Recent incidents of E. coli contamination of spinach and lettuce raise questions about maintaining food safety. Most Americans think this is a necessary function of government. Most economists agree, although some — including a couple of Nobel laureates — do not.
And this disagreement highlights how economic theorizing continues to evolve.
Economists do agree on basics: Governments generally should not act when private markets meet society’s needs. When markets fail, government action may improve things. Government actions are not invariably successful, however, and often produce unintended consequences.
Milton Friedman, the Nobel laureate who died recently, was an articulate spokesman for the libertarian view that government should be minimal indeed. For Friedman and others, including James Buchanan, another Nobel winner, government should be limited to defending the country, maintaining public order, administering a justice system that enforces contracts between private individuals and providing a few other public goods.
This group believed that inevitably, government regulation is subverted by private interest groups that use political influence to further their own ends, and that private markets, free of government intervention, do a better job of meeting society’s needs.
Friedman apparently never addressed issues of food safety. However, he did advocate abolishing the Food and Drug Administration.
The FDA, Friedman argued, is not necessary. In its absence, he said, observant, rational people will discern which drugs are safe and effective and which are not. Word will get around, and people will buy those drugs that are superior, just as they choose to buy the circular saws or pickled beets that are the better product. Firms offering inferior drugs will lose sales. If they don’t change their ways they will go broke like auto manufacturer Studebaker or locomotive builder Baldwin.
To Friedman, the FDA was not just unnecessary. By imposing high regulatory barriers, he argued, the FDA slows the process of bringing new drugs to the public and makes them more expensive. In his view, more people die because the FDA inhibits the adoption of effective new drugs than would die if the FDA were out of the picture.
This libertarian position is an extreme one within economics. Historically, most economists did not agree, although few went into detail about why.
I think most were convinced by the nation’s experience with unsafe food and drugs before the federal government took a major role a century ago. The unfettered market apparently did not function well. People did not discriminate efficiently between safe and unsafe products. The toll in illness and death due to ineffective or contaminated products was high.
Economists have long agreed that the markets can fail for several reasons, including monopoly power on the part of either buyers or sellers.
Markets also can fail when there is insufficient information for either producers or consumers to fully weigh all the consequences of their decisions.
This clearly is the key issue in food safety.
Consumers do not have the information to judge which companies sell safer food and which do not. Someone who becomes ill from eating tainted lettuce or spinach in Minnesota has no way of knowing that other people in other states have the same problem.
Indeed, it may be impossible to determine which particular food item is at fault without questioning many different victims about what and where they ate before they got sick. In practical terms, this usually is impossible to do outside of a federal government agency.
Failure of unfettered markets can justify government action. However, there is no guarantee that government action will solve the problem.
We have a very fragmented food-safety system with responsibilities divided between the FDA, the U.S. Department of Agriculture and various state health and agriculture departments. The system is not well funded, and there is little political pressure for improvement.
Indeed, there is so much uncertainty about safety of raw produce that some fast food and supermarket chains, including Taco Bell and Albertsons, contract with private food-safety consultants to audit and monitor their suppliers. These companies want to preserve their reputation and avoid the expense of lawsuits.
Those incentives for private action are just what Ronald Coase, Friedman’s colleague at the University of Chicago and fellow Nobel laureate, argued would apply if you properly structured liability laws and property rights. Maybe the free-market people still have some useful insights.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.