Free to Choose Chapter 7: Who Protects the Consumer - The Market Solution

In Part 1, we saw how regulatory agencies – the ICC, the FDA – were created to protect consumers and ended up protecting the industries they were supposed to regulate. But the Friedmans are not done. What about product safety? What about the environment? What about energy? And if government regulation keeps failing, what is the alternative? Part 2 answers these questions – and the answer is not what you might expect.

This is post 12 in my Free to Choose retelling series. This is Part 2 of Chapter 7. If you missed Part 1, start there.

The Consumer Product Safety Commission – Safety at What Cost?

The Consumer Product Safety Commission was created in 1973. Unlike older agencies that regulated one industry, the CPSC had authority over almost every consumer product – from bicycles to book matches to Christmas tree lights. Its mission sounded noble: protect the public from “unreasonable risks of injury.”

But “unreasonable risk” is not a scientific term. Who decides what is unreasonable? How loud can a toy cap gun be before it is a danger to a child’s hearing? How heavy should a bicycle be to make it “safe enough”? A safer bicycle is slower, heavier, and more expensive. How much speed should we sacrifice? How much extra cost should we add? These are not questions that bureaucrats in Washington can answer for every family in the country.

And here is the problem with setting those standards from above. The people with the most influence over the rules are not consumers. They are the manufacturers. They are the only ones with enough expertise and enough at stake to comment on proposed standards. In practice, trade associations end up writing many of the standards themselves – with a sharp eye toward protecting their members from competition, especially from newcomers and foreign producers. The result looks like consumer protection but functions as industry protection.

The Friedmans offer two examples that show the real danger of across-the-board regulation.

Three months after the CPSC started operating, it banned certain spray adhesives based on a single researcher’s preliminary finding that they might cause birth defects. The commission later reversed the ban when better research could not confirm the claim. Good for them – admitting a mistake is rare for a government agency. But the damage was done. At least nine pregnant women who had used the adhesive had already chosen to end their pregnancies out of fear.

The second example is worse. The CPSC strengthened standards for children’s sleepwear to make it fire-resistant. The cheapest way for manufacturers to meet this standard was to treat fabric with a chemical called Tris. Soon, 99 percent of children’s sleepwear in the country was treated with Tris. Then researchers discovered Tris was a potent carcinogen. The commission banned it in 1977 – and in its annual report, took credit for removing a dangerous product from the market, without mentioning that its own regulation had put it there in the first place.

Had the market been left alone, Tris would have been introduced gradually by some manufacturers, not all at once by everyone. There would have been time to discover the cancer risk before millions of children were exposed. That is the advantage of trial and error over central planning. Mistakes in a free market tend to be small and correctable. Mistakes from government mandates tend to be universal and catastrophic.

The Environment – A Real Problem, a Wrong Approach

Friedman makes an important admission here. Environmental pollution is a real problem, and it is one area where government does have a legitimate role. When a factory dumps waste into a river, the people downstream bear the cost. They did not choose to participate. The market cannot easily handle this because there is no simple way for the affected parties to negotiate directly. Economists call this a “neighborhood effect” or “third-party effect.”

But recognizing the problem does not mean the standard approach works. And the standard approach – creating the Environmental Protection Agency and giving it power to issue detailed rules and orders – has the same flaws as every other regulatory agency.

Friedman pushes back against something he sees in public discussions of the environment. People tend to frame it as pollution versus no pollution, as if zero pollution is the goal. That is not realistic and not even desirable. Zero pollution from cars would mean no cars. Zero pollution from breathing would mean no breathing. Everything has a cost. The real question is not “how do we eliminate pollution?” but “how much pollution is worth tolerating, given what we would have to give up to reduce it further?”

