CHAPTER 14 Unsafe at Any Speed ON IMPROVING THE MARKET THROUGH REGULATION PRODUCT SAFETY

WHEN CONSIDERING THE possibility of an unregulated market, one question that arises frequently is how consumers can be protected against unsafe products without government intervention.

Safety is not an absolute value that automatically trumps all others. Highway safety would go up if everyone drove a multi-million-dollar armored-personnel carrier or if everyone was forced to drive at two miles an hour. The mere fact that no one is suggesting those ideas illustrates that even the most die-hard of consumer protectionists realize that safety must be traded against other factors. Products need not be “absolutely safe,” whatever that would mean, but merely “safe enough.” However, government efforts to ensure that products are safe enough run into an insurmountable barrier. Having crippled the price mechanism via its intervention, the government has no means by which to gauge what trade-off consumers desire between safety, cost, convenience, and other product features.

In an unhampered market, it is the effort on the part of entrepreneurs to make profits by satisfying consumer demand that guides that trade-off. Let us imagine the market for chain saws to be in a plain state of rest, where it also happens to be the case that all producers are manufacturing saws that are equally safe. Now the producers, in their efforts to make profits, have reduced the costs to produce such saws to the minimum level that they could, given the means available to them. Competition will also drive those entrepreneurs to make the best saws that they can at any given cost. Thus any safety improvements can come about only with an increase in costs.

Let us further imagine that there are safety improvements that at least some consumers value more than the cost of adding them. This will mean that there are factors of production, be they safety engineers, quality inspectors, automatic shut-off devices, or so on, that are underutilized in meeting consumer demand, and therefore are priced below the level that would fully account for their value in yielding consumer satisfaction. The discrepancy between the prices of the factors of production and the prices of the final consumer products they might yield creates an opportunity for entrepreneurial profit. An entrepreneur can purchase those undervalued resources and use them to create a product that will sell for more than his costs. We have good reason to suspect that some entrepreneur, in the endless quest to find further sources of profit, will realize that the discrepancy exists and act to eliminate it.

True, the market process does not guarantee that every such opportunity will be found. However, aside from the search for profits, there is no possible procedure, other than guessing, to discover those opportunities. Furthermore, guessing without prices, while it might occasionally get the right result, does not even provide a way to detect success after the fact! Entrepreneurs have feedback as to whether they did a good job of estimating consumer demand; was the venture profitable? On the other hand, if the government steps into the chain saw market and mandates a certain feature, it destroys the very mechanism by which we might discover whether consumers valued such a feature more than its cost. Since all chain saws will now have the feature, consumers must pay for it whether they want it or not. No one can say whether consumers find this to be a reasonable trade-off, since they no longer are able to express their preferences by choosing between saws with and without the feature.

There is not even any guarantee that in requiring some safety feature the government will not make us less safe, as it might have overlooked another, more important element of safety. Michael Levin, in his Free Market article “Labeling and Consumer Choice,” talks about his surprise at finding his son’s new jacket had no drawstring. The reason the manufacturer had removed this feature was pressure from the Consumer Product Safety Commission. Apparently, some children had gotten their drawstrings caught in something and been injured. But perhaps the risk of pneumonia in cold climates is greater than the (minimal) risk of getting the string caught. Who knows? The government found a couple of cases of harm and saw the opportunity to “act decisively.” But, as Levin points out: “Meanwhile, in the chilly New York wind, my son can’t figure out how to tighten his hood.”

When presented with these arguments, a friend of mine commented: “OK, but I don’t have the time to research the safety of every product I buy, while the government can employ people to do so full time.”

That is certainly true. If every consumer were left entirely to his own devices in determining product safety, the world would be a riskier place. But implicit in this concern is the idea that if the government does not fulfill such a role, then no one can. It overlooks other important sources of safety information, which would function even more effectively in an unhampered market than they do at present. Not only do such sources exist, but they have the distinct advantage that the decision whether to use them or not is voluntary. Perhaps I don’t care how safe my chain saw is, as long as it chops up trees “real fast.” In that case, why should I be forced to pay for safety evaluations that don’t interest me?

One source of privately supplied safety information is independent consumer publications, such as Consumer Reports. While they provide consumers with good information today, the demand for safety information, and hence the supply of it, is dampened by the fact that these groups are competing with the “free” consumer information and protection from the government. (It’s not free to us as taxpayers, of course, but since we pay for it whether or not we use it, there is no additional cost in making use of it in our role as consumers.) Some religious or ethnic groups have a tradition of private safety standards as well, such as the “kosher” designation on foods.

