Who Protects the Consumer? – The Failure of Government Regulation
The seventh major argument in Free to Choose is a direct assault on the modern consumer protection movement and the vast web of government regulatory agencies it has spawned. The Friedmans argue that this movement, while cloaked in the appealing rhetoric of protecting the public from unsafe products and corporate greed, has in practice become a major source of economic harm. Government regulation, they contend, is a cure that is far worse than the disease.
The central thesis is that the free market itself is the most effective and efficient consumer protection agency ever devised. The competitive process, driven by the self-interest of both buyers and sellers, provides a powerful, built-in mechanism for ensuring quality, safety, and fair prices. Government regulatory agencies, by contrast, are clumsy, bureaucratic, and inherently biased. They stifle innovation, raise costs, restrict consumer choice, and are inevitably captured by the very special interests they are supposed to regulate, ultimately harming the consumer far more than they help.
The Market as the Primary Protector
How does the free market protect the consumer? The Friedmans’ answer returns to the fundamental logic of voluntary exchange. A business succeeds by attracting and retaining satisfied customers. As Adam Smith noted, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.”
- Competition: The most powerful protection for the consumer is the existence of choice. If one seller offers a shoddy product or an unfair price, the consumer is free to take their business to a competitor. This simple fact forces businesses to be vigilant about quality and price. A company that consistently disappoints its customers will not be in business for long.
- Reputation and Brand Names: In a market economy, a good reputation is a company’s most valuable asset. Building a brand name like Coca-Cola, General Electric, or Toyota takes years of consistent performance and billions of dollars in investment. This “goodwill” is a powerful guarantee to the consumer. A company with a valuable reputation has an immense self-interest in protecting it by ensuring its products are safe and reliable. A single, major scandal can destroy decades of brand-building and erase billions in value. This provides a far stronger incentive to maintain quality than the threat of a fine from a government agency.
- The Role of Middlemen and Retailers: The consumer does not need to be an expert on every product they buy. The market creates specialists who monitor quality on the consumer’s behalf. A major department store like Sears or a supermarket chain like Safeway has its own powerful incentive to vet the products it puts on its shelves. Their reputation is on the line with every item they sell. If they sell a defective toaster, the customer will return it to the store, not the manufacturer. Retailers thus act as powerful, private consumer protection agencies, using their expertise and buying power to police the quality of goods.
- Private Information and Certification: The market also provides information through private, voluntary channels. Organizations like Consumers Union (publisher of Consumer Reports) and Underwriters Laboratories (UL) exist to test and certify products. Their success depends entirely on their credibility and their ability to provide valuable, unbiased information to the public. These private mechanisms are a direct market response to the consumer’s need for information.
The Natural History of Government Regulation: The ICC
If the market provides these powerful protections, why does government regulation arise and what are its actual effects? The Friedmans argue that regulatory agencies follow a predictable and perverse life cycle, which they illustrate with the history of the Interstate Commerce Commission (ICC), America’s first major federal regulatory agency.
- The Crusade: The process begins with a public crusade, often led by well-meaning reformers and “public interest” advocates, to correct a real or perceived evil. In the late 19th century, the railroads, with their complex and sometimes discriminatory pricing (charging more for a short haul than a long haul, for example), became a target for populist reformers who decried them as exploitative monopolies.
- The Unholy Alliance: The reformers are soon joined by a much more potent political force: a segment of the regulated industry itself. The railroad barons of the 19th century were plagued by fierce, “cutthroat” competition that constantly undermined their attempts to form cartels and fix prices. They astutely realized that a government commission, established in the name of “protecting the public,” could be used to do for them what they could not legally do for themselves: enforce a cartel, stifle competition, and guarantee profits.
- The Legislation: This coalition succeeds in getting a law passed with a noble-sounding preamble about serving the public interest. The ICC was established in 1887 to ensure “reasonable and just” rates.
- The Capture: The reformers, having achieved their victory, move on to other causes. The regulated industry, however, has a permanent, concentrated interest in the agency’s actions. It works tirelessly to influence the agency’s appointments and decisions. The agency’s staff is drawn from the industry, its day-to-day business is with the industry, and its officials’ future career prospects often lie in the industry. Inevitably, the agency is “captured.” As Attorney General Richard Olney advised a railroad president shortly after the ICC’s creation, “The Commission…is, or can be made, of great use to the railroads…It thus becomes a sort of barrier between the railroad corporations and the people.”
- The Perverse Outcome: The captured agency proceeds to serve the interests of the producers, not the consumers. The ICC “solved” the long-haul/short-haul problem not by lowering the short-haul rates, but by raising the long-haul rates. It became a government-enforced cartel manager. When a new, innovative competitor emerged—the trucking industry—the ICC’s jurisdiction was extended in 1935 to regulate trucking, not to protect the public from monopolistic trucks (an absurdity in a highly competitive industry), but to protect the established railroads and large trucking firms from competition. The result has been higher shipping costs, less innovation, and a less efficient transportation system for everyone.
The Modern Regulators: FDA, CPSC, and EPA
The Friedmans argue that this same dynamic of capture and perverse outcomes is at work in the newer, more powerful regulatory agencies, though the specific mechanisms are different.
