Freeman

ARTICLE

Product Information on the Market

JANUARY 01, 1986 by JOSEPH S. FULDA

Joseph Fulda is assistant professor of computer science at Hofstra University.

Consumers determine the amount of information available to them.

One often overlooked dimension of competition is information. Information, it must be recalled, is an economic good: it is both scarce and valued. (See Gary North, “Exploitation and Knowledge,” The Freeman, January 1982.) Product information will thus sometimes be available and sometimes not, depending on whether it is more profitable to procure and disseminate it or more profitable not to do so. This in turn depends on whether or not consumers value the information more than the resulting increment in price.

Thus food processors providing the extensive testing necessary to label cholesterol content to the nearest milligram only under threat of harassment by government agents are not denying consumers information they “ought” to have. Such information, like any economic good, is provided in quantities determined by the intersection of its demand curve with its supply curve. If rather little information is provided, this indicates not malevolent exploitation of ignorance, but rather that consumers are unwilling to pay the price that would generate a greater stock. That is a decision that should be left to them. Under the market system it is.

When the demand for accurate information about a product is sufficiently high as to support the price needed to call forth the supply, competition will assure its presence. But, the critics contend, doesn’t such simple-minded supply-demand analysis suppose that the information in question is neutral? What if provision of the information would cause the demand curve to fall off sharply? What recourse do buyers have when the product fails to perform adequately? And what prevents the unscrupulous seller from masking defects or other in formation which reflects undesirably on his product? If the market is based on the profit motive and incentives, what about cases where the incentives are apparently in all the wrong places: to be insensitive rather than sensitive, to be unscrupulous rather than honorable, and so on? There is genuine moral concern underlying these questions, concern that should be addressed.

As usual, critics of the market believe that if government does not regulate, there will be chaos. In reality, however, liberty is self-regulating and the free market turns chaos into order. Specifically, the consumer has several sources of protection from the competitor who shields nonneutral information: the law, other competitors, other consumers, and himself.

By recourse to the law we do not refer to regulatory law, “consumer law,” or any other of the new areas of statutory endeavor—all of which, in greater or lesser degree, presume guilt in the producer—but rather to the common law, as it has developed over the centuries. If outright fraud is perpetrated or the warranty of merchantability is breached, the purchase lacks informed consent and redress by the courts is in order. Likewise, the time has long passed when poison can be sold as medicine—violence done to person or property, willfully or through negligence, is not specially protected by its perpetration through economic transactions. But recourse to the law, as the critics remind us, is a cumbersome and expensive process and one which is necessarily undertaken only after the improper action is taken and the damage is suffered. If the law is not to presume guilt, it can sanction retaliatory measures only. Preventive measures must be left to the marketplace, a topic to which we now turn.

Circumscribing the actions of competitors on the market are other competitors who seek business, consumers who seek the best buy, and groups of these acting in concert to protect their common interests. To begin with, it must be understood that just as there can never be complete product information, there can never be neutral product information. All information about a product affects the choices of the consumer and is thus nonneutral. Information about proper use or care for the product will usually not change a consumer’s mind about a product. But if it is absent it presents a risk to consumers buying the product or imposes the cost of obtaining the information elsewhere. Likewise, if the instructions indicate that the product is one that is not easy to use, the decision about its purchase may be negatively affected. Risk, it might be added, is central here. The less complete the information, the greater the risk. The willingness to bear that risk is ultimately up to the consumer and it is he, therefore, who has ultimate responsibility for his purchases.

But everyone prefers to operate under a minimum of risk and a maximum of information. Thus information becomes a dimension of competition. Sure, producers might prefer to offer their wares without the information that is a necessary concomitant; but the existence of other competitors who provide more information and consumers who value such information leaves them no such choice. Other competititors may even supply the decidedly nonneutral information that the wayward producer shields from view. News organizations, responding to the same demand, may also reveal it. Even if not revealed, however, the absence of information, like the presence of discouraging information, is often enough to deter the consumer from making the purchase.

Guarding Against Risk

There will be instances where information cannot be verified by consumers even when present and where substantial danger would result from poor quality and an accompanying lack of information, as with medication. In such cases, the after the fact penalties exacted by the law—in damages, including possible punitive damages—and the market—in loss of future sales—would be correspondingly high. Too high to risk. There can be little doubt but that such companies would take out insurance. They have every incentive to do so, especially if they are not conscientious. But the insurance companies have every incentive to see to it that claims are not made and, if made, not collected. They will thus act to guard their assets. Inspections by private insurance companies with millions of dollars at stake and whose inspectors may well have their jobs on the line will surely be more thorough than disinterested bureaucrats working for indifferent agencies. Likewise, the expensive and cumbersome legal process of proving fraud or negligence when an insured company does market a dangerous product is now gladly undertaken by the insurance company.

