*Rates are incremental and apply to taxable income (income after deductions and exemptions).

**California taxes may be deductible on next year’s federal tax calculation.

If a college teacher living in California who earns $75,000 per year publishes an article in Ideas on Liberty, and FEE pays him $100, how much do the federal and state governments take? How much does he get to keep?

Here is the pertinent information about the direct takings of such earnings:

2002 Federal Tax Brackets and Rates*

Single Person                     Married Couple

Income and Rates                Income and Rates

Up to $6,000     10%           Up to $12,000   10%

to $27,950        15%           to $46,700         15%

to $67,700        27%           to $112,850       27%

to $141,250      30%           to $171,950       30%

to $307,050      35%           to $307,050       35%

above that         38.6%        above that          38.6%

Federal “Payroll” Taxes—Social Security & Medicare

If you have an employer you pay 7.65 percent and your employer pays 7.65 percent of the first $84,900 of earnings. (And your wages reflect that burden.) Each pays 1.45 percent of everything over $84,900.

If you are self-employed, you pay 15.3 percent of the first $84,900 of earnings and 2.9 percent of everything over $84,900.

2001 California Tax Brackets and Rates***

Single Person                     Married Couple

Income and Rates                Income and Rates

Up to $5,700     1%             Up to $11,500   1%

to $13,600        2%             To $27,300       2%

to $21,500        4%             to $43,000         4%

to $29,900        6%             to $59,700         6%

to $37,700        8%             to $75,500         8%

(2002 brackets and rates were not available at time of publication.)

The Tax Bite at the Margin

The payment from FEE would be counted as “self-employed” earnings, so the college teacher would have to pay 15.3 percent in levies supposedly for Social Security and Medicare. After deductions and exemptions, his taxable income is in the range of $55,000.

If he’s married, here’s what happens to the $100 payment: Governments take $48.30 and he keeps $51.70.

If he is single, governments take $51.60, and he keeps $48.40.

Furthermore, out of the retained portion he pays sales taxes (about 9 percent in Santa Clara County, California), property taxes (on the condominium he owns), and excise taxes (on the alcohol, gasoline, and telephone services he buys, for example).

Of the additional $100 he receives from FEE, all told, governments will take over 55 percent.

“ . . . The land of the free, and the home . . . of the . . . brave.”

Though FEE usually pays its authors, we instructed it not to pay us for this article. We care for FEE not as much as we care for ourselves, but a lot more than we care for the federal and California governments. Better that FEE have the money than the governments, even if it means fewer dollars for us.

The Food and Drug Administration has a stranglehold on the introduction of new drugs, medical devices, and manufacturer-written information about products. The rationale is to assure quality and safety. Although consumers demand quality and safety assurance, the free-enterprise and tort system are supposedly unable to supply it. The way to help consumers is, of course, to deny their freedom of choice, curtail their access to information, fetter the enterprises of their trading partners, and stunt the prerogatives of their doctors, hospital workers, pharmacists, insurers, and other agents and advisers.

Almost every economist who has written about the FDA has favored reform in the libertarian direction. A stream of literature has for decades explained why massive bureaucracy and the strangulation of enterprise are no aids to quality and safety. And the literature has in several ways proved the point empirically. Yet FDA feel-good fascism persists and expands, because enlightenment is unpopular at the NBC “Nightly News.”

Physician and Hoover Institution fellow Henry Miller makes a splendid contribution. He covers briefly the familiar ground, including the history of drug control, the expansion of FDA power, its procedures and practices, the perversity of its incentives and agenda (such as the bias toward withholding approvals), the damage to drug development, and the consequent death and morbidity for the American people. The book enriches understanding with several insights that come by virtue of Dr. Miller’s personal qualification: He worked in the FDA’s regulatory apparatus from 1979 to 1994. Thus we have in Henry Miller a medical doctor, an expert on the pharmaceutical industry, and an expert on the internal workings of the FDA itself. His personal story must be a fascinating one of dissidence and eventual defection.

While enlightened criticism continues to hit at the exterior walls of the FDA, how do those inside respond? Not seriously. Miller writes, “[B]oxes on the organizational chart are arranged and rearranged, added and eliminated; names of entities are changed (and then changed back); and various pilot programs come and go. FDA managers avidly craft and meet new performance milestones, but there is little impact on the bottom line of timely patients’ access to new therapies.” FDA “reforms” are often merely the codification of old internal practices and its pronouncements are often merely criticism deflectors and public-relations exercises. When the House of Representatives in 1996 wrote a significant reform bill, the FDA and Clintonistas “pulled out all the stops to defeat it.”

