The same concept can be extended to concepts that are objectively definable — but not to concepts that are NOT objectively definable. If somebody wants to sell “milk”, that term can be defined as “the white stuff that comes out of a cow”. If FBN Dairies mixes powdered chalk with water and calls it milk, that’s fraud. Sure, consumers could easily detect such an obvious fraud, but what about a fraud that requires scientific measurement to detect?

There’s an important difference here between the market approach and the regulatory approach: the cost of violation. The market can only desist from future purchases of an unreliable supplier; his ill-gotten gains remain his. The government can impose fines upon the supplier in retrospect. This provides a more effective deterrent to fraud than the market’s approach.

Again, I emphasize that these considerations apply only to those factors that can be objectively defined. If FBN Dairies wants to label their stuff “dairy product”, that’s fine. The consumer can read the label and decide for himself. But standards are a crucial component of all economic activity. Whether you’re selling milk or electricity or paper, it’s crucial that there be standards.

Now I have to address the issue of privately established standards. The computer industry has gotten very good at establishing all sorts of standards without any government intervention. However, there are two key factors to consider:

1. to what extent are the standards relied upon by the consumer (versus another manufacturer)?

2. is the standard being created for something new and different, or something that’s been on the market for a long time?

In the first case, the creation of standards for manufacturing is easy and doesn’t concern the consumer. The label “USB” is copyrighted and can be used only if the device meets the standard. The consumer doesn’t care about the specifics — he just wants to know that the device will work. That’s easy enough.

In the second case, it’s almost impossible to privately establish a standard. People have been drinking milk for a long time and there are a zillion purveyors of milk. How are they going to get together to agree on a standard? If a definition is needed, the government will be the best source of that definition.

Again, I want to emphasize my main point: there’s no basic difference between the government defining the meaning of “ounce” and the government defining the meaning of “milk”. There IS a difference between defining the meaning of “ounce” and defining the meaning of “tasty”.

You say the following in support of your argument: This is a fundamental flaw with free markets — they can never achieve perfect information.

While, in isolation, this statement is correct, its context in your argument make me think you’re implying something which is patently false, that perfect information can be achieved. It would be more correct to say: This is a fundamental flaw with the human race – they can never achieve perfect information.

That said, difference in effectiveness between economic and regulatory systems is how they deal with imperfect information. A free market, which allows consumers to make choices using the available information to choose between competing products or services, lets consumers compare the available information that is relevant to their preferences. In a free market with vibrant competition (which I acknowledge is not always the case), Fly-by-Night Dairy would likely never gain market share if it started out offering inferior products or less value than its competitors. So, to gain enough market share that any fraud would be profitable, the company would have to start out making products equal to, or better than, that of their competitors. This would prove to be a rather significant barrier to entry for a bad actor.

A centrally-regulated system, on the other hand, encourages a drive towards a minimum standard, set by the regulatory authority. While it increases the odds of getting what it promised, it simultaneously reduces the odds of consumers getting things that meet their preferences. Why? Centrally-regulated systems also have imperfect information, though the information is “imperfect” is different. In the free market, the consumer does not have all the information about the products he’s considering. In the centrally-regulated system, the regulator does not have all the information about consumer preferences. Depending on how far away the central regulating authority is, on the equivalent of the federal level, they may have nothing but the most abstract idea of what consumer preferences are.

Free markets are more apt to produce results that are more satisfying to the consumer not because they enable a consumer to make a choice with perfect information, but rather because they keep the decisions and information close to the consumer. In fact, the phenomenon on which Brad is commenting in this post shows that even the regulators need the free market to determine what consumer preferences are. (That is, of course, when they’re not on an ideological crusade, in which case consumer preferences go out the window and NO ONE besides the regulators themselves are satisfied.)

I guess what I’m getting at here is that central regulatory control is contrary to the goal of meeting consumer preferences by nature. The farther removed a decision maker is from the information available to the consumer and that consumer’s preferences, the less likely that decision maker will satisfy the consumer. When one decision is centrally applied to many consumers, the variance of consumer preferences all but ensure that some will not be satisfied. This does not take into account the tendency of regulators to substitute their own preferences when the information is unclear (or just plain contrary to what they believe), which makes the odds of satisfying consumers even lower.

