Last Saturday I was at the Libertarian
Party of Minnesota's state convention, where I was again one of the
speakers. The party has been growing, and I was amazed by the number
of young members, who showed a lot of enthusiasm, dedication and
willingness to work on spreading the libertarian philosophy.
I was especially pleased to meet Scott
Malleck, LPMN vice chair, who had written an excellent article in the
state party's newsletter
on voluntary entrepreneurial solutions rather than government
regulation. It is an article that deserves much wider circulation.
So, with permission, we reprint it as follows:
Government
regulations often lead to costly, ineffective, and progress-stifling
outcomes, and are frequently criticized by Libertarians. Skeptics
abound, however. Many in the public are wary of “deregulation”,
fearing a “wild west” where individuals could be left on their
own against the unscrupulous. Unfortunately, these skeptics aren’t
familiar with how oversight would be performed in a libertarian
society, and in fact, is already being performed in many cases. And
that’s what this article is about.
UL,
ETL, and FM seals of approval for consumer appliances.
The
skeptics often begin by claiming that companies cannot police
themselves. In most cases, this method actually does work. Companies
who release a shoddy product or engage in fraudulent tactics will
quickly receive negative publicity, causing an immediate loss of
revenue to the offending company as customers take their business
elsewhere. Thus, companies have a strong incentive to act ethically.
Even
so, there are indeed unscrupulous players willing to take advantage
of an unknowing public. High-profile cases like Enron are an example.
Many investors who trusted Bernard Madoff no longer had the means to
“take their business elsewhere” after being defrauded. How to
stop companies and individuals from harming the public with unsafe
products or fraudulent tactics in the first place? Who would monitor
the marketplace without government at the watch?
The
answer: in a free society, companies would be policed by other
companies and organizations.
This
is no pipe dream. In several sectors of society today, this type of
market-based regulation is already a reality. And it’s working so
well that most of the public aren’t even aware of it. Here are
several eye-opening examples.
Fire safety for buildings
The
infamous Asch Building fire in New York City was so profound that
students still learn about it in school today. More commonly known as
the Triangle Shirtwaist fire, 146 textile workers were killed in this
tragic accident in 1911.
In
the aftermath of this and other fires, and without government
intervention, individual citizens stepped up to take action to help
prevent future tragedies. Insurance underwriters didn’t like paying
claims for property damage and loss of life. Firefighters didn’t
wish to put their lives at risk for accidents that were preventable.
Engineers sought to utilize modern technologies to protect the
public. A group of insurers, firefighters, and engineers joined
forces to create the NFPA (National
Fire Protection Association) in 1896. This organization’s efforts
were strongly bolstered after the Asch Building fire, drawing
important attention to the NFPA’s work to create fire safety
standards in building construction.
The
NFPA has created numerous codes such as NFPA-13 (sprinkler systems),
NFPA-72 (fire alarm systems), and NFPA-101 (life-safety evacuation
methods), among many others. They are now responsible for developing
and promoting safety standards for residential, commercial, and
industrial buildings today. No government agency performs this role
in the US, or ever did. The NFPA is singlehandedly trusted with this
responsibility. Their most well-known work is the National
Electrical Code (NEC),
defining electrical design and installation practices for buildings,
a code that every electrical contractor is familiar with.
There
are other examples of similar trade associations. The IEEE (Institute
of Electrical and Electronics Engineers) develops standards for
utility-type generation and power transmission equipment, originally
created under a different name in 1884. The ASME (American Society of
Mechanical Engineers) was founded in 1880 to create design standards
for the steam-powered boilers that were prevalent at the time; they
now cover pressurized tanks and piping for liquids and gases of all
types. Due to the loss of life and property damage that can result
from explosive failure, commercial and industrial facilities will not
install such equipment if it’s not built and installed according to
ASME standards.
Consumer goods
Who
protects individual consumers from poorly-designed and unsafe
products? Here’s a hint: it’s not the government. No federal or
state agency has ever performed this role.
That’s
because UL (Underwriters
Laboratories) was established in 1894. This for-profit company sets
rigid standards, performs stress testing, and certifies consumer
appliances. Appliance manufacturers pay UL for the ability to display
the UL’s seal of approval on their products. UL has developed a
reputation for enforcing quality by strict standards, and thus,
retailers refuse to carry non-UL certified appliances because they
don’t want the insurance liability of doing so.
But
while UL has a well-established reputation for quality, it hasn’t
been perfect. This introduces a key aspect of what can develop with
market-based regulation: regulatory
competition.
Unfortunately for itself, UL also developed a reputation for being
slow to respond when customized products needed certification.
Manufacturers being held to quick delivery schedules were displeased
with having to wait weeks or months for a UL inspector. Thus, a group
of entrepreneurs responded by establishing a new firm.ETL (Electrical
Testing Laboratories), now owned by Intertek, promised the same
quality as UL but a better level of responsiveness. UL and ETL now
compete with each other to certify appliances.
A
third organization, FM (Factory
Mutual), also provides testing and certification of appliances.
Beneath your appliances at home, you’ll almost certainly find a UL,
ETL, or FM seal. Look around your own home and see for yourself!
Numismatics
One
aspect of investment has recently seen innovation in the form of
market-based regulation. Numismatics describes the art of coin
collecting by hobbyists and investors, where a coin’s rarity and
quality are key considerations. Coins are assigned
grades such
as Fine, Very Fine, About Uncirculated, and Mint State, and also
accompanied by a 70-point scale, with very poor as 1 and perfect as
70. For rare coins at the upper end of the scale, very small
differences in grade can mean very substantial differences in value
and price. One coin dealer’s MS-68 coin upon a sale was often
claimed by another dealer to be MS-65 upon repurchase, which led to
disputes and skepticism of the industry by consumers.