Miller supplies several glimpses into the banality of FDA evil. The agency is perfectly willing to lie through its institutional teeth, as was made plain in the assault on silicone breast implants. That assault killed Dow Corning, but the large pharmaceutical companies have developed “formidable regulatory affairs apparatuses [and] have become comfortable with the present system.” They can beat any small outfit or newcomer in the fine art of “negotiating their way through the regulatory maze.” This helps explain their complacency, though Miller also notes that companies are disinclined to antagonize their masters.

The book compares the FDA to drug-control systems in Europe, where the regulatory authorities are less Naderish in their attitudes and relationships with manufacturers. Swedish regulators know that AstraZeneca representatives from Södertälje are fellow Swedes and not bent on cheating or poisoning their customers. The drug-delay victims too are fellow Swedes, probably even second cousins. The European agencies use and trust external reviewers, cooperate with applying companies, and grant reciprocal approval across national boundaries. “The FDA, by contrast, is compliance-oriented, comports itself like a police agency—it actually has armed inspectors—and frequently treats drug companies like adversaries.”

Miller understands that the demand for assurance generates opportunities for entrepreneurs to profit by supplying assurance. He says: “[O]ne might even postulate that in the complete absence of a government drug-regulating agency, market forces would spur the creation of whatever mechanisms would be required to assess and ensure pharmaceuticals’ safety and efficacy. This is, after all, what Consumer Reports, Consumers’ Research, J.D. Power & Associates, and other private-sector organizations do for consumer products and service industries; and Underwriters’ Laboratories actually establishes standards and offers formal certification of products.”

Instead of pressing a laissez-faire line, however, Miller develops a reform proposal that would attempt to institutionalize the cooperative virtues of the European systems. Drug development and application would be overseen by nongovernmental “drug certifying bodies.” They would compete with one another for hire by companies developing a new drug. The hired drug-certifying body would oversee investigation, help develop the new drug application, and then make an initial decision on the application—that is, decide whether to certify the drug. The European agencies would also be permitted to serve as drug-certifying bodies. The company and its certifying body would then go together to the FDA for final approval of the new drug. The FDA, therefore, would retain final authority, but would rely on a set of trusted drug-certifying bodies, which would compete to get it right, do it quickly, and keep fees low. Under such a regime, says Miller, the FDA “becomes primarily a certifier of certifiers, rather than a certifier of products.”

Miller’s plan would vastly improve the situation in the United States, but one should keep in mind that it would give the FDA coercive authority over new drugs and devices, as well as hegemony over the setting of quality and safety standards and the recognition of drug-certifying bodies. There are good reasons to believe that such a system would work less well than laissez faire. Still, To America’s Health is a useful and much-needed book.

Contributing editor Daniel Klein is an associate professor of economics at Santa Clara University.

A sulfa drug called Elixir Sulfanilamide released in 1937 killed over 100 Americans, mostly children. A sedative called Thalidomide released in Europe in 1957 and taken by pregnant women caused deformities in 10,000 children. These famous episodes strike us as horrible injustices that must be prevented.

But more deadly are quack platitudes that guide public policy. Platitudes such as “safety,” “consumer protection,” and “imperfect information” have paved the way for a government stranglehold on the pharmaceutical industry. The Food and Drug Administration (FDA) decides whether to permit a company to manufacture and sell a drug or medical device and what the company may say about it.

In medical matters, expertise and good sense should decide. In policy matters, expertise and good sense also should decide—but they do not. The issue here is one of economic policy, not medicine. The true “doctors” for drug policy are the political economists. But as economist John Calfee says, “the FDA has never sought to accumulate expertise in economics.”^[1] Quacks make policy against the doctors’ orders.

Many economists have studied the FDA. Their diagnosis is well expressed by Nobel-winning economist Milton Friedman: “The FDA has done enormous harm to the health of the American public by greatly increasing the costs of pharmaceutical research, thereby reducing the supply of new and effective drugs, and by delaying the approval of such drugs as survive the tortuous FDA process.”^[2] Other economists’ prescriptions regarding the FDA are uniformly libertarian, ranging from gradual decontrol to outright abolition of the agency (as Friedman recommends). Although one can occasionally find remarks by economists vaguely favoring government restrictions on health products, those are not the economists who have written on the FDA or provided serious argumentation.^[3] I have tried to survey all economists’ writings on the FDA and have not been able to find a single instance of an economist defending the contemporary FDA or advocating tighter restrictions. Contrary to the joke about laying all the economists end to end, those who study the issue do reach a conclusion: Relax restrictions on drugs and devices.