Premiums for such insurance will be determined on the basis of the company’s record and inspections. A company with substantially higher premiums than its competitors, and that includes companies insured on the basis of statistics without inspections, will soon find its prices noncompetitive and its customers switching loyalties. A company without insurance at all is likely to be boycotted by most consumers. The existence of insured firms and consumers seeking security insures this. Once again, producers and suppliers who are insured have every incentive to advertise the fact, and to attach inspection labels with the name of the certifying company onto their wares. (The insurance company may either insure the client company against liability or extraordinary loss of business due to product failure, or insure consumers directly. The certifying company need not be known as an insurance company—it could be a magazine—but in this respect it will function as one.)

It must be admitted, however, that on the free market consumers who wish to bear the risk of buying from an uninsured, uninspected drug company either to save money or for other reasons are free to do so. The market adequately prevents and retaliates for harm done us by others; it does not prevent us from harming ourselves.

Notice, though, what has happened. Through the complex interplay of a series of market incentives, retaliatory legal and market penalties have been transmuted into preventive measures. Such insurance schemes as we have described are not more widespread only because government heavily regulates both the insurance industry and the potential client industries. Because government has effectively monopolized and usurped the insurance business, some of the insurance industry’s most natural constituencies have never been fully cultivated.

Another market mechanism for protecting the consumer which has been adopted under pressure of competition is the guarantee. Because prior information about the quality of some goods and services is difficult to obtain (e.g., repair services), guarantees have become a standard substitute. Although this remedy works only after the transaction, it both removes the incentive for and imposes a cost on making a sale on false pretenses. Thus, once again a subsequent remedy is transmuted by market incentives into a preventive measure.

Competition Promotes Information

If one wishes evidence that competition promotes rather than stifles the dissemination of product information, one need only compare the readily available information about goods and services offered on the market with that available about services offered by the government. It is legend that taxpayers inquiring about government services are shifted endlessly from office to office in a vain quest. Despite reams of published material detailing every last function of government, taxpayers are often unable to obtain answers to even the simplest of questions. Likewise it is interesting to note that just those areas of enterprise deprived of competition, notably utility and other companies with direct or indirect grants of monopoly power, are the least satisfying when it comes to information about their products and prices. Computing the price for even a relatively simple service often entails poring through pages of cross-referenced tables with notes and addenda. Some of this excess is due to the absence of competition decreed by the state. Not surprisingly much of it is the result of company response to state agencies which take it upon themselves to set a “just price,” a task which belongs to the market.

Yet another market mechanism that competitors must worry about is the voluntary inspections and standards of trade groups and consumer associations. Yes, companies can deny these entry, but to many consumers that would be primafacie evidence of failure to meet those standards. Yes, the standards themselves may be weak or poorly enforced, but if demand for the product or underlying need is even reasonably elastic (as it almost always is), the incentives are in all the right places: weak or poorly enforced standards cause the public to view the entire industry with distrust (this has happened with the mass media, for example) and that is bad for business. Furthermore, consumer groups which undertake such projects as comparative rating of products, product testing, determining best buys, and listing appliances together with their specifications can be a formidable opponent of shoddy production practices. Nevertheless, as we remarked about insurance, neither trade groups nor consumer associations have developed on the market to the extent that manifest concern about these matters—consumer demand—would call forth. These initiatives, too, have been largely usurped by the activities of government regulators.

It must be admitted, however, that at times none of these sources of consumer protection will operate. The presence of residual fraud, misrepresentation, or omission of damaging information that obtains under the market system is often defended by the advocates of capitalism as the price of freedom from prior controls, constant supervision, and the like. The simple truth is that no system can eliminate abuse. The market system at least minimizes it. Abuse is the price of being human, not the price of being free. The quality and safety of products manufactured under command economies, where every stage of the production process is under supervision and subject to government standards and controls, is a powerful indication of this.

Where the market fails, planning must fail spectacularly, for the mistakes of central planners, unlike those of entrepreneurs, are centrally imposed on the entire economy. Where the market and the law under which it operates may at least take action after an abuse occurs, the system of planning with its unnatural disjunctions between profits and success, losses and failure, and responsibility for actions and Ii-ability for their consequences remains indifferent. The market attends to economic signals which duly report mistakes. Planners, on the other hand, having destroyed or distorted economic calculation, attend only to political signals which report whatever meets the party line.

Before concluding, we should take note of the moral issue involved in forcing the release of information. In finding the forced recitation of the Pledge of Allegiance by school children unconstitutional, the Supreme Court has declared the right not to speak at least as protected as the right to speak. (See West Virginia State Board of Education v. Barnette [1943].) Circumscriptions of speech generally involve a mild contraction of choice, whereas coerced speech eliminates all choice. It is thus a mark of how far the artificial dichotomy between economic and personal freedom has permeated our law that, despite the reasoning above, producers and sup pliers are daily forced to make all manner of declarations, issue all sorts of lists, and post a wide variety of information.

Notice that what is moral and what is pragmatic are harmoniously aligned. The forced release of information is thus not only inefficient and counterproductive. It is a violation of privacy and the natural right of free expression. There are natural laws governing human action, just as surely as there are laws governing the operation of the physical universe. For human action to be productive and beneficial to mankind, the self- evident moral constraints on such action must be observed with care.

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January 1986

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