Wednesday, April 29, 2015
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.
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.
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.
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!
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.
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.
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.
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!
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.