team reported: “Midwest ATC is providing satisfactory ATC service and has an excellent working relationship with users and airport personnel, as well as other FAA facilities. The relationship between controllers and pilots is the best it has ever been.”

The evidence is clear. Private, profit-seeking air traffic controllers do at least as good a job of providing safety in air traffic as their FAA counterparts. And private firms can do it at a fraction of the cost. Wouldn’t it make good sense to have the private firms, as the proven superior providers of air traffic control, operate all of this nation’s control towers? According to a report cited in Reason magazine several years ago, the nationwide replacement of FAA towers with private towers would save United States taxpayers about $25 million per year!

Conclusion

Are governments always providing the economic goods and services we assume they’re providing? If the service in question is sanitary food preparation, the answer is “no.” The experience of The Chicago Sun-Times and the Better Government Association with the Mirage is proof of that.

Can the private sector provide this service? The answer is “yes.” And when it is provided as Bill Knapp’s and The Embers have provided it, it can contribute to the growth and longevity of those restaurants that deliver it.

One Principle. Where there is a free market, there is competition. The employees in competitive enterprises have to woo customers. In order to do so, they must be attentive to their customers’ wishes. There are no exceptions.

So if the business is a restaurant and the wish is for hygienically prepared food, it is in the self-interest of the owner and employees of that restaurant to prepare food hygienically. And if customers want the same amount of hygiene, restaurants will provide basically the same standards of hygiene. If customers want different amounts of hygiene, restaurants will have different standards of hygiene.

Perhaps we would be wise to take a closer look at all the goods and services we are supposed to be getting from government. Maybe we’re not getting what we assume we are in education, mass transit, fire protection, garbage collection, road repair, park maintenance, and so on. Maybe politicians, bureaucrats, inspectors, and other government employees are arbitrarily determining what we’re getting, because they are shielded from the wishes of consumers.

In those cases where government is providing a valued service, is it doing so at the lowest possible cost? By contrasting FAA-supplied air traffic control with air traffic control supplied by private, for-profit firms such as Barton ATC and Midwest ATC, we discover the answer is definitely “no.” There is a simple explanation for this.

A Second Principle. Whenever a job is done by a profit-seeking firm, there is someone who stands to gain if the firm makes a profit. That someone can improve the firm’s chances of making a profit if he can hold down or cut costs. When someone is motivated to hold costs down, it’s more likely that they will be held down. That motivation is stronger among the people who own and work at Barton ATC and Midwest ATC. Because the FAA is not a private, profit-seeking organization, that motivation is weaker among FAA employees.

Perhaps we would be wise to rely more on private, profit-seeking firms if we want to get the goods and services consumers most highly value—and be more certain of getting them at the lowest possible prices.

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July 1986

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