There is another uncomfortable point. The people who benefit most from environmental regulations tend to be wealthier and more educated. The people who pay the cost – through higher prices for electricity, food, steel, and chemicals – tend to be poorer. A low-income family might prefer cheaper electricity to slightly cleaner air. But nobody asks them. This is Director’s Law again: programs sold as benefiting everyone end up benefiting the well-off at the expense of the poor.

Most economists, Friedman says, agree there is a better approach. Instead of telling companies exactly what equipment to install or what emission levels to meet, charge them a tax on the pollution they produce. An effluent charge, as economists call it. If the tax is small and pollution drops a lot, that tells you the pollution was cheap to reduce. If the tax is high and pollution barely drops, that tells you reducing it is genuinely expensive – and the tax revenue can compensate the people affected.

This approach lets companies find the cheapest way to reduce pollution. It produces clear information about the real costs. It still puts the burden on the people who use the polluting products. But it does all this at a lower cost and with fewer side effects than detailed regulation. Why has this approach not been tried? Two economists put it bluntly: “It is not entirely facetious to suggest that the reason an economic-incentive approach has not been tried is that it would work.” Politicians prefer approaches where the costs are hidden, not visible.

The Department of Energy – Creating the Crisis It Was Supposed to Solve

After the OPEC oil embargo of 1973, gas prices spiked and long lines appeared at gas stations. The government responded by creating one energy bureaucracy after another, eventually establishing the Department of Energy in 1977.

Government officials blamed the crisis on greedy oil companies, wasteful consumers, or Arab sheikhs. Friedman asks a simple question that cuts through all of it: why were there no energy crises for over a century before 1971? The oil industry was always profit-seeking. Consumers were always using energy. Winters were always cold. What changed?

What changed was government price controls. President Nixon froze wages and prices in 1971. When OPEC quadrupled oil prices in 1973, the price controls on petroleum could not be removed because that would mean admitting the controls were the problem. So they stayed.

Here is Economics 101. Want a surplus? Set a minimum price above the market price. That is how America got surpluses of wheat and butter. Want a shortage? Set a maximum price below the market price. That is what New York City did with apartments – and why it has a housing shortage. That is what the government did with gasoline – and why there were long lines at the pump.

The solution was simple. Remove the price controls. Not in six months, not in six years – tomorrow. Prices at the pump might go up a few cents, but the true cost of gasoline would actually fall. Because the true cost includes the time and gas wasted sitting in line, plus the $10.8 billion annual budget of the Department of Energy itself – which worked out to about 9 cents per gallon.

Meanwhile, the government was paying OPEC nations $20 a barrel for oil while forcing American producers to sell oil for as little as $5.94 a barrel. It taxed domestic production to subsidize foreign imports. It paid more than double for imported natural gas from Algeria compared to what it let American producers charge. It imposed strict environmental rules on energy production with little regard for cost. Then President Carter proposed spending $88 billion on synthetic fuels – essentially paying $40 per barrel for shale oil while banning domestic producers from receiving more than $6 for theirs.

The free market alternative was straightforward. Remove price controls. Let domestic producers sell at market prices. If synthetic fuels are genuinely cheaper than alternatives, private companies will develop them – no government program needed. The Alaska pipeline proved that private markets can raise massive capital for big energy projects. The only thing stopping private investment was the threat that government would control the price of whatever they produced.

The Market as Consumer Protector

So if not government, then what? Friedman argues that the market itself – when allowed to work – protects consumers better than any bureaucracy.

Not because businessmen are kind. Not because they care about you. But because it is in their self-interest to serve you well. If one store sells you bad products, you go to another store. If a company makes defective goods, it loses customers. Nobody forces you to buy. You are free to choose.

The market has developed several powerful mechanisms to protect consumers.

First, middlemen. A department store monitors quality on your behalf. You do not need to be an expert on shirts or shoes. The retailer is. If something is defective, you return it to the store. Retailers like Sears built entire reputations on standing behind what they sold.