- The Food and Drug Administration (FDA): The FDA was greatly empowered by the 1962 Kefauver amendments, which required that new drugs be proven not only “safe” but also “effective” before they could be marketed. While the goal is laudable, the practical result has been a disaster for medical innovation and public health.
The problem lies in the institutional incentives faced by an FDA bureaucrat. He or she can make two kinds of errors:
- Type I Error: Approve a drug that turns out to have harmful side effects (like Thalidomide).
- Type II Error: Refuse to approve a drug that is actually safe and effective, thereby denying it to patients who could be cured or helped by it.
The consequences of these two errors for the bureaucrat are wildly asymmetric. A Type I error results in a public scandal, congressional hearings, and career ruin. A Type II error is invisible. The people who die or suffer because a life-saving drug was not approved do not know they are victims. Their deaths are statistically silent. The bureaucrat who blocks a good drug is seen as being “cautious” and “prudent.”
This creates an overwhelming institutional bias toward delay and risk-aversion. The result is a “drug lag,” where vital medicines available in other countries are kept off the U.S. market for years. The cost of developing new drugs has skyrocketed, making it unprofitable to pursue treatments for rare diseases. The Friedmans argue that this invisible toll—the lives that are not saved because of FDA-induced delays—far outweighs the visible benefits of preventing a few harmful drugs from reaching the market. The FDA, they conclude, has caused more death and suffering than it has prevented.
- The Consumer Product Safety Commission (CPSC) and Environmental Protection Agency (EPA): These newer agencies represent an even broader and more intrusive form of regulation. Their mandates are vague (“unreasonable risks,” “protect the environment”), giving them immense discretionary power.
This power, however, does not lead to rational outcomes. The agencies operate in a world of political and media pressure, not scientific cost-benefit analysis. A single, well-publicized incident (like the fear over aerosol spray adhesives, which led to unnecessary abortions before the ban was reversed) can trigger draconian regulations that impose huge costs on society. The crusade to make children’s sleepwear flame-retardant led the CPSC to mandate the use of the chemical Tris, which was later discovered to be a potent carcinogen. The government first forced an entire industry to use a dangerous substance and then forced it to recall the products.
In the case of the environment, the Friedmans argue that the command-and-control approach of the EPA is grossly inefficient. Instead of telling firms exactly what technology to install, a far better approach would be to use the price mechanism by imposing an “effluent tax”—a charge for every unit of pollution emitted. This would give firms a direct economic incentive to find the cheapest and most innovative ways to reduce their pollution. But this market-based approach is resisted precisely because it would work efficiently and transparently, exposing the true costs of environmental goals and removing the power from the hands of the bureaucrats and their allied “public interest” groups.
The Case of Energy
The energy crisis of the 1970s is presented as the ultimate case study in the failure of government regulation. The Friedmans argue that there was no “energy crisis” in the sense of a physical shortage of energy. There was only a crisis of government policy. The long gasoline lines of the 1970s were not caused by greedy oil companies or Arab sheikhs. They were caused by one thing and one thing only: government price controls on oil and gasoline.
The lesson of economics is simple and universal: if you set a maximum price for a product below the market-clearing price, you will create a shortage. The price controls prevented the price of gasoline from rising to a level that would have balanced supply and demand. This simultaneously encouraged wasteful consumption (because the price was artificially low) and discouraged production and exploration (because profits were artificially limited). The result was predictable and inevitable: shortages.
The government’s “solution” to the crisis it created was to create a massive new bureaucracy, the Department of Energy, to manage the shortage through a complex and absurd system of allocations and regulations. This system was not only inefficient but also deeply inequitable, creating chaos and rewarding those with the political connections to navigate the maze of rules. The simple and immediate cure for the gasoline lines, the Friedmans argue, was and is to abolish all price controls and let the market work. The price at the pump would rise to its market level, instantly eliminating the lines, encouraging conservation, and providing a powerful incentive for producers to find and develop new sources of energy.
Conclusion: Freedom of Choice is the Best Protection
The ultimate protector of the consumer is not the government, but freedom. The freedom to choose and the freedom to compete. The regulatory state, born of a paternalistic impulse to protect the consumer from himself and from business, has become a labyrinth of bureaucratic power that serves neither the consumer nor the cause of progress. It protects established industries from competition, saddles the economy with enormous and unnecessary costs, and restricts the freedom of individuals to make their own choices and take their own risks.
The Friedmans end with a chilling analogy to Prohibition. Enacted with the noble intention of protecting people from the evils of alcohol, Prohibition failed to stop drinking but succeeded in turning millions of otherwise law-abiding citizens into criminals, fostering the rise of organized crime, and corroding respect for the law. The modern regulatory crusade, in its zeal to create a perfectly safe, risk-free world, threatens a similar outcome. If the government is to protect us from every conceivable danger, then logic demands that it prohibit not only cyclamates but also alcohol and tobacco; not only faulty toasters but also risky activities like skiing and motorcycling.
This path leads not to safety, but to tyranny. The proper role for government is not to command and control, but to provide information and to enforce a rule of law that allows individuals the freedom to make their own choices and to bear the consequences. For in the end, the greatest danger to the consumer, and to the citizen, is not a faulty product or a greedy corporation, but the concentration of coercive power in the hands of the state.