But the good policy doctors are largely ignored. The result has been like a plague. Yet the journalists and educators have not explained it or its FDA origins. Economists and libertarians are up against a Goliath—the country’s entire quack political culture.

Today men with risk of heart trouble know to take half an aspirin a day. By 1988 it was well established that aspirin greatly reduces the risk of myocardial occlusion. But for years the FDA forbade aspirin makers from advertising that fact (the FDA still significantly restricts advertising about it). The FDA surely killed tens, and quite possibly hundreds, of thousands of Americans by this restriction alone.^[4]

The FDA delays, stifles, and suppresses life-saving drugs and devices. Such drugs and devices as Practolol, Interleukin-2, Taxotere, Vasoseal, Ancrod, Glucophage, Navelbine, Lamictal, Ethyol, Photofrin, Rilutek, Citicoline, Panorex, Femara, Prostar, Omnicath, and Transform have been subject to long delays, killing tens of thousands and causing awful suffering.^[5]

The drug delays we can list, taken together, are just the tip of the iceberg. A 1987 study catalogued 192 generic and 1,535 brand-name tested drugs available abroad but not approved in the United States. Of the drugs approved by the FDA between 1987 and 1993, fully 73 percent had already been approved abroad.^[6] And because the FDA process is so expensive, so protracted, and so uncertain, thousands of untold drugs are never discovered or developed. It is impossible to estimate the suffering and death caused, but surely it greatly exceeds 50,000 premature deaths annually.

Here one might object, “But isn’t your diagnosis one-sided? Doesn’t the FDA screen out unsafe drugs?”

Quality and Safety Assurance Without the FDA

First of all, “safety” is not a yes-or-no issue. Is chemotherapy safe? Medicine is often poison. The safety of a drug depends on myriad particulars about the patient: age, physical strength and condition, attitude and spirit, activities, allergies, diet, dosage, medical attention, and drug regimen. In 1994 adverse reactions to FDA-approved drugs killed 106,000 hospital patients.^[7] Inevitably, many people will suffer and die from unwanted side effects. (In 1998, about 130 people died while on Viagra; speculation continues overwhether these deaths are to be attributed to side effects of the drug or excitement “under the influence.”)

That said, I am prepared to grant that few FDA-approved drugs are flagrantly unsafe. But here’s the important point: Drug safety would be—and is—certified and assured by a panoply of private-sector, voluntary institutions and by the tort system. When a company harms consumers with an unsafe drug, it suffers devastating losses. Its reputation suffers, and it pays hefty damages to victims. In deciding which drugs to use, consumers seek various assurances by:

• asking the doctor which drug to take;
• choosing doctors affiliated with health organizations (such as hospitals, clinics, medical groups, and insurers);
• buying drugs of brand-name manufacturers;
• buying drugs from reputable pharmacies and supermarkets;
• being an “active patient” by researching therapies in libraries and on the Internet (at encyclopedic drug databases, such as the WebMD or onHealth Web sites).
• Meanwhile, our providers and agents seek assurances in more professional ways—mysterious to us, but not to those involved:
• drug review by medical insurers;
• seal of approval or evaluations by independent organizations (ECRI, American Hospital Formulary Service Drug Information, US Pharmacopoeia);
• professional newsletters (Clinica, Health Devices Alert, The Medical Letter);
• scientific testing and publishing (The New England Journal of Medicine, and others).

Ultimately, the whole enterprise of medical science is about safety and efficacy! Malpractice or negligence is a professional scandal for the private organizations involved. They work hard to avoid blights to their reputation, quite apart from the FDA. Consumers desire not only quality and safety but also assurance of quality and safety. The quality of the thing offered may be excellent, but if consumers lack confidence about that quality, they abstain from buying. Confidence comes by way of meaningful assurances of quality, so entrepreneurs have incentives to provide that assurance.^[8]

Quality and Safety Assurance Without the FDA: Four Proofs

Although some might tell you otherwise, voluntary society (plus the tort system) can provide assurance at least as well as government intervention can. Here are four empirical proofs of the claim.

