The Self-Interset of Self-Regulation; J. B. Phillips

Honest businessmen, who are well aware of the importance of customer goodwill, try to in sure that their businesses are not harmed by the unscrupulous actions· of others. Many of them have formed voluntary associations to provide self-regulation in their industries. It is important to understand the differences between a voluntary association and a govern ment agency. The fact that the former is volun tary and the latter is compulsory is the funda mental distinction. But this leads to other dif ferences. Government agencies are political bodies. Consequently, political expediency often has as much to do with a regulation as any legitimate economic or ethical concern. Furthermore, government regulatory agencies are established Mr. Phillips is afree-Iance writer based in Houston, Texas. for the express purpose of protecting con sumers. And herein lies the unspoken premise: that the interests of consumers and producers are inherently at odds.

Voluntary associations are established pre cisely because this assertion is false-honest businessmen want to protect both consumers and themselves from dishonest businessmen. Voluntary agencies operate on the premise that the interests of consumers and producers do not conflict and, in fact, are often the same. Government regulatory agencies ultimately set producers against one another, as each tries to secure political privileges for himself. Vol untary associations operate cooperatively, as producers realize that their mutual needs can be better served by working together. All of this sounds good on paper. But do businesses really attempt to promote the in terests of both consumers and producers? Is practice consistent with theory? Most trades and professions have some form of professional association. Many of these are little more than fraternal organizations. Others would be more accurately described as political action committees. But many provide some form of self-regulation within their trade through the inspection of facilities, the estab lishment of a code of ethics, and/or the arbitra tion of disputes. Businessmen across the nation recognize the self-interest in self-regulation.

For example, the Greater Houston Builders' Association (GHBA) is a voluntary organiza tion whose members include insurance, mort gage, and title companies, banks, subcon tractors, material suppliers, and many other trades, as well as builders. The association's primary purpose is to further the interests of its members through advertisements, promotions, the arbitration of disputes, and by watching for legislation which will adversely affect the building industry. But the association also promotes the in terests of consumers. Its Code of Ethics states, ' among other things: "Honesty is our guiding business policy. High standards of health, safety, and sanitation shall be built into every residence. Members shall deal fairly with their respective employees, subcontractors and sup pliers. "1 GHBA members can use the associa tion's logo in their advertisements, indicating to consumers that the business has pledged to uphold these principles. When disputes do arise, consumers have not only the local GHBA to tum to, but also state and national builders' associations.

On a state level, the Bed and Breakfast So ciety of Texas (BBST) offers self-regulation to approximately 75 bed and breakfast establish ments across the state. BBST is a privately owned business which also serves as a reserva tion service for its members. BBST owner Marguerite Swanson has a background in guid ance and counseling, which she uses to screen potential guests. Because many of the bed and breakfasts are located in private 'homes, this screening process prevents the dilemma of an unexpected guest suddenly appearing at one's door. This provides members with a degree of protection. To join the BBST, an establishment must meet Mrs. Swanson's guidelines. These in clude a separate bathroom for each guest bed room, fresh fruit for breakfast, and more sub jective criteria such as comfort and safety. Mrs. Swanson personally inspects each establish ment and looks for "the kind of accommoda tions that I and all the people involved with bed and breakfast would actually seek ourselves. ' '2 She also teaches several courses in running a bed and breakfast, which member hosts and hostesses must periodically attend.

Consumers benefit from the BBST because they are guaranteed quality accommodations at reasonable rates. Additionally, Mrs. Swanson tries to match guests with compatible hosts, making the experience more pleasant for ev67 eryone. She must be successful, because she always has a backlog of bed and breakfasts wanting to join her association, and most guests are repeat customers. A more widely known example of self-regu lation is the Better Business Bureau (BBB). Es tablished in the early 1900s "to combat untrue advertising and set standards for advertisers, "3 BBBs exist in nearly every city in the country. Today the BBB has three primary goals: main taining truthful ads, early detection of fraud, and arbitrating consumer disputes. A BBB pamphlet states that the organization "is de voted to the protection of the consuming public and to the vitality of the free enterprise system. It works to fulfill its mission by fostering the highest standards of responsibility and probity in business practice, by advocating truth in ad vertising and integrity in the performance of business services."4 Clearly, the BBB and its members recognize the self-interest in self-reg ulation.

