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Why There Should Be a Free Market in Food Labeling

Mises Daily: Friday, January 31, 2014 by

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Voters in Washington State recently rejected a measure that would have required foods containing genetic engineering to be labeled. California voters did the same thing in 2012.

Genetically-modified foods are derived from genetically modified organisms (GMOs) that have been altered to contain a “new” protein or proteins. This is done by changing the code or sequence of DNA, the blueprint for making proteins. The plant (or animal, but nearly all GMOs used in production agriculture are plants) is then cultivated and produces the “new” protein (or proteins), which confers new characteristics on the plant. For example, some corn has been genetically altered to produce a protein that is toxic to insects.

The purpose of this article is not to discuss the suitability of these techniques to create food products, their effectiveness, safety, or how they came to be in the first place. The larger question I wish to address is whether or not GMO labeling should be mandated by governments.

Shortly before the GMO vote in Washington State, Michael Lipsky explained why GMO labeling requirements would not increase food prices. In the article he states:

For one thing, if labeling were required, particularly if (and when) the labeling requirement is adopted by other states, demand for non-GMO versions of corn, soybeans, and sugar beets — the basic GMO crops — would increase, production would expand, and prices for non-GMO ingredients would decline. The result would be a new price equilibrium surely less costly for food producers than the cost of current non-GMO ingredients.

He goes on to say the following: “For another, if foods with GMO ingredients indeed were cheaper to produce, there would be ongoing demand for the less expensive versions of food products, and some GMO foods would find a market niche at the lower price point.”

The analysis here is correct: producers and consumers interact, supply and demand leads to prices which reflect this information, and the market reaches some sort of equilibrium. But, all of this misses the point.

Food producers shouldn’t be required to give this information. Food companies should be able to put whatever they want on the labels of their products, and consumers will tell them if it is enough information by choosing to purchase their products, or by not purchasing them and going somewhere else. The government is simply not required in this process. And, legislation almost always creates more problems than it solves.

One problem lies in determining what exactly GMOs are. It’s not as straightforward as you might think. Could food companies simply put a boiler-plate label on each product (“May Contain GMOs,” for example) and satisfy the regulation? Who is responsible for enforcement and what is now not being dealt with as a result of this new policing requirement?

In many cases, when labels are used, it is not always clear what constitutes a GMO and what does not. The typical thinking is that a GMO is a plant that has had “foreign” genetic material inserted into its genome, and is made by one of several large agri-businesses. What this definition ignores is the natural occurrence of GMOs, including the transfer of toxins, without human intervention. On the other hand, if the goal is to label foods modified by human intervention, this would encompass virtually everything that we eat – plants and animals have been selectively bred for thousands of years by humans. This has encouraged the retention of certain genetic traits over others, and therefore, every food product could be considered a GMO.

Whenever labeling guidelines are mandated by the government, the first order of business for the manufacturer is to meet these legal requirements. This may or may not satisfy consumers. It seems that, had these labeling laws been passed in Washington or California, food manufacturers could simply put “GMO” or “may contain GMOs” or “to the best of our knowledge, this product is likely to contain GMOs” on the every label and satisfy the requirement. Examples given in the Washington state initiative seem to indicate that this generic language could be used. This would result in consumers actually having less information than they did before the labeling requirement went into effect. This effect was demonstrated when the FDA required nutrition information to be labeled on food products. By mandating what must be included on the label, food producers seek first to satisfy this requirement. While some products do contain additional information on the label, this is always included after all of the mandates have been met — even when consumers don’t care about the mandated information on a product they may be using for other reasons.

Enforcement is another problem with these labeling requirements. The Washington state initiative mentions the punishment portion of violating the law, but says nothing about who would take samples, conduct and pay for GMO testing, or what tests would be appropriate. If this task is forced on state agricultural officials, what other duties would now be neglected? Perhaps something more important than enforcing a GMO labeling law.

In partial agreement with Mr. Lipsky, food manufacturers claimed (and produced studies indicating) that GMO labeling requirements would raise food prices. From these studies, the article states that “food costs for the average family would increase by several hundred dollars a year.” In addition, compliance with the new requirements could be accomplished “by using certified non-GMO ingredients or organic inputs.”

Many people don’t want to pay more for anything with higher-priced ingredients, perhaps especially food, but food companies themselves substitute ingredients in, or production practices for, products all the time, and charge more for them – in hopes that consumers will buy these premium products. For example, Eggland’s Best eggs are produced with costly practices that enhance the nutrient content of the eggs, and this features prominently as marketing on their packaging. As a result, they charge more for this food product, compared with other eggs. Food companies bring a staggering array of products to the market on a regular basis — ever evolving attempts to adapt to changing preferences and price points. And, by doing so, they raise prices on their products all the time. This is only a natural consequence of changing how something — anything — is made. Prices reflect these changes, and consumers’ choices indicate if the changes should have been made in the first place. A product that is priced beyond what consumers are willing or able to pay will not stay on the market very long.

The articles from Lipsky and the food manufacturers both miss the point. The price of any good or service could be altered through state regulation of labeling GMO products (and new price equilibrium established) but there is no need for this to happen. Producers and consumers can and do take care of this on their own. Also, prices rising and falling is a natural consequence of any functioning market. The price is a signal to producers and consumers, and is used to allocate scarce resources, such as food. Rising prices create opportunities for producers, while falling prices indicate that either demand for the good or service is declining, or the supply is too abundant relative to demand. It is the distortion of these pricing signals that causes the real problems, not the fact that prices rise and fall.

So, it is widely known that some consumers care whether or not they are eating GMO foods, while others do not. Food producers are listening. A similar process occurred when the organic food movement began many decades ago — a “new” food market was created based on consumer demand. There is no reason to think that food choices and labels can’t change without legal mandates from the government. In fact, it is the mandates that would remove choice and knowledge on labels of food products for consumers.