Assurance in Other Industries. How is safety assured in other industries? In electronics, manufacturers submit products to Underwriters’ Laboratories, a private organization that grants its safety mark to products that pass its inspection. The process is voluntary: manufacturers may sell without the UL mark. But retailers and distributors usually prefer the products with it.

Suppose someone proposed a new government agency that forbade manufacturers from making any electronic product until approved by the agency. We would think the proposal to be totalitarian and crazy. But that is the system we have in drugs. It is inconsistent to favor the free-enterprise approach to assurance in electronics but the totalitarian approach in drugs. Sometimes people rejoin: “You can’t compare drugs to a toaster! Drugs have much larger effects on our physical well-being.” The point, however, cuts both ways. Because drugs are so important, the downside of government restrictions is enormous—as we have seen.

Calamity Before 1962? The FDA was much less powerful before 1962. The historical record—decades of a relatively free market up to 1962—shows that free-market institutions and the tort system succeeded in keeping unsafe drugs to a minimum. The Elixir Sulfanilamide tragedy (107 killed) was the worst in those decades.^[9] (Thalidomide was never approved for sale in the United States.) The economists Samuel Peltzman and Dale Gieringer have made the grisly comparison: the victims of Sulfanilamide and other small tragedies prior to 1962 are insignificant compared to the death toll of the post-1962 FDA.^[10]

Were They Dropping Like Flies in Europe? Most countries have their own counterparts to the FDA. But other countries approve drugs quicker. From about 1970 to 1993 the approval times for drugs and devices in the United Kingdom, France, Spain, and Germany was significantly shorter than in the United States.^[11] As we have noted, delays mean morbidity for patients. Although FDA drug approval times have improved and are now similar to those in Europe, the prior period of U.S. “drug lag” suggests a lesson about drug approval.^[12]

The European agencies took less time to approve new drugs, but such laxness did not produce a scourge of unsafe drugs. As researchers of the Tufts Center for the Study of Drug Development write: “the probability that a marketed drug will be removed for safety reasons was not appreciably greater in the United Kingdom than in the United States.”^[13] Lighter approval requirements did not lead to any noticeable problem. One explanation would be that the European agencies function more effectively (and there is reason to believe this). Yet I am inclined to think that in both Europe and the United States the government approval process, as a means of assuring safety, is superfluous.

Even without government approval, voluntary institutions and the tort system would use scientific testing and professional certification to screen out unsafe drugs. The government approval process here and abroad is a set of bureaucratic hoops and hurdles often inappropriate or unnecessary for the drugs in question.

The Hidden Lesson in Off-Label Prescribing: Proof that we don’t need FDA approval of drugs can even be found in America today. A drug’s FDA-approved uses are called its “on-label” uses. Once a drug is approved for any use, it may be used in any way doctors and users see fit. Approved drugs are often found to have other benefits, and doctors learn to prescribe those drugs for such “off-label” uses. Although off-label uses have absolutely no standing with or approval by the FDA, they are perfectly legal. Do patients and doctors shrink in fear from uses not certified by the FDA?

Absolutely not! Off-label prescribing is pervasive and vital to the health of millions of Americans. As economist Alexander Tabarrok says, “most hospital patients are given drugs which are not FDA-approved for the prescribed use.”^[14] Off-label prescriptions are especially common for AIDS, cancer, and pediatric patients, but are standard practice throughout medicine.

Doctors learn of off-label uses from extensive medical research, testing, newsletters, conferences, seminars, Internet sources, and trusted colleagues. Scientists and doctors, working through professional associations and organizations, make official determinations of “best practice” and certify off-label uses in standard reference compendia such as AMA Drug Evaluations, American Hospital Formulary Service Drug Information, and US Pharmacopoeia Drug Information—all without FDA meddling or restriction. Economist J. Howard Beales finds that off-label uses that later got FDA recognition appeared in the Pharmacopoeia on average 2.5 years earlier.^[15] Where voluntary society finds room to stand, its practices lead, not follow, government determinations.

No one would be foolish enough to suggest that the FDA prohibit off-label prescribing. But as Tabarrok astutely points out, there is a logical inconsistency in allowing off-label prescribing and requiring proof of efficacy for the drug’s initial use. Logical consistency would require that one either oppose off-label uses and favor initial proof of efficacy, or favor off-label prescribing and oppose initial proof-of-efficacy. Experience recommends the second option. Efficacy requirements should be dropped altogether!

