Harvard University law professor Einer Elhauge argued in the Washington Post last summer that free-market economists who oppose the multibillion-dollar tobacco litigation have made a big mistake. Professor Elhauge writes that opponents are apparently unaware that for the past 40 years the tobacco companies conspired in order “not to independently market safer tobacco products” and “to withhold product safety information” (August 4, 1998).
This “market failure” supposedly justifies the political plundering of the tobacco industry through war-on-drugs–style regulation of tobacco products, extortionate tax increases, and having the government instruct jurors in tobacco liability cases that they are to assume that smokers bear no responsibility for their smoking-related health problems. To Elhauge, a free market is not really a market free of government intervention; it is a market in which antitrust regulation is pervasive and stands in the way of price-fixing, quantity-fixing, or quality-fixing conspiracies. But the history of the cigarette industry proves that Elhauge’s assertions could not be farther from the truth; the free market did lead to better quality cigarettes until the good professor’s cherished regulation put an end to decades of vigorous quality competition.
That the cigarette companies vigorously competed on quality before regulation impeded them has been painstakingly documented by economist John E. Calfee, a fellow at the American Enterprise Institute, in “The Ghost of Cigarette Advertising Past” (Regulation magazine, Summer 1997) and his 1997 book, Fear of Persuasion: A New Perspective on Advertising and Regulation. In the 1950s, before the Federal Trade Commission (FTC) started regulating cigarette advertising, the tobacco companies used health as an effective means of promoting one brand over another. This competition led to rapid improvements in cigarettes in light of the new research on the health effects of smoking that was being developed in the 1940s and ’50s.
According to Calfee, cigarette ads from the 1920s to the early 1950s included such slogans as “Not a cough in a carload”; “Not a single case of throat irritation due to smoking Camels”; “Smoking’s more fun when you’re not worried by throat irritation or smoker’s cough”; “Lowest tar of all low-tar cigarettes”; “Today’s Marlboro—22 percent less tar, 34 percent less nicotine”; “Why risk sore throats?” and “less tar and more taste . . . they said it couldn’t be done.” This kind of advertising was so pervasive that in 1953, Business Week wrote that the tobacco companies were “screaming at the top of their lungs about nicotine, cigarette hangovers, smoker’s cough . . . and kindred subjects.”
The industry’s claims were not just talk. Tar and nicotine levels declined by nearly 40 percent between 1957 and 1959, Calfee writes. Nothing like that has happened since. In the 1950s both Consumer Reports and Reader’s Digest published monthly health ratings on cigarettes that carefully noted which brands had improved. Epidemiological studies in later years showed that these tar and nicotine reductions led to roughly proportionate declines in death rates from smoking-related disease.
Regulation Ruins Health-Based Advertising
It was the arrogant heavy-handedness of FTC bureaucrats, not the free market, that was responsible for the decline in health-based advertising in the cigarette industry over the past four decades. In the early 1950s the bureaucrats convinced themselves that all brands of cigarettes were identical and filed numerous “deceptive advertising” claims against the tobacco companies for their ads that made reference to coughing, lung health, and the like.
Incredibly, Calfee points out, in 1950 the FTC declared that smoking cigarettes “is not appreciably harmful” and that health-based advertising was therefore fraudulent. The FTC also decided it was technically impossible to manufacture a cigarette with less tar and nicotine than another. It ordered the tobacco companies to “cease and desist” such advertising.
But the FTC rule prohibited health-based advertising claims only for existing brands of cigarettes. The tobacco companies ingeniously evaded this restriction by creating new low-tar and low-nicotine brands. That fierce quality competition came to be known in industry circles as the “tar derby.”
By the late 1950s, as scientific evidence on the link between smoking and lung cancer mounted, the tobacco companies responded by increasing the share of the cigarette market accounted for by filtered brands from 1 to 10 percent and advertised “healthier” filtered brands heavily. Individual companies sought to gain market share with their advertising by scaring smokers about their competitors’ brands.
That so-called “fear advertising” was successful for some firms, but overall cigarette sales began to fall—an outcome that the industry certainly wanted to avoid. It was free-market competition that led to that result. When the FTC further regulated cigarette advertising, it reduced the degree of competition and the amount of health-related advertising, and slowed the decline in U.S. smoking rates.
In 1960 the FTC ruled that all tar and nicotine advertising was illegal, eliminating such ads for several years. After making this declaration, Calfee writes, the FTC also deceptively announced that the industry had adopted a “self-imposed Cigarette Advertising Code.” Of course, it was not “self-imposed”; the FTC would have sued the industry had it not adopted the government-sanctioned code. Consequently, during the early 1960s all cigarette ads spoke only of flavor and pleasure.
After the Surgeon General’s Report on smoking and cancer in 1965, the FTC changed its position again and permitted advertising references to tar and nicotine—but it was illegal to link these substances to health. In 1970 Congress banned all cigarette advertising on television and radio, ending once and for all the free market in cigarette advertising.
In sum, Professor Elhauge is dead wrong. When the free market was allowed to work, there was vigorous quality competition in the cigarette industry, which produced an enormous amount of information about the health hazards of smoking. The FTC’s interventions may well have been part of a conspiracy, however: the industry’s “fear advertising” was causing a drop in the incidence of smoking, which the industry wanted to reverse. If the industry did in fact conspire with FTC bureaucrats to eliminate health-based advertising, the lesson is that such conspiracies can only work if they are organized by corrupt government regulators; they are impossible in the free market. Professor Elhauge, read your history.
—Thomas J. DiLorenzo
Professor of Economics
Loyola College, Maryland