Mises Wire

Regulation in the Free Market: It’s Not What Most People Believe

When the idea of a totally free market is floated in economic discussion, a widely accepted critique of such an idea is often related to the issue of how goods and services could be guaranteed safe for consumption. After all, without a government sending inspectors and decreeing standards of safety for products, it is often assumed companies, in their everlasting quest for profits without mercy, would have no incentive against selling whatever brings in the most cash.

This, however, is well understood by the Austrian school to be untrue, and I do not wish to beat a dead horse by explaining why. Instead, I want to focus on how a true free market would enact regulation in a natural and decentralized fashion and how it could emerge in a real-world situation. So let’s jump out of our Orwellian modern world into a world where laissez-faire reigns supreme.

Let us suppose our imagined free market has survived up until this point without any need for regulation from a centralized power. But now trouble in paradise has arisen, and a company, to keep itself profitable, has resorted to selling a food product inflicting bad stomachaches upon some of its consumers. How could we possibly get out of this mess without conjuring a centralized power to regulate the market in a way not like our governments here in the real world do it?

Well, first we should assume that in a free market at least some forms of media companies exist; after all, they aren’t a product of the government, and there has been a persistent demand for information throughout history. We can also assume that at least some of these media companies would pick up a story about a company that sells goods unfit for consumption, especially if no such thing has ever happened before.

In our hypothetical free market, a company working in a dishonest and harmful way would be a completely novel thing, and such a story would garner considerable amounts of public attention, thus bringing vast amounts of viewership to the media covering it. This in and of itself would act as a regulating mechanism since the bad publicity would bring the consumer opinion of a company acting with inadequate standards down, reducing its profits. Also, if the food producer acted in a dishonest way to save itself from bankruptcy, the drop in demand from bad publicity alone would most likely put the final nail in the coffin for the specific business entity.

At this point in a society where a centralized authority (the state) exists, regulations would be drawn up to try to prevent anything similar from ever happening again. This could happen through the enaction of universal safety standards for food, such as requiring packaging or an expiration date on the package to prevent spoiled food from being sold, or a flat out ban on an additive or a chemical used in production that is believed to have caused the stomachaches. The possibilities are endless as shown by this page from the Food and Drug Administration (FDA).

What I want to point out is there are massive amounts of tax dollars that go into all the administrative functions of regulatory agencies like the FDA, not to mention the user fees from the very industries they regulate, a mechanism destined to generate conflicts of interest. It is safe to assume, in my opinion, that government regulation is at best inefficient and wasteful.

But let’s return to our true free market, where a news story has shaken the public to its very core and has left everyone pondering whether they can trust any food producer in the future. From an economic perspective, this story has generated public attention, and thus, in effect, media companies covering the story have sold their goods to voluntary consumers, generating profit. If the public considers the violation of the food producer to be severe enough, they will stop purchasing goods from said producer, eliminating it from the market. By extension, this will also disincentivize other producers from acting in a similar fashion in the future.

If the act is forgiven or forgotten by consumers, then it should be safe to assume that the stomachaches were not serious enough to stop people from continuing to consume the product. If the inadequacies of the product were severe enough to cause serious harm, such as death or prolonged injury, then consumers would almost certainly abstain from using the product and have the producers held as an unlawful entity, since it has failed to adhere to the principle of not initiating harm on other people. The food producer would thus most likely have to cease its operations and declare bankruptcy.

In any case of a company producing faulty goods and knowledge of this being provided by the media to the public, demand for information about the quality of food products would arise. This would create a market for such information, and companies would exploit this opening to provide supply for this demand. In practice, supply would emerge as independent entities that would sell, for example, their stamp of approval for other businesses and allow competition in the regulatory market. Consumers could pick and choose according to their preferences the products that have been inspected by regulating entities, or choose products that have not been inspected, as they would most likely be a cheaper alternative since the companies producing them would not have to pay for any inspection and research on the safety of their product.

As with all government functions, regulation has simply provided supply to a demand for regulation. And as with all government functions, due to their blind universality, lack of a price mechanism, and an elitist way of thinking, the regulatory state has always been and always will be an inefficient system.

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