Quackery Often Prevails

A drug may be developed, tested, and found to save lives. But the FDA will prevent Eli Lilly, Rite Aid, and Kaiser Permanente from making the drug available until it has gone through the tortuous and expensive approval process. That might take ten years. It might take forever if the drug is for a rare disease (and hence a small market). Because voluntary society would accomplish anythingthat the FDA accomplishes, the harms of the FDA are unredeemed.

Economists from Adam Smith to Milton Friedman have had the unenviable task of pointing out that popular, well-intentioned cures are often worse than the disease. Economists seem nasty when they report that the FDA is bad medicine. People don’t like to hear that they have bought into quackery. In collective decision-making, quackery often prevails over sense. []

Notes

1. John E. Calfee, “The Leverage Principle in the FDA’s Regulation of Information,” in Competitive Strategies in the Pharmaceutical Industry, ed. R. B. Helms (Washington D.C.: American Enterprise Institute, 1996), pp. 306-21.
2. Quoted in Durk Pearson and Sandy Shaw, Freedom of Informed Choice: FDA Versus Nutrient Supplements (Neptune, N.J.: Common Sense Press, 1993), p. 39.
3. Economists making passing remarks vaguely favoring government restrictions on health products include Jerome Rothenberg, “Social Strategy and the Tactics in the Search for Safety,” Critical Review, Spring/Summer 1993, pp. 159-80, especially pp. 166, 172, and Paul Krugman, “Natural Born Killers,” New York Times, March 22, 2000.
4. Alison Keith, “Regulating Information about Aspirin and the Prevention of Heart Attack,” American Economic Review, May 1995, pp. 96-99.
5. A chief source of information about drug development and approval is the Tufts Center for the Study of Drug Development. Its information is often mined and analyzed from a libertarian perspective by researchers at the Competitive Enterprise Institute (see both organizations online).
6. Kenneth Anderson and Lois Anderson, eds., Orphan Drugs (Los Angeles: The Body Press, 1987). Henry I. Miller, “Failed FDA Reform,” Regulation, 3, 1998, p. 24.
7. Jason Lazarou et al., “Incidence of Adverse Drug Reactions in Hospitalized Patients,” Journal of the American Medical Association, April 15, 1998, pp. 1200-05.
8. See Daniel B. Klein, Assurance and Trust in a Great Society, Foundation for Economic Education Occasional Paper no. 2, 2000.
9. Dale H. Gieringer, “The Safety and Efficacy of New Drug Approval,” Cato Journal, Spring/Summer 1985, pp. 177-201, provides a table of cases worldwide, 1950-80, with at least 100 casualties from an unsafe new drug (p. 192). There are none listed for the United States from 1950 to 1962.
10. Gieringer; Sam Peltzman, “The Benefits and Costs of New Drug Regulation,” in Regulating New Drugs, ed. Richard L. Landau (Chicago: University of Chicago Press, 1973), pp. 114-211.
11. Kenneth I. Kaitin and Jeffrey S. Brown, “A Drug Lag Update,” Drug Information Journal, 29, 1995, pp. 361-73; Robert Higgs, “How FDA is Causing a Technological Exodus: A Comparative Analysis of Medical Device Regulation: United States, Europe, Canada, and Japan,” Competitive Enterprise Institute, March 1995.
12. Elaine M. Healy and Kenneth Kaitin, “The European Agency for the Evaluation of Medicinal Product’s Centralized Procedure for Product Approval: Current Status,” Drug Information Journal, 33, 1999, pp. 969-78. It should be noted that approval is but the last stage in the development of a drug, and the FDA reaches far back into the clinical-testing stages of drug development. Therefore, looking only at approval times does not give a complete picture of whether the FDA now keeps pace with its European counterparts. Historically drug development has taken longer in the United States. Whether the “drug lag” in this broader and fuller sense is diminishing is not yet established.
13. Quoted in Kaitin and Brown, pp. 370-71.
14. Alexander Tabarrok, “Assessing the FDA via the Anomaly of Off-Label Drug Prescribing,” The Independent Review, Summer 2000, pp. 25-53.
15. J. Howard Beales III, “New Uses for Old Drugs,” in Helms, pp. 281-305.

In academia most economists practice technical crafts. Academic incentives strongly favor such crafts, and economists pursue academic rewards, perhaps with a faith in the applicability of “the invisible hand” to their own “industry.” But the crafts are mostly irrelevant to policy issues and contribute little to society.

