Who protects consumers from big businesses?

In response to yesterday's post, Jeremy writes:

"How do you respond to the leftist argument that free-markets enable undesirable behavior by industries such as "predatory lending" or the neglect of ecological disasters such as the Union Carbide leak in Bhopal.

"The behavior I'm particularly interested in hearing your response to is manufactured demand. Most economic models act under the assumption that the consumer is logical - but I think you are aware of just how illogical consumers can be...

Sales of bottled water didn't skyrocket until massive marketing campaigns (propaganda?) convinced people that bottled water was a good idea - despite being wasteful and relatively quite expensive.

"Credit cards are another example. I would argue credit cards are a significantly better idea than bottled water - and certainly have their uses. But obviously, some people just shouldn't have them. Credit card debt can be devastating. If they were logical and well informed, I assume they wouldn't demand the service - or maybe demand less, but there are obviously instances of people borrowing more than they can handle.

"People who fail to pay their bill on time and suffer late fees are profitable. In a free-market, what's to stop a credit card company from spending millions on targeting their marketing towards profitable consumers in the absence of education (generally public) or consumer protection mechanisms?

"Individualism and self-reliance (qualities highly valued by the right) are great, but what's an individual to do when millions (billions?) of dollars are spent to convince them to act a certain way that benefits industry but, arguable, is destructive to them. (Think: consuming expensive bottled water, eating fast food and accumulating excessive debt.)"

In answer to your first question, I believe competition in the free market protects most consumers from bad products. The Internet has been a great tool for assembling consumer reviews, including repeating horror stories of bad companies.

Milton Friedman did a PBS special in his 1980 Free to Choose series entitled "Who Protects the Consumer?" that goes deeper into how the free market encourages good products and services, and how government intervention stifles these things and creates monopolies. You can see it here.

It's important to remember that even though there are flaws in the marketplace, the treatment from government intervention has a lot more potential to do harm.

Bruce Yandle came up with a theory called "Bootleggers and Baptists" that any piece of legislation will have two types of supporters: Those who support it on moral grounds (The Baptists) and those who support it because they will benefit from it (The Bootleggers). He explains how the Clean Air Act was worsened by coal lobbyists. The legislation forced companies to buy an air-cleaning product that made it cheaper to buy the most toxic coal around, and it lead to more pollution.

In addition, Yandle identifies the tobacco settlement in the 1990s as a scheme to make it more expensive to sell tobacco; protecting big tobacco from smaller competitors.

If you take one thing away from this response, let it be this: Corporation do not want a free market. Big companies would much rather have the government protect them from competition. They are willing to lobby or make outrageous claims in support of regulations, tariffs, subsidies and bailouts for protection.

Advertising as propaganda

As for advertising influencing people to buy things they don't need, I point you to skeptical marketer Steve Cuno's article on that very subject here, and his response to angry critics here. I am unaware of his politics, or if he envisions any legal restrictions on advertising, but his commitment to science is clear. A telling paragraph from his first essay:

"No matter how well crafted advertising may be, the inescapable fact is that the market always has a choice. The most skillful advertiser cannot foist a product on a public that doesn’t want it. There’s a reason for the failure of products like Bic disposable underwear, Cosmopolitan (magazine) yogurt, Colgate kitchen entrees, Ben-Gay aspirin, Smith & Wesson mountain bikes, and McDonald’s clothing. Though respected, experienced advertising agencies threw their best at these products, the market voted NO with its collective checkbook, leaving ad agencies powerless to do anything about it.

"But markets can and often do wield the checkbook irrationally. When that happens, advertising makes a handy scapegoat. Advertising couldn’t make us buy Coors bottled water or Harley-Davidson perfume, but people still prefer to believe it makes us reach for Apple Jacks instead of apples."

So while I agree that buying bottled water is foolish, I don't know what impact advertising had on it's success. As Cuno writes, it's a logical fallacy to assume that because sales increased after an advertisement, that the advertisement caused the sale. Specifically, that fallacy is called "Post hoc ergo propter hoc."

As for predatory lending - I really don't know much about this subject. It's possible that companies try to give people credit so they can be trapped in debt, but that just sounds like a campfire story about dark masters.

What I do know a little about is the allegations of predatory lending and the recession. We blame companies for giving houses to people who can't afford them. However, that doesn't mean it was the free market at fault. We had a big push to help people get houses, and we had a string of lawsuits against financial institutions that didn't lend to the poor.

What are banks supposed to do? We said its wrong when they only lend to the rich, but then when they lend to poor people and those loans default, we say they were acting irresponsibly.

Mike Munger of Duke University said regulations set the banks up for the fall. There's still plenty of blame to go around to the banks, but it wasn't simply a lack of regulation that caused the terrible problems.

What are the limits?

The free market, however, does not guarantee environmental protection. That's why I support pollution taxes. It's very easy for a company to tolerate pollution "externalities" and a tax on pollution makes companies absorb those costs.

In addition, I also believe the government has a role in punishing companies that commit fraud. They aren't doing a good job of it with pseudomedicine, as the FDA allows companies to sell placebo products if they just put a little message on it that says it hasn't been tested.

In both of these cases, someone could make an argument that the free market will solve them. Fraudulent businesses will get bad publicity and people will avoid them, and there's a big push for environmentally-friendly companies. Consumers can encourage a company to be more Earth-friendly by boycotting reckless ones.

However, I don't believe these forces are enough. Fraud is a very purposeful act and deserves legal punishment, and people don't shop around enough for things like utility companies - which can lead to a lot of avoidable pollution.