“We cannot depend upon benevolence for our dinner—but can we depend wholly on Adam Smith’s invisible hand?” Free to Choose
These are the words of Milton Friedman, 1976 Nobel laureate in Economics, from his straightforward account of how freedom and personal economic well-being are inextricably interwoven. While the late Friedman despaired that the volume of U.S. business regulation and government control seemed to rise in inverse proportion to economic growth and consumer well-being, he would probably be pleased by one market-driven alternative to government regulation: the Red Pepper Principle of Product Safety.
The red pepper principle is a term coined to reflect the consumer product safety measures adopted by the McCormick spice corporation. The measures addressed a persistent quality control issue. Ultimately, however, they resulted in benefits to consumers and to McCormick’s bottom line. In brief, the Baltimore, MD based McCormick company, in conjunction with the independent Indian Spice Board, decided to require exact identification of each individual source of the (relatively homogeneous) chili peppers they were purchasing for shipment to the U.S. The result was increased grower accountability, certifiable quality to the buyer, increased sales and market share, and reduced corporate risk.
Two key ingredients in the ‘red pepper’ solution are:
• Private quality-certification agencies (like the India Spice Board)
• Increased communication of U.S. standards with oversees producers; observation of foreign production methods and materials if needed
In a competitive market, brand-name reputation counts, and the producer identification method brings reputation to the table. It has the advantage of using market incentives that prevent unnecessary costs or harms from befalling the consumer. Coupled with independent certification of product standards, costs fall directly on the producer; standards are met, or sales/imports don’t take place. And certification by trusted private agencies also reduces the need for point of entry inspection. Significantly, the reputation of each certifying agency would also be on the line.
Market discipline–even in a global economy?
As a U.S. consumer you can get pretty much whatever you want in the market, from anywhere in the world. And for the most part, you can assume that what you buy is safe to use and consume. How did that happen?
Consumer product safety has long been an issue—attended by multiple governmental agencies —in American production and consumer life. Recent safety problems reported with toys imported from China, with contaminated agricultural produce from domestic and foreign sources, and with banking failures illustrates that government regulation of products doesn’t always make consumers safer. The question we should consider is; are there more effective ways—in addition to or instead of current regulation— to make product safety a reality? Ideally, the answer will leave consumers with the maximum array of freely chosen options, including trade-offs between personally acceptable degrees of safety vs. informed risk.
Problems with recent U.S. imports of Chinese toys are a good example of how pre-importation standards might better protect consumers. With the exchange of product standards information and oversight, market discipline would probably have prevented dangerous toys from being imported in the first place. That would have been superior to after-the-fact remedies. It would also have been less costly all around.
In an increasingly global economy, components of domestically assembled and distributed products may have their source anywhere in the world. U.S. regulation can’t guarantee the integrity of every source. It needs help, at very least. And nearly everyone believes that 100 percent point-of-entry inspection on all international goods is not feasible. Even with ‘adequate’ resources, thoroughgoing point-of-entry inspections would bring trade to a virtual standstill.
Nor is government command—total regulatory control—a solution. The absolute control of all economic resources, of production, of consumption, and even legal reproduction by Chinese authorities (the Chinese problem described in the previous FMM) have failed to protect the Chinese population safe from lung-choking pollution and other environmental risks. Investigative reports have documented the perverse effects of existing U.S. regulation, much enacted in the name of the consumer. And the regulatory response to recent consumer safety problems has spurred even more of same.
Despite the adoption of increased product regulation and import controls, the best news for consumers is more market-imposed discipline. The Red Pepper Principle of Product Safety is an excellent place to start.
Especially in a global economy.