All Commentary
Tuesday, December 15, 2015

Regulators Try to Crush 300,000 Handmade Cosmetics Makers

Special interests are looking out for (escaping) consumers again

If you have ever been in the market for homemade soaps, you know how exciting and vibrant this sector is. The number of choices in the marketplace is absolutely stunning. There is nothing you can imagine that you can’t buy, right now.

We’ve come a long way since your only choices were Ivory, Dial, Dove, and Irish Spring. Now you can get thousands of types:

Exotic flavors: Indigo Wild, Zum Bar, Goat’s Milk Soap, Dead Sea Mud Detox Soap, Monoi Ylang Soap, Eucalyptus & Tea Tree Soap, Guava Fig Soap;

Textures: Shaman Scrub, Sage Against the Machine, Oatmeal and Clover Over and Over, Bamboo Charcoal Soap;

Themes: Pi Soap, Man of La Washa Don Quixote Soap, Sinking Titanic soap, This is Your Brain on Drugs Cannabis Brain Soap, Dunk Your Donuts Soap 3-Pack.

You can get soap made out of anything from bacon to beer to dragon’s blood.

Why such an explosion of offerings and creativity? The internet has allowed people to market homemade goods. It used to be that such entrepreneurs could reach only a local market; now they can reach the world, through such sites as Etsy.

Technology Plus Freedom

This is more evidence of the P2P revolution and the devolution of hierarchical structures to the level of individual communication, without regard of geography. Commerce — Adam Smith’s “propensity to truck and barter” based on mutual benefit is the driving force and technology is making it possible.

This is evidently giving rise to a lucrative industry of small and micro businesses making soaps and cosmetics. It is also a jobs creator (estimates run as high as 600,000).  

Technology and low startup costs might be necessary conditions for such a thriving market on this scale, but these are not sufficient conditions. An economist friend who makes soap on weekends revealed to me the salient point. For whatever reason, government regulators seemed to have overlooked soap.

The FDA has a broad definition that allows for easy compliance. The Consumer Product Safety Commission has just a few comments on the stuff. It’s a hands-off policy all around very uncharacteristic.

The soap market is about as free as they come. To become a producer and seller, there’s not a lot of paperwork, no serious compliance issues, no great consumer-protection regulations, or anything like that. It’s an industry that has actually escaped a key problem of our time: legal barriers to entry. Anyone can jump in. Your success is determined by your creativity, marketing savvy, and consumer service.

And what are the results? According to the the Handmade Cosmetic Alliance, there are now some 300,000 makers of cosmetics and soaps who sell their products to the public. Ninety-five percent are women-owned and have only a handful of employees. Their market share might be one percent, but their industry matters for hundreds of thousands of workers and millions of consumers.

What Does Freedom Feel Like?

Why does this matter? People who favor freer markets often have a hard time imagining fully what industrial structure would look like in a deregulated world. There are so few examples around us.

Without government purchases and restrictions, would Microsoft hold its market position? Without public roads and bond deals, would Wal-Mart be as dominate as it is? Without corn subsidies, would prices be what they are for the carb-heavy diet? How different would our grocery stores look? Would Monsanto (or Whole Foods) be as big as it is? 

Usually, market advocates have tended to defend big business and even market concentration. Big business starts as small business and grows only by serving the consumer with quality products and services at good prices. In a market setting, it is merit that drives bigness.

But what about a mixed and regulated economy where large market players have inordinate influence over the regulatory environment, and what if they use that power to drive up costs on their competition? This is essentially the story of where government regulation comes from, even from its inception with the meat-packers industry.

To imagine industry structure on modern life, in the presence of massive government power, is to engage in a counterfactual. We can argue and argue, but no one knows for sure, for precisely the reasons Bastiat explained: the unseen is the largest cost of intervention.

Perhaps the soap industry provides a good case study of what relative freedom looks like. Yes, it is dominated by a few top players who have been around for decades. They have major brand recognition and economies of scale. But they wield no power to force others out. A thousand flowers can also bloom.

All Good Things End?

So far, the big players have not been able to drive out the competition with regulation and compliance costs. As a result, a hundred thousand niche markets exist. No one is excluded by law, and consumers rule the marketplace. After all, not everyone wants an exotic soap. Most people are happy with name brands.

Of course, no industry is entirely safe from government. This year, Senator Diana Feinstein (D-CA) and Senator Susan Collins (R-ME) introduced the Personal Care Products Safety Act (S. 1014). It imposes fees, registration requirements, and reporting mandates that would devastate small businesses — all in the name of consumer protection.

And guess who is supporting it? Their backers call them “stakeholders.” That’s another way of saying the dominant industrial groups: Johnson & Johnson, Procter & Gamble, Unilever, Estee Lauder, L’Oréal and Revlon. These companies are the fist within the glove of “consumer protection.” If they can raise the costs of doing business, driving the small businesses that sell on Etsy out of business, they have a firmer hold on their market share.

“We do feel it’s very important that the FDA’s authority in this space bring peace of mind to consumers and at the same time reflect modern science and advancements,” Darrel Jodrey, Executive Director of Federal Affairs for Johnson & Johnson, told the press, conveniently forgetting to mention how such regulation would help his own company.

Peace of mind? I just know you have been laying awake at night worrying about soap safety and hoping for some fabulous regulation. No?

This case is a beautiful microcosm. A deregulated environment — which we might even call capitalism — is a blessing to small business. Large business, however, benefits from the cartelization of industry. But such cartelization is rarely advertised that way. It is usually pushed as consumer protection, with the flags of public health and high quality raised on high.

It’s tragic that such small manufacturers have to beg for their rights, but such is life when a government stands ready to drive you out of business to the advantage of well-heeled competition. All this country’s home-based soap makers are asking for is freedom. And that’s not really too much to ask.