Or have a look at nearly any electric item you own and you will see a “UL Mark.” It stands for “Underwriters Laboratories.” The UL Mark is applied to as many as 17 billion products every year, to show that the product meets some standard of safety. UL has been providing the service for more than 100 years, long before the regulators got into the business. It’s also completely private, a company with 6,000 employees that examines 20,000 different types of products. Its marks are forced on no one. The existence of organizations like Underwriters Laboratories depends on the fact that most businesses consider it disadvantageous to kill their own customers, both because it will tend to give one a bad name, and because marketing studies have consistently shown the dead to be far less avid consumers than the living.

There is always the risk that a testing organization might become beholden to some big client, and grow less than rigorous in testing that client’s products. However, using that fear as a justification for government safety standards is flawed in two respects. First of all, it simply assumes that government agencies are free from such difficulties. The Public Choice School has long since debunked that idea.

The second problem is that it ignores the fact that competition is the consumer’s best friend, here as elsewhere. In an unhampered market, if a testing organization is not performing up to snuff, there is an opportunity for competitors to draw away customers and make a profit by pointing that out. That is, in my estimation, the most significant source of safety information on any company’s products: its competitors. No one else in the economy has as much motivation to study Company A’s widgets as competing widget-maker Company B. The means by which such knowledge can be propagated to the consumer is advertising. Examples of companies that have relied heavily on advertising the high safety standards of their products include Volvo and Michelin.

Empirical work on product safety bears out our theoretical considerations. Economist Ronald Coase describes the results of an extensive study of U.S. drug regulation by Sam Peltzman as follows: “The gains (if any) which accrued from the exclusion of ineffective or harmful drugs were far outweighed by the benefits foregone because effective drugs were not marketed” (Essays on Economics and Economists). Reason magazine contributor Jacob Sullum, in his article “Safety That Kills,” contends that federal airline safety regulations most likely cost lives. Sullum also points out, in “Alcohol Blindness,” that because of federal regulations, there are strong restrictions on mentioning the health benefits of moderate alcohol consumption. Dickinson College economist Nicola Tynan has done extensive research indicating that the socialization of the water supply in nineteenth-century London, done in the name of public safety, often created the large epidemics it was supposed to alleviate. In addition, private water suppliers were increasing water safety well before the government acted.

People have different tolerances for risk, and different views of the benefits of risky activities. Government regulations, with their one-size-fits-all view of this trade-off, are simply an attempt by some people to make that choice for everyone else. They are unsafe at any speed.

IN PRAISE OF BUGS

PRODUCT QUALITY IS closely akin to safety—in some cases, such as bungee cords, “quality” might even be a synonym for “safety.” It is also another area where some people have claimed that there is market failure, and a need for the government to “step in and correct” the outcome of the market process.

One particular product that has often been accused of unconscionably poor reliability is computer software. Wall Street Journal tech columnist Walter Mossberg wrote a column a few years ago entitled “I’m Tired of the Way Windows Freezes!” in which he indicts the reliability of his PC software. As Mossberg puts it, “[Computers] should just work, all the time.” In a similar vein, San Jose Mercury News tech columnist Dan Gillmor complains, “the attitude [of the technical industry] toward reliability and customer service has been scandalous.”

Over the years, any number of other writers have sounded similar themes: computer systems are too buggy, there’s no excuse for a single defect in software, if programmers built bridges we’d be afraid to drive on them, and so on. In their view, software defects are a moral issue, instead of simply a result of the well-known trade-off between schedule, cost, and quality. For them, there is no trade-off possible—defects are a moral failing, and a complete absence of defects must be assured, whatever achieving that goal does to the cost and the schedule.

What all of these writers allege, knowingly or not, is that, in the market for software, consumer sovereignty has been violated. The consumers would prefer bug-free software, whatever the cost, but greedy companies, thinking only of their profits, somehow force the current, inferior breed of software on them.

But is achieving bug-free software always in the consumer’s best interest? Let’s contemplate an example. I once went to work for a partnership that trades stocks with the partners’ capital. There, the people who specified the software, the people who managed its development, the people who paid for that development, and the end users were all the same people. There was little risk that those people, in their role of managing development, were misrepresenting their own interests as users of the end product. Nevertheless, I was shocked at the haste with which the traders put my first, practically untested, development effort into use. One of the partners explained to me that this was not recklessness or ignorance, but simple accounting sense. For a company creating an automated trading system, one measure of its quality would be the ratio of good trades (i.e., trades the designers intended the system to make) to bad trades. If the average cost for a bad trade is $6,000, and the average benefit of a good one $4,000, then once the system generates 61 percent good trades, it is profitable. Any pre-release testing beyond that point is costing the firm money. Further testing may make the system more profitable, but once it achieves 61 percent reliability it is worth releasing.