The invisible hand works well when supply—of, say, shoes—caters to customers who purchase with their own money product for their own use. Competing suppliers prosper by best serving demanders. In academia, however, the demand for academic product comes from journal editors, referees, and university departments. The demand is the expression of other suppliers. It is as though shoe demanders were only other shoe makers, who demand shoes not for how well they wear but for aesthetic niceties fancied by the guild. Academic economists tend to favor peers whose crafts exalt their own handiwork. In the social sciences and humanities, demand and supply are highly interlocking, circular, and self-legitimating. The “industry” is more of a craft circle or club. And the club subsists on tax and tuition dollars. The grounds for faith in an invisible hand are rather slight.

Society would gain a great deal if economists became more relevant. Most economists are wiser about economic policy than the average voter. The public needs their help. And in being relevant, economists would better learn economic judgment and become yet wiser.

Who Makes Public Policy?

In fields such as medicine and chemistry important new decisions are made by trained experts. Even when an active patient makes his own medical decisions, he first obtains knowledge about his particular condition and becomes a narrow sort of expert. Unlike an individual making his own medical decisions, however, we decide public policy collectively. In political economy important decisions are made not by trained experts, but by government officials and voters—the Everyman (which of course includes every woman). Politicians must worry about meeting the approval of voters, the Everyman, not economists. Because the Everyman neither expects his vote to make the difference in an election nor anticipates bearing the many hard-to-see drawbacks, he has little incentive to know better about public issues. He often decides rashly, ignorantly, and incompetently.

Not knowing better, the Everyman needs saving from himself. He shoots himself in the foot by building rail transit or government housing, monopolizing letter delivery, subsidizing agriculture, restricting imports or pharmaceuticals, imposing price controls, and imposing licensing restrictions. Foolishness may be avoided by economic enlightenment. Well-intentioned policies have drawbacks that economists can skillfully illuminate.

Building rail transit or government housing means creating public-sector operations that serve society poorly and that no one owns or takes a long-term interest in. Government investment also means the displacing of other, probably more useful investment. Imposing a minimum-wage law means stripping unskilled workers of their chief means of competing against higher-skilled workers and machines. Restricting pharmaceuticals in the name of safety means denying patients drugs they need and discouraging drug development and innovation. Imposing occupational licensing means restricting the supply of services, raising the price, and preventing poor people from entering the occupation and getting a foothold on the economic ladder. Were economists to better engage the Everyman and point out such drawbacks, economists would reduce the not-worth-knowing-better problem.

The Everyman is somewhat like the drunk looking for his lost keys under a lamppost because the light is better there. Assisting the Everyman would require only basic economic ideas. Most economists could provide the analysis needed. In doing so, however, they might not show themselves to be exceptionally smart or clever. In fact, the cleverest economists at MIT or Harvard might explain basic principles no better than young graduate students at George Mason University. The economists, though knowing where the keys are, give little assistance.

Theory of What?

Academic economists crave academic rank and prestige, which translate into nice tenured positions, easy grant money, and influence over graduate students and the profession. As in most walks of life, material benefits go hand in hand with ego benefits.

The academic world needs standards for ranking economists and their research. In economics two official genres have evolved and now dominate. One is model building. The model builder writes down a toy economy ofmathematical functions called “consumers,” “producers,” and so on. As in solving a puzzle, the model builder finds the “equilibrium,” which is treated as the conclusion of the story. Of the many particulars of human practices and institutions, only one or two can be modeled at a time. Going by the code word “theory,” model building often makes no serious reference to real world happenings. Dubious work of this kind appears in Econometrica and The Journal of Economic Theory. Theory of what? one wonders.

The other official genre is statistical significance—an important test of many hypotheses, but one that is rarely placed into a broader body of argument on a policy issue. If the economist does try to make an argument about the real world, the fancy statistics are usually not the persuasive part of the argument. As Ronald Coase, Herbert Stein, Lawrence Summers, and Deirdre McCloskey have pointed out, simpler forms of evidence and reasoning are much more believable and carry the oomph of economic persuasiveness. But the simpler forms don’t qualify as impressive performance.

So to gain prestige economists perform for each other rather than enlighten society at large. If an economist writes policy studies or nonacademic articles, his colleagues may disparage such work by calling it “advocacy,” “popularization,” and “nonscience.” In academia, participating in public discourse often counts against you.

Do You Have Faith in Academia?

