The Self-Interest of Self-Regulation
FEBRUARY 01, 1988 by J. BRIAN PHILLIPS
Mr. Phillips is a free-lance writer based in Houston, Texas.
Proponents of government regulation often overlook the many ways in which the free market itself polices producers, without the need for government involvement. Let us make a quick survey of these ways, in the hope that it will help us better to understand the market process, as well as shed further light on the wisdom of government intervention.
Almost all businessmen realize that to succeed they must please the buying public. A satisfied customer most likely will become a regular customer. A dissatisfied customer will not return, and too many dissatisfied customers will cause a business to fail. Consequently, the businessman has an interest in providing his customers with quality products and services at reasonable costs.
Honest businessmen, who are well aware of the importance of customer goodwill, try to insure that their businesses are not harmed by the unscrupulous actions of others. Many of them have formed voluntary associations to provide self-regulation in their industries.
It is important to understand the differences between a voluntary association and a government agency. The fact that the former is voluntary and the latter is compulsory is the fundamental distinction. But this leads to other differences.
Government agencies are political bodies. Consequently, political expediency often has as much to do with a regulation as any legitimate economic or ethical concern. Furthermore, government regulatory agencies are established for the express purpose of protecting consumers. And herein lies the unspoken premise: that the interests of consumers and producers are inherently at odds.
Voluntary associations are established precisely because this assertion is false—honest businessmen want to protect both consumers and themselves from dishonest businessmen. Voluntary agencies operate on the premise that the interests of consumers and producers do not conflict and, in fact, are often the same.
Government regulatory agencies ultimately set producers against one another, as each tries to secure political privileges for himself. Voluntary associations operate cooperatively, as producers realize that their mutual needs can be better served by working together.
All of this sounds good on paper. But do businesses really attempt to promote the interests of both consumers and producers? Is practice consistent with theory?
Most trades and professions have some form of professional association. Many of these are little more than fraternal organizations. Others would be more accurately described as political action committees. But many provide some form of self-regulation within their trade through the inspection of facilities, the establishment of a code of ethics, and/or the arbitration of disputes. Businessmen across the nation recognize the self-interest in self-regulation.
For example, the Greater Houston Builders’ Association (GHBA) is a voluntary organization whose members include insurance, mortgage, and title companies, banks, subcontractors, material suppliers, and many other trades, as well as builders. The association’s primary purpose is to further the interests of its members through advertisements, promotions, the arbitration of disputes, and by watching for legislation which will adversely affect the building industry.
But the association also promotes the interests of consumers. Its Code of Ethics states, among other things: “Honesty is our guiding business policy. High standards of health, safety, and sanitation shall be built into every residence. Members shall deal fairly with their respective employees, subcontractors and suppliers." GHBA members can use the association’s logo in their advertisements, indicating to consumers that the business has pledged to uphold these principles. When disputes do arise, consumers have not only the local GHBA to turn to, but also state and national builders’ associations.
On a state level, the Bed and Breakfast Society of Texas (BBST) offers self-regulation to approximately 75 bed and breakfast establishments across the state. BBST is a privately owned business which also serves as a reservation service for its members. BBST owner Marguerite Swanson has a background in guidance and counseling, which she uses to screen potential guests. Because many of the bed and breakfasts are located in private homes, this screening process prevents the dilemma of an unexpected guest suddenly appearing at one’s door. This provides members with a degree of protection.
To join the BBST, an establishment must meet Mrs. Swanson’s guidelines. These include a separate bathroom for each guest bedroom, fresh fruit for breakfast, and more subjective criteria such as comfort and safety. Mrs. Swanson personally inspects each establishment and looks for “the kind of accommodations that I and all the people involved with bed and breakfast would actually seek ourselves.” She also teaches several courses in running a bed and breakfast, which member hosts and hostesses must periodically attend.
Consumers benefit from the BBST because they are guaranteed quality accommodations at reasonable rates. Additionally, Mrs. Swanson tries to match guests with compatible hosts, making the experience more pleasant for everyone. She must be successful, because she always has a backlog of bed and breakfasts wanting to join her association, and most guests are repeat customers.
A more widely known example of self-regulation is the Better Business Bureau (BBB). Established in the early 1900s “to combat untrue advertising and set standards for advertisers,” BBBs exist in nearly every city in the country. Today the BBB has three primary goals: main-raining truthful ads, early detection of fraud, and arbitrating consumer disputes. A BBB pamphlet states that the organization “is devoted to the protection of the consuming public and to the vitality of the free enterprise system. R works to fulfill its mission by fostering the highest standards of responsibility and probity in business practice, by advocating truth in advertising and integrity in the performance of business services.” Clearly, the BBB and its members recognize the self-interest in self-regulation.
Another form of self-regulation includes authorized and limited dealerships. This method insures consumers that the local businessman is in good standing with the manufacturer and is qualified to sell and/or service a particular product. When dealerships are limited, dealers must maintain high standards or the manufacturer may withdraw its authorization and present it to a competitor.
In addition to these various forms of self-regulation, the free market has provided a number of other means of promoting consumer awareness and exposing fraudulent business practices.
Underwriters’ Laboratories (UL), for example, is an independent testing agency established by insurance underwriters. One of the first such agencies, UL tests nearly every electrical appliance put on the market today. Manufacturers are charged a fee to have UL test their products, and those that meet their standards may use the UL label on their products and in their advertising. This label is now widely recognized as a symbol of safety and quality.
The monthly magazine Consumer Reports is published by Consumers Union, an independent “nonprofit organization established in 1936 to provide consumers with information and advice on goods, services, health, and personal finance . . . .” Consumers Union makes anonymous purchases at retail outlets, tests the products, and publishes the results. To avoid conflicts of interest, and maintain its independent status, Consumers Union does not allow manufacturers to advertise in its magazine, nor does it award a “Seal of Approval.” They merely test and report on consumer products, so that consumers can judge for themselves which products best fit their needs.
However, Good Housekeeping magazine does award a “Seal of Approval” which manufacturers can use on their products and in their advertising. In awarding the seal, the magazine guarantees to replace or refund the cost of any defective product. Obviously, to make such a guarantee, the magazine is confident of theproduct’s quality, and the consumer is guaranteed satisfaction.
Honest businessmen have a vested interest in exposing fraudulent practices. The organizations we have examined demonstrate that businessmen recognize this and are willing and able to protect their self-interest through the voluntary, peaceful means of the free market. In the process, they also protect consumers.