Second, brand names. General Electric, Rolls-Royce, and similar companies invest heavily in their reputation. That “goodwill” is often worth more than their factories. A company that destroys its reputation destroys its value. That is a powerful incentive to maintain quality.

Third, private testing organizations. Consumers Union, founded in 1935, publishes Consumer Reports. Consumers’ Research, started in 1928, does similar work. These organizations test and rate thousands of products. They are entirely market-driven – no government mandate created them. They exist because consumers wanted them.

Interestingly, after nearly fifty years, these organizations attracted only about 1 to 2 percent of potential consumers. That tells you something important. Most people get the quality information they need through other channels – brand reputation, retailer guarantees, word of mouth. The market provides multiple layers of consumer protection without any government involvement.

What about advertising? Critics claim that companies manipulate consumers into wanting things they do not really want. Friedman is skeptical. The Ford Edsel – one of the most aggressively advertised cars in history – was one of the biggest commercial failures ever. If advertising could truly create artificial demand, the Edsel would have been a hit. Cars that skipped annual model changes were always available. Consumers mostly chose not to buy them. The real complaint of most advertising critics is not that consumers are being manipulated but that consumers have tastes the critics do not approve of.

The greatest danger to consumers, Friedman concludes, is monopoly – whether private or governmental. And the best weapon against monopoly is not a bigger antitrust division but free trade. Japanese and German car manufacturers did more to force American companies to improve than any government agency ever did. Freddie Laker cracked the airline cartel without help from the Department of Justice. Competition from around the world, when it is permitted, is the consumer’s most powerful protector.

The Prohibition Warning

Friedman ends the chapter with a warning, and it is one of his most memorable passages.

When Prohibition began in 1920, evangelist Billy Sunday predicted paradise: “The slums will be only a memory. Men will walk upright now, women will smile, and the children will laugh.” What actually happened? New prisons had to be built. Al Capone and organized crime flourished. Ordinary citizens became lawbreakers just for wanting a drink. Prohibition did not stop drinking. It destroyed the market mechanisms that normally protect consumers from dangerous products. It corrupted law enforcement. It did enormous damage – all in the name of protecting people from themselves.

Friedman sees a milder version of the same impulse in the FDA’s banning of cyclamates, DDT, and laetrile. Citizens were already crossing into Canada and Mexico to buy drugs they could not get in the United States – just as people crossed borders during Prohibition for a legal drink.

Follow the logic far enough, he says, and it leads to absurdity. If the government must protect us from dangerous drugs, why not ban alcohol and tobacco, which kill far more people? If it must protect us from unsafe bicycles and cap guns, why not ban hang-gliding, motorcycling, and skiing?

Even the regulators themselves back away from this conclusion. And the public pushes back whenever the government goes too far – like the time it tried to require an interlock system on cars, or proposed banning saccharin. People want information. They do not want someone else making their choices for them.

The chapter closes with a sentence that captures the whole book: “Let it leave us free to choose what chances we want to take with our own lives.”

Key Takeaway

Government regulation fails not because the people running it are bad, but because the system’s incentives point in the wrong direction. The CPSC exposed millions of children to a carcinogen through its own fire-safety rules. The EPA uses a regulatory approach that costs more and achieves less than a simple pollution tax would. The Department of Energy created the very energy crisis it was supposed to solve – through price controls that any first-year economics student could have predicted would cause shortages. Meanwhile, the market quietly protects consumers through competition, brand reputation, middlemen, and private testing organizations. None of these mechanisms is perfect. But Friedman’s central argument is hard to dismiss: when you compare the real market to the real government – not ideal versions of either – the market does a better job of serving consumers. The most effective consumer protection is not a government agency. It is your freedom to walk away and buy from someone else.

Book: Free to Choose by Milton and Rose Friedman | ISBN: 978-0-15-633460-0

Previous: Chapter 7 Part 1 - Regulatory Agencies

Next up: Chapter 8 - Who Protects the Worker - The real effects of unions and minimum wage laws.