Another form of self-regulation includes au thorized and limited dealerships. This method insures consumers that the local businessman is in good standing with the manufacturer and is qualified to sell and/or service a particular product. When dealerships are limited, dealers must maintain high standards or the manufac turer may withdraw its authorization and present it to a competitor. In addition to these various forms of self-reg ulation, the free market has provided a number of other means of promoting consumer aware ness and exposing fraudulent business prac tices. Underwriters' Laboratories (UL), for ex ample, is an independent testing agency estab lished by insurance underwriters. One of the first such agencies, UL tests nearly every elec trical appliance put on the market today. Manu facturers are charged a fee to have UL test their products, and those that meet their standards may use the UL label on their products and in their advertising. This label is now widely rec ognized as a symbol of safety and quality.

The monthly magazine Consumer Reports is published by Consumers Union, an indepen dent "nonprofit organization established in 1936 to provide consumers with information and advice on goods, services, health, and per68 THE FREEMAN. FEBRUARY 1988 sonal finance . . . ." 5 Consumers Union makes anonymous purchases at retail outlets, tests the products, and publishes the results. To avoid conflicts of interest, and maintain its indepen dent status, Consumers Union does not allow manufacturers to advertise in its magazine, nor does it award a "Seal of Approval." They merely test and report on consumer products, so that consumers can judge for themselves which products best fit their needs. However, Good Housekeeping magazine does award a "Seal of Approval" which manu facturers can use on their products and in their advertising. In awarding the seal, the magazine guarantees to replace or refund the cost of any defective product. Obviously, to make such a guarantee, the magazine is confident of the Wanted: Cooperation product's quality, and the consumer is guaran teed satisfaction.

Honest businessmen have a vested interest in exposing fraudulent practices. The organiza tions we have examined demonstrate that busi nessmen recognize this and are willing and able to protect their self-interest through the volun tary, peaceful means of the free market. In the process, they also protect consumers. 0 1. Pamphlet distributed by the Greater Houston Builders' Asso ciation. 2. Interview with Mrs. Swanson. 3. Pamphlet distributed by the Better Business Bureau of Metro politan Houston. 4. Ibid. 5. Masthead statement, Consumer Reports. IDEAS ON LIBERTY F rom the awareness of the limitations of individual knowledge and from the fact that no person or small group of persons can know all that is known to somebody, individualism also derives its main practical conclusion: its demand for a strict limitation of all coercive or exclusive power. Its opposition, however, is directed only against the use of coercion to bring about organization or association, and not against association as such. Far from being opposed to voluntary association, the case of the individualist rests, on the contrary, on the contention that much of what in the opinion of many can be brought about only by conscious direction, can be better achieved by the voluntary and spontaneous collab oration of individuals. The consistent individualist ought therefore to be an enthusiast for voluntary collaboration-wherever and whenever it does not degenerate into coercion of others or lead to the assumption of exclu sive powers.

-F. A. HAYEK, Individualism and Economic Order 69 The "New Socialistn" by John K. Williams F ive years ago my native country of Aus tralia elected a socialist government. A perusal, however, of legislative mea sures taken by that government leads one to ask precisely what the label "socialist" today means, at least in Australia. The socialist government floated the Austra lian dollar, thereby partially entrusting the na tion's currency to market forces rather than to political control. It deregulated banking and nu merous other industries. It cut marginal tax rates. It froze, and in some cases actually cut, social security benefits and tightened eligibility requirements for welfare. It is now planning to sell government-owned enterprises to the pri vate sector. Our socialist Prime Minister and Treasurer regularly speak of the importance of incentives, the significance of market forces, the necessity for capital formation, and the cru cial role of private property rights in achieving prosperity.