Monday, February 18, 2008

The wonders of industry self-regulation

We've been seeing how well self-regulation works in the financial markets. Here's a nice non-finance example:
Huge beef recall stems from Calif. plant
By GREG RISLING, Associated Press Writer
Mon Feb 18, 2008
LOS ANGELES - The U.S. Department of Agriculture on Sunday ordered the recall of 143 million pounds of frozen beef from a California slaughterhouse, the subject of an animal-abuse investigation, that provided meat to school lunch programs.
Ah, what the heck - it's not for ordinary consumers, just for school lunch programs!... they should be grateful to get anything to eat!!
Secretary of Agriculture Ed Schafer said his department has evidence that Westland did not routinely contact its veterinarian when cattle became non-ambulatory after passing inspection, violating health regulations.

"Because the cattle did not receive complete and proper inspection, Food Safety and Inspection Service has determined them to be unfit for human food and the company is conducting a recall," Schafer said in a statement.
The conservative economic icon, Milton Friedman, has something to answer for:
Private Sector; An Economic Reality Check From Someone Who's Seen It All
By SYLVIA NASAR (COMPILED BY RICK GLADSTONE)[NYT]
Published: September 29, 2002
At 90, Milton Friedman has witnessed nearly a century's worth of business scandals, booms and busts. How does the current crisis of confidence compare with past bouts of doubt?
...
[Discussing the 2001-2 economic hiccup:]
The biggest risk now, he said, is that overzealous regulators could frighten honest chief executives into ducking legitimate risks. ''The system doesn't work unless business is willing to take risks,'' he said, adding that the public tends to forget that in allocating capital, ''losses are just as important as profits.''
Ah, yes - those nefarious, overzealous government regulators!

As Paul Krugman has noted:
Fear of Eating
By PAUL KRUGMAN
Published: May 21, 2007 [NYT]
Yesterday I did something risky: I ate a salad.
...
Who’s responsible for the new fear of eating? Some blame globalization; some blame food-producing corporations; some blame the Bush administration. But I blame Milton Friedman.
...
The economic case for having the government enforce rules on food safety seems overwhelming. Consumers have no way of knowing whether the food they eat is contaminated, and in this case what you don’t know can hurt or even kill you. But there are some people who refuse to accept that case, because it’s ideologically inconvenient.

That’s why I blame the food safety crisis on Milton Friedman, who called for the abolition of both the food and the drug sides of the F.D.A. What would protect the public from dangerous or ineffective drugs? “It’s in the self-interest of pharmaceutical companies not to have these bad things,” he insisted in a 1999 interview. He would presumably have applied the same logic to food safety (as he did to airline safety): regardless of circumstances, you can always trust the private sector to police itself.
There ya have it! It's in industry's best interest to police itself - off with their heads!

Once upon a time this argument might have made sense.

In a market populated by numerous small producers, all known to the consumers, then, yes, it is in Mabel's Milk's interest to produce a safe product. Otherwise, folk'll start noticing that Mabel's Milk makes 'em sick, and start patronizing Dirk's Dairy instead. Mabel will go out of business.

But today? We are NOT living in a world of numerous small producers, all well-known to us. We take what we get at the local market, usually provided by a large corporation - one of a handful that provide goods.

... AND - large corporations incentivize short-term results: did the stock go up THIS QUARTER? As I've argued before, the private sector is NOT inherently efficient. A corporation's only LEGAL obligation is to make money for share-holders. If it can do that by cutting corners, so be it.

[Note: the phrase, "once upon a time" used to introduce a sentence above was deliberately chosen. The ideal free-market is a fairy tale. It doesn't today exist. Maybe it did once, but that "once upon a time" is now long past!]

Stop the madness!

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