Economics aside, there is a Constitutional issue when it comes to “regulating” interstate commerce. In the time since the Constitution was written, the meaning of the word regulate has shifted from “to make regular” towards being more synonymous with legislate, though usually involving career regulators or industry specialists instead of elected legislators. This means that the powers granted by the framers to the Congress with regards to interstate commerce are far less than is accepted today. The framers intended this clause to resolve the issue, present in the pre-Constitution days, of different states having different commerce laws, sometimes going as far as laying tariffs on commerce between the states. In the intended application, the laws passed using this clause would apply more to the states than to individual companies or citizens. With the shift in meaning from then to now, the activity in Brad’s post is constitutionally acceptable when the commerce clause is read by modern eyes.

This is why I like having a keg at home… The proper serving size is “whatever the hell I feel like” :-)

One fundamental flaw with this analysis. It’s much easier to dupe the public than it is to dupe other companies.

For example, there was a story in the blogosphere about an employment agency that was scamming their customers (charge them $3000 for their service, and then don’t do anything to get a job)… They did exactly what you mentioned. Once they got sued, they closed their doors, and opened the exact same business under a new name to start screwing new people. The government doesn’t really stop that, and really often does very little to punish it.

On the opposite side, when you’re a company trying to win the business as a supplier to another company, the world is a lot smaller. You’re not waiting for some sucker to come in off the street. For example, the company I work for has to often provide references before certain companies will do business with us. Not only that, we know all our competitors (from having competed in the same accounts with them), and if someone was screwing their customers and then just closed shop and opened anew, the rumor mill would be well ahead of the curve on that one. Why would something like milk be any different? If I’m a buyer for a major supermarket chain, I’m going to try to work with reputable suppliers. If I get screwed by salesman Joe Schmo from Fly-By-Night Milk, and then 3 months later Joe Schmo comes in with his new business card from Trustworthy Milk Company (which has only been in business a month), do you think I’m going to buy from him? After all, I’ve already screwed up once, do you think I’m going to put my job on the line and not check up on Mr. Schmo and his organization (noticing that the board of directors, president, etc are all the same guys who screwed me at Fly-By-Night)?

You’d be surprised, companies scamming each other isn’t as easy as you think. Bad reputations often last longer than bad companies, and there’s enough cross-movement and information between companies within industries that everyone usually knows what everyone else is up to.

But let’s go to the next step now. Suppose that FBN Dairies takes 15 ounces of milk, adds 5 ounces of water, and puts the mix into a milk bottle labeled “20 ounces of milk”. Who’s the wiser? FBN Dairies makes big profits until somebody finally figures out their trick, and then they just move on.

If the government can justly declare that “20 ounces of milk” means 20 government-defined ounces of milk, then shouldn’t they declare that “milk” means government-defined milk? We have exactly the same principle at work with “milk” that we have with “ounces”. So why shouldn’t the government define the terms of trade that are reasonably definable? Again, it would definitely address a weakness of the market.

We’d probably switch to the metric system, which we should have done a long time ago anyway!

But seriously, do you think that if we didn’t have the National Bureau of Standards to define an “ounce”, which is a universally agreed-upon quantity regardless of what country it’s in, that we’d have a problem? After all, even without the NBS, we all know what an ounce is, and you could still either engage in suit at common law for a company that was defrauding its customers, or simply try them in the court of public opinion. If General Mills got a reputation for shorting their customers, do you really think they’d be in business for more than 5-10 years?

And you say that Congress has the power to fix the standard of weights and measures. Do they really? What would happen if they just arbitrarily decided a kilogram was 1.5 times the size of the internationally-agreed upon kilogram? Do you really think anyone would take them seriously? They may be “authorized by the Constitution” to fix the standard of weights and measures, but believe, me, they’re just following the crowd on this one.

Hell, all this thought experiment is making my head hurt… I think I need a pint of beer. Or should it be an imperial pint? Oh dear, it’s so confusing… How will I ever know how much beer to pour now?!

So far so good, or do we have absolute libertarians here who reject the Constitution?

Nobody was willing to sink large sums of money on anything when there was a risk of the government shutting them down any minute. Nor was the government helpful; nobody is permitted to put anything with more power than a lawnmower in the air without govt permission.

I believe the fear of regulators set the development of truly profitable space travel back by at least a decade.