Not only does society suffer from missed economic instruction, but by removing himself from public discourse the academic economist also misses opportunities to better learn how policy and markets really work. Focusing exclusively on technical schemes, economists have blinded themselves to certain broad realities that do not fit in. In real life, market conditions are highly particular and in flux. Knowledge of moment-by-moment particulars resides only in decentralized form among myriad individuals, each of whom interprets the situation differently. Model building and statistical significance can scarcely appreciate the implications of a world with divided, disjointed knowledge, because only by assuming uniformity, stasis, and common knowledge does the system of equations become workable. By shutting themselves off from the real economy, economists have lost touch with the basic economic insights of Adam Smith, F.A. Hayek, and Coase. They are in fact worse economists for having preoccupied themselves with the meretricious standards of academic rank.

The failings of universities were discussed long ago by Adam Smith. He said educational institutions subsisting on endowments or state funding tend to lose enthusiasm for the basic instructional needs of the people. University faculty become a self-evaluating body. They indulge one another’s neglect of basic teaching and occupy themselves with elegant yet arid learning. Furthermore, their avoidance of “the current opinions of the world” (that is, the policy opinions of the Everyman) shields their own beliefs from challenge. Smith’s discussion of universities suggests that in scholastic communities irrelevance and bad judgment go together—a result today more amply demonstrated, in my opinion, in the more leftist (and hence, willy-nilly, more statist) disciplines of the academy. The average economist today is wiser about public policy than the average voter, but that wisdom would be still greater by his engaging in more give-and-take on concrete policy issues.

Club economists complacently affirm status-quo academic institutions. The implicit presumption is that doing well academically is doing good for society—the invisible-hand result. Some prominent free-market economists, such as George Stigler and Sherwin Rosen, have even made the presumption explicit.^* But neither they nor any other economist has actually done the economics of his”industry” to sustain such an invisible-hand faith. Meanwhile, many complacent club economists are ready to dismiss the research esteemed in sociology, political science, or women’s studies. But the structure of all the social science “industries” is basically similar, so why would the invisible hand apply to economics but not to the other social sciences? Economists ought to think harder about the economics of economics.

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* George J. Stigler, The Economist as Preacher and Other Essays (Chicago: University of Chicago Press, 1982), pp. 34, 67; and Memoirs of an Unregulated Economist (New York: Basic Books, 1988), p. 85, 179; and Sherwin Rosen, “Austrian and Neoclassical Economics: Any Gains From Trade?” Journal of Economic Perspectives, Fall 1997, pp. 139-52; see p. 151.

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Let’s Debate the Issue!

A scholarly community depends on standards for good research, and those needs are relatively well met by equilibrium model building and statistical significance. Those genres have their proper place, and a degree of scholasticism is inevitable and indeed desirable. But there is too much. To foster research and teaching that is less paradigmatic and more relevant to policy, economists should relax certain scholastic norms.

As Thomas Mayer argues, in good policy-relevant work the chains of argument are usually made up of links even the strongest of which are not very fancy. Economists might shift their standards of evaluation to the entire chain of policy argument, not just its strongest links. In doing so, they could reduce the Everyman’s cost of learning the basics and improve public decisions.

Policy-relevant work is bound to involve greater exercise of judgment. Like scotch, judgment is heady stuff. But one may learn to imbibe more responsibly and to tolerate better the passions of other imbibers. Economists tend to see consensus as the hallmark of science, but in a science like political economy, where the true practitioner is the Everyman, perhaps equal standing should be given to dialogue. Economists should make their seminar rooms and professional journals more hospitable to policy debate and outspokenness. They should increase their esteem for basic policy work, and decrease their esteem for the two modes of academic performance currently dominant.

With the growth of the Internet has come a lot of talk about privacy. In a recent cover story in The Economist, “The End of Privacy,” the magazine warned that “threats to traditional notions of privacy will proliferate.” It cites a survey showing that 80 percent of Americans worry about what happens to information collected about them.

The current debate over Internet privacy seems to prove that no blessing is without its detractors. Public issues should be built on systemic patterns of actual human troubles. In privacy skirmishes the only actual infringements ever cited are isolated or ephemeral. When the automobile became a widespread consumer product, did people fret over having something that could be broken into? They installed locks and eventually alarms, built garages and secure parking lots with fences and gates, and watched over them with video cameras. The need to secure their cars may have raised new problems for law enforcement, but certainly did not justify new regulation of the automobile industry or the security industry.

