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Austrian School vs. “Law & Economics" on Product Safety

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Tags Bureaucracy and RegulationOther Schools of Thought

As a co-host (along with Tom Woods) of the podcast Contra Krugman, I spend a lot of my time contrasting the typical Keynesian approach with that of the Austro-libertarian. And as fun as that is, it’s even more interesting to show how Austrians differ from another market-friendly paradigm, namely the “Law & Economics” paradigm associated with the Chicago School and UCLA.

In this post I’ll illustrate “Austrian School vs. Law & Econ” with respect to product safety regulation, and in a follow-up post (Part 2 of 2) I’ll showcase their differences with respect to air pollution. As we’ll see, Austrian economics coupled with libertarian political theory offers a much more compelling foundation for analyzing typical issues in government regulation, and it actually is much more reasonable in these situations than the (sometimes deliberately) “shocking” pronouncements from economists coming out of the Chicago and UCLA tradition.

Consumer Product Safety

The motivation for the present post is Robin Kaiser-Schatzlein’s recent review in The New Republic, covering Binyamin Appelbaum’s book, The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society. Now elsewhere I have already covered one hilarious aspect of the review, in which it excoriated economists for having a 97% agreement on opposition to rent control. Rather than using this “expert consensus” to browbeat Bernie Sanders as a “science denier,” the homogenous views of economists on things like tariffs were taken as evidence of group-think and their lack of humility. (!) 

For our present purposes, I want to focus on the following opening from Kaiser-Schatzlein’s review:

In 1984, a two-year-old named Joy Griffith climbed onto her grandfather’s reclining sofa chair to watch cartoons. At one point, she fell between the collapsible footrest and the seat. The footrest trapped her head, and she began to suffocate….The toddler had permanent brain damage. From then on out, she lay in a vegetative state in a hospital.

In June of 1985, the Consumer Product Safety Commission issued a “national consumer alert” about the type of sofa chair that strangled Griffith. But the commission still needed to decide if they would require design changes. So Warren Prunella, the chief economist for the Commission, did some calculations. He figured that 40 million chairs were in use, each of which lasted ten years. Estimates said modifications likely would save about one life per year, and since the commission had decided in 1980 that the value of a life was one million dollars, the benefit of the requirement would be only ten million. This was far below the cost to the manufacturers. So in December, the commission decided that they didn’t need to require chair manufacturers to modify their products. If this seems odd today, it was then too—so odd, in fact, that the chair manufacturers voluntarily changed their designs.

Prunella’s calculations were the result of a growing reliance on cost-benefit analysis, something that the Reagan administration had recently made mandatory for all new government regulations. It signaled the rise of economists to the top of the federal regulatory apparatus. “Economists effectively were deciding whether armchairs should be allowed to crush children,” Binyamin Appelbaum writes in his new book The Economists’ Hour.

The attitude of the economist here, along with the horrified reaction of Appelbaum and the writer for The New Republic, epitomizes the problem with the cost-benefit efficiency approach of the “Law & Economics” tradition. (To be clear, Warren Prunella did not formally study at the University of Chicago or UCLA, but his work is in that tradition. By the same token, I’m from “the Austrian School” even though I didn’t study at Vienna.)

Making Goods That Cause No Fatalities? Priceless.

Although I am ultimately critical of Prunella’s actions as head of the Consumer Product Safety Commission, what he did wasn’t nearly as monstrous as Appelbaum and The New Republic writer are suggesting. To get to the heart of the issue: The only way to ensure that no child ever gets killed by a consumer product is to ban the product altogether. (And even then, the product might still be produced on the black market, in which case it would probably be more dangerous than if the government hadn’t gotten involved.)

It might be hard to understand the principle in the context of a sofa chair, but it’s easier to see when it comes to automobiles. By mandating seat belts, a padded steering wheel, anti-lock brakes, a driver’s side airbag, a backup camera, etc., and furthermore by insisting that cars obey a speed limit and get periodically inspected, the government can—at least in theory—increase the safety of driving and reduce the number of fatalities on the roads. (I say “in theory” because people drive more recklessly when they are forced to wear seat belts and because air bags can harm petite passengers in low-speed collisions.)

However, no matter how safe you make vehicles, there is always still a slight chance of a fatality. And clearly, it would be absurd to insist that everyone drive around in armored cars going 10mph. In other words, just about everyone would agree that there is some point on the spectrum of “increasing automobile safety” in which a marginal increase wouldn’t be worth it. Which is to say, at some point just about everyone would agree, “It’s better for such-and-such people to die in car accidents each year, rather than making auto transport even more expensive and less convenient.”