In
response, reputable coin dealers decided to standardize the grading
process to weed out unscrupulous dealers, promote their trade, and
attract broader consumer interest. Fortunately, they didn’t appeal
to the US Treasury Department to add a new government program for
certifying numismatic coins. Instead, they acted entrepreneurially
and formed a new organization. They created the PCGS(Professional
Coin Grading Service) in 1985, which employs experts who
independently evaluate coins, certifying and packaging them into
tamper-proof containers. Sellers can charge a premium for PCGS-graded
coins, and buyers are often willing to pay that premium for the
assurance that the coin’s grade is genuine.
A
competing regulatory firm, NGC (Numismatic
Guaranty Corporation), also provides independent grading and
certification.
The grand prize winner
There’s
one company that stands out beyond all the others in terms its
longevity. And that’s Goldsmiths’
Hall of
London.
This
company tests and verifies the precious metals content of ingots and
jewelry in their laboratory. They certify these items by placing
their hallmark,
or stamp of approval, upon them. Both buyers and sellers benefit.
Sellers can sell their assets for a premium by having the hallmark.
Buyers are willing to pay that premium, knowing what they might buy
is verified as legitimate. The company uses traditional stamping
methods to denote purity, and has innovated to perform
laser-engraving as well.
Hallmarks
by Goldsmiths’ Hall: traditional stamping (above) and laser
engraving (below).
Obtaining
a hallmark is not mandatory. Buyers are free to use the “caveat
emptor” method if they choose. But, like buyers of investment-grade
PCGS or NGC graded numismatic coins, most opt for the hallmark to
guarantee the value of their assets. As a voluntary service,
Goldsmiths’ Hall has established a strong reputation and they
steadfastly defend it — and their revenue — by maintaining
continued integrity. Goldsmiths’ Hall understands their role as a
market-based regulator and are regarded as experts in their trade.
And they’ve been performing this function since the year 1327.
The
longevity of these organizations is important to note. Most have been
performing their role well for decades, even centuries.
This track record demonstrates that, once market-based regulators
become established, they continue to reliably protect the public
indefinitely. After all, their reputations are on the line; if they
were to drop the ball, a competitor will be ready to pick it up.
Our obsolete system today
What
a sharp contrast to our government-based regulatory agencies in many
other areas. The SEC (Securities and Exchange Commission) failed to
protect individual investors from Enron, and then again from the
Bernard Madoff fraud, even ignoring warning signs before the frauds
were exposed. The USDA (US Department of Agriculture) made the
headlines over unsanitary
conditions for eggs,
where whistleblowers were ignored by the agency. The FDA (Food &
Drug Administration) may be one of the worst performers. Ground beef,
pistachios, peanuts, spinach, and the chemical alar in apples have
resulted in public scares after multiple
FDA inspection breakdowns.
Government
regulation does protect the public to some extent. But at what cost?
The FDA’s medicine testing process is so bureaucratic that every
new pharmaceutical drug costs over $1 billion to get from the science
table out to the marketplace. Those costs get passed on to consumers
and are a key reason that healthcare continues to become more
unaffordable. And their process takes years,
about 10 years on average, to approve new drugs. But as the FDA’s
infamous Vioxx
scandal shows,
a pharmaceutical drug can survive the FDA’s long and expensive
testing process, only to be found unsafe after release to the public
— so unsafe that 38,000 people died.
The
rituals following these scandals have become all-too-familiar. Public
hearings are held and there are calls for “reform”. The
bureaucrats hang their heads in contrition, promising to do better
next time. But the same system remains in place, setting the stage
for tomorrow’s scandal. Often the bureaucrats ask legislators for a
budget increase to fix the problems, ironically being rewarded with
more taxpayer money on account of their failure. The system is not
working. Something must be done!
Why market-based regulation is superior
Government
regulatory agencies like the SEC, USDA, and FDA act as monopolies,
facing no threat of competition, and thus no real incentive to
improve. Furthermore, their regulations have the full force of law,
backed by penalties. However, market-based regulatory organizations
like UL, ETL, and Goldsmiths’ Hall don’t have the power to force
compliance. Counter-intuitively, that’s an important advantage.
These organizations have a strong incentive to make sure any
standards they create are reasonable, that inspection and testing
costs remain low, and that their overall efforts lead to genuine
safety or protection. If not, the individuals and companies seeking
certification could opt out. This holds companies like UL in-line, as
does free-market competition by other organizations such as ETL.
Libertarians
ask: what if food and pharmaceutical drugs could be certified in the
same way as UL certifies household appliances? To move in this
direction, Libertarian officials must be elected to office, where
they’ll be able to (1) issue a public call for entrepreneurs to
step forward to fill this critical role, and (2) begin dismantling
hulking bureaucracies like the FDA to make way for innovative new
methods of ensuring food and drug safety.
Companies,
organizations, and trade associations have shown that they are very
effective at protecting the public. This is important because it
clearly demonstrates that Libertarian solutions are already
proven to work. Skeptics should not fear the Libertarian approach
of replacing government with market-based alternatives. In fact, the
public should consider and begin to embrace these ideas, because in a
free society, they will find themselves protected like never before.