After the publication of Mossberg’s column, one woman wrote in, saying, “I never have to reboot my refrigerator, no matter what I put in it.” But a refrigerator does the same thing with all input—keeps it cold. It doesn’t have to connect to your head of cabbage, format your waffles, recalculate the spiciness of your horseradish, or spell-check the labels on your pickles. In fact, it keeps cooling even if you have nothing in it—something that we would consider a bug in a piece of software. A refrigerator is a fairly simple device, and a refrigeration engineer could explain the inner workings of one to us in about half an hour. On the other hand, modern computer systems are among the most complex devices humans have ever constructed. To achieve a moderate understanding of the inner workings of Windows NT or Linux, starting from scratch, would take years.

Complaining along the same lines, Gillmor writes, “The appliances we use at home do not crash.” He seems blissfully unaware of the existence of washing machine repairmen, plumbers, electricians, telephone repairmen, and the dozens of other trades that help maintain our homes.

Fantasies about life in an ideal world where there is a surplus of everything are irrelevant to economics. In such a world there would no longer be economic goods, and the science of economics would cease to be of importance. Consumers would no doubt love to have software that contained every feature they might ever want to use, was completely without defects, and merely appeared on their hard drive at no cost. But here in the real world, where resources are scarce, we must choose A while foregoing B. Software can be made more reliable only by leaving out features, or increasing the cost of developing it, or both. Consumers’ preferences in regard to this trade-off are embodied in their actual purchases.

Gillmor says: “[Consumers] just don’t want to consider the possibility that low prices can mean not-so-great service. . . . People have to patronize the companies that provide quality, and have to be willing to pay more.” He doesn’t consider that consumers might be well aware that there is a trade-off between price and service, and could rationally choose a lower price at the expense of service. Someone using an on-line brokerage might decide that saving $15 a trade is worth suffering the service being down for one hour a month. Why shouldn’t a consumer make that trade-off if he feels it is in his interest?

Even in the market most thoroughly dominated by Microsoft—desktop operating systems—consumers are able to make their own choices on quality in software every day. There were, at the time Gillmor was writing, two major varieties of Windows on the market. Windows 98, the cheaper of the two, was much more prone to crashing than Windows NT, the more expensive (in terms of learning time and administration costs, as well as initial price). This fact was well publicized in reviews and advice columns. Yet consumers overwhelmingly opt for Windows 98. Shouldn’t they have that option?

Whatever one thinks of the degree of “market power” that Microsoft wields, it certainly spends a great deal of time and effort putting out new releases of its products. As is often lamented, the releases tend to focus on new features, and generally contain about the same number of bugs as previous ones did. But if customers truly cared more about the bugs than the new features, then even from a monopoly position, wouldn’t Microsoft want to focus on that area, so as to sell more upgrades?

There is no reason to conclude that consumers are not getting roughly the level of software reliability they prefer, given the scarcity of resources available to produce software. (I say roughly because Austrians do not believe that we can possibly arrive at the “equilibrium always” state of the evenly rotating economy.) But let us imagine that entrepreneurs have made a general mistake, and badly misestimated the desire for quality software. Either explicitly or implicitly, views like those described above contain calls for the government to do something about the problem. Many interventionists believe that once they have found an area in which the market’s behavior is, in some sense, less than optimal, they have fully justified the case for government intervention. But as Ronald Coase points out, they have barely begun: Even if most software is, in some sense, “too buggy,” what evidence exists that some government intervention could improve the situation? A common suggestion is to enforce a licensing system for software engineers. However, such schemes, by driving up the cost of entry, serve to protect the salary of those who can acquire the licenses, and to raise the cost of software. There is no evidence that practitioners who have, for instance, a bachelor’s degree in computer science produce software that is more reliable than those who have entered the field with no formal training. Who can better judge the competence of software engineers for the task at hand than the entrepreneurs who hire them? Who better knows “the particular circumstances of time and place”?

The attempt to replace the actual preferences of consumers, as expressed in their willingness to pay real prices for real products, with fanciful musings about an ideal world in which ends are achieved without expending any means (except jawboning!) is doomed to disappoint. Such frivolity is not an attempt to strive toward an unrealizable standard, as there is no striving involved on the part of the daydreamer. Instead, these ideas, when acted upon by the state, only serve to cripple our ability to create the most desired of the less-than-perfect goods that we less-than-perfect beings actually can create.