Furthermore, where we come down on that tradeoff is going to be influenced by how wealthy we are. As a society grows richer, its members will want their cars to be safer, even if that means they are more expensive to build.

Think of it this way: Nowadays most Americans consider it “obvious” that all new vehicles sold in the U.S. should have headlights, seatbelts, an airbag for the driver, and other standard safety features. But if today’s “obvious” standards had been enforced back in, say, 1950, it would have made cars unaffordable to most Americans. If you had asked Americans in the 1950s if the government should mandate all of those features, they would have thought the question absurd.

Of course, what’s happening here is that a richer society can afford the luxury of safer consumer products. This is what Warren Prunella was attempting to do, when he used the “statistical value of a human life” as a way to quantify the benefits of additional safety measures (in his case, for sofa chairs). Although it would no doubt shock the sensibilities of Appelbaum and The New Republic staff, the “statistical value of a human life” is higher for richer societies than for poorer ones. And that “makes sense,” because it would be absurd for the government in modern-day Bangladesh, say, to enforce the same building codes and product safety mandates as the modern-day U.S. government does.

The Austro-Libertarian Solution

Even though I argued in the previous section that the cost-benefit efficiency approach to regulation isn’t as monstrous and callous as it first sounds, let me be clear: It is creepy, and it can lead to awful abuses. 

Regarding the deep-seated conceptual flaws with the mainstream law & economics approach, I refer the interested reader to Walter Block’s critique of Ronald Coase and Harold Demsetz on property rights.

But for our purposes in this article, let me sketch out some of the major differences between the mainstream and the Austrians, and show how a Rothbardian can retain the insights from the law & economics approach, while avoiding its problems.

First and most obvious, the federal government has no business telling consumers which portions of the safety/other-attributes spectrum are off-limits. Other things equal, a safer car (or sofa chair, for that matter) will be more expensive and/or will be inferior in other respects. For example, one obvious way to make a car safer is to make it heavier, but that means it will get fewer miles to the gallon. (This is why federal mandates on fuel economy standards have caused—depending on the estimates—thousands of excess road fatalities, though newer research argues that earlier studies were too pessimistic.))

So we don’t need federal bureaucrats estimating the “statistical value of a human life” and deciding if a particular increase in safety is “worth it.” Instead, we can let companies offer a wide range of products, with varying combinations of price and safety, and let households make those decisions on their own, according to their subjective preferences and in light of their specific circumstances. I should also mention that retailers, such as Walmart, can perform the intermediary function of weeding out “unacceptably dangerous” products so that their customers in turn don’t need to do loads of research before buying a TV.

If we push the analysis more deeply, we realize that in a free society, it would probably become standard business practice for firms to offer compensation clauses with their products. So if, say, a child died in a freak accident involving a sofa chair, the manufacturer might pay the family a large sum. Third-party insurance companies would sell policies to the manufacturer, based on the danger of the products and the size of the compensatory payment (in the event of injury/death). 

The benefit of this more nuanced approach is that the risk would be more efficiently handled. The sofa chairs would still cost more (accounting for the premium that the manufacturer had to pay to the insurance company), but now the possible outcomes aren’t merely, “A safer chair versus a more dangerous chair.” Instead, the outcomes include things like, “A slightly safer chair, along with a payment of $300,000 if someone still happens to die in a freak accident.” Depending on the preferences of the population, maybe that is an option that many consumers would prefer.  The academic Law & Economics literature is aware of these nuances, but as we’ve seen, the monopoly government regulators still impose arbitrary standards rather than allowing a bottom-up market process.

Finally, notice that the “comparing costs and benefits” logic of the regulatory approach still has an influence in my alternative paradigm, but the lack of a government monopoly ensures a much wider scope for individual preferences and consumer choice.

Conclusion

Although the reaction to government cost-benefit analysis in consumer safety regulation is often too simplistic, it is understandable that normal people find it very disturbing when government bean counters decide the “value” of a life. Fortunately, the Austro-libertarian approach retains the logic of economic efficiency while respecting the rights of the individual. The consumers in a Rothbardian society would enjoy a wider range of possible goods that would allow everyone to pick the spot on the safety/other-features tradeoff that was individually optimal.

Robert P. Murphy is a Senior Fellow with the Mises Institute. He is the author of many books. His latest is Contra Krugman: Smashing the Errors of America's Most Famous KeynesianHis other works include Chaos Theory, Lessons for the Young Economist, and Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) which is a modern distillation of the essentials of Mises's thought for the layperson. Murphy is co-host, with Tom Woods, of the popular podcast Contra Krugman, which is a weekly refutation of Paul Krugman's New York Times column. He is also host of The Bob Murphy Show.

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