The average citizen does not find it worthwhile to inform himself about an issue when he can’t affect policy. A pollster, it has been said, is someone who asks citizens what they think about something they don’t think about. We can understand how the average survey respondent might fret over privacy as a way of flattering himself. We like to think we are so important that others want to talk about us.

That troubles of privacy and trustworthiness on the Net have not proven significant should not surprise us. In free markets consumers reward producers only when all their concerns are met. Profits go to the producers who are trustworthy and responsible, except in fleeting and atypical circumstances.

Suppose the consumer wants a reliable watch. That want carries with it several ancillary wants: The consumer wants to know where the watch is available; he wants to determine the claims made for the watch; he wants assurance that the claims can be trusted; he wants convenience in completing the purchase; he may want discreetness in how information about the purchase is used. The bundle of wants must all be addressed if the producer is to win the consumer’s patronage and make a profit.

What are supermarkets, shopping malls, and established retailers if not ways of providing the ancillaries while relying on wholesalers for the primary want? The shopping mall gives the consumer free parking, security, pleasant surroundings, and brand-name assurance. The supermarket too is really an immense fair where hundreds of manufacturers sell their goods. Such places that serve both the primary and ancillary wants may be called marketplaces.

Each marketplace has to compete with other marketplaces. Safeway competes with Lucky’s and to some extent with 7-Eleven. There is a whole field of marketplaces competing for consumers’ dollars. It’s really a market for marketplaces. The important point is that to succeed in the market for market places, a marketplace must meet all the consumers’ wants, not just the primary want.

Another type of marketplace is the Web site. Web sites also compete in the market for marketplaces. This manner of speaking may be confusing, but it underscores that assurance and privacy are just other things that consumers demand. Just as the demand for watches creates opportunities for entrepreneurs to profit by providing watches, the demand for assurance and privacy creates opportunities for entrepreneurs to profit by providing assurance and privacy. There is no more reason for government to regulate the production of those things than there is for it to regulate the production of watches.

Researchers have explored how producers provide assurance of quality and safety. The central mechanism is reputation, the general opinion of whether one’s promises of quality and safety are trustworthy. Producers build reputation by a variety of means.

Firms seek repeat dealings so that satisfied customers gain confidence and return for more purchases. If the producer were to cheat customers, he would lose future purchases not only by that customer but also by others informed of the dissatisfying experience. Firms develop an array of services brought under the umbrella of brand names, logos, and trademarks, using their reputation to assure quality and safety.

Retailers build bridges of trust by becoming regular dealers between producers and consumers. Rite Aid and Safeway have a continuing relationship with pharmaceutical suppliers on one side and consumers on the other. Buying from a trusted middleman, like Safeway, assures the customer of quality and safety in goods from a supplier once removed. By serving as a middleman, Safeway makes the consumer’s relationship with the ultimate manufacturer like the relationship we have with the friend of a friend.

Firms also seek seals of approval awarded by various organizations that evaluate quality and safety. Classic examples include Underwriters Laboratories, Moody’s, AAA, and the Orthodox Union. Some evaluators work on the other side of the market. Consumers themselves turn to Consumer Reports, Zagat’s, movie reviews, doctors, and so on to gain assurance of quality and safety.

The Overlooked Market

Nothing here should be startling. But a careful study of that intangible good, assurance, shows that the voluntary sector of society has developed many seemingly disparate ways of providing it. Unfamiliarity with these practices often leads people to overlook them altogether and to suppose that the only source of assurance is the tort system and government regulation. Scholarly research indicates that, in day-in-and-day-out commerce, the voluntary approach is by far the most important, and that tort and regulation are a distant second and third.

Traditional practices are of course extended to the Net. What is TRUSTe.org but a seal-of-approval organization paid to evaluate privacy policy and certify deserving Web sites to assure customers of responsible use of information? The auction site eBay is a complex approval giver: it registers users, manages interaction, insures some purchases, and certifies escrow providers for other purchases. Amazon is a giant middleman. Because we trust Amazon, we have a bridge to every smalltime publisher in its listing. Infomediaries might convert the ancillary want into the primary want and act as information handlers for consumers. There is no definitive method or approach to assurance and privacy, nor should there be. But we may predict that there will be remedies to the problems that trouble consumers enough that they are willing to pay to avoid them.

Experience in traditional markets offers other lessons for the Net. It should teach us the mischief that government regulation creates in the name of assuring quality and safety. Regulations like occupational licensing and those imposed by the Food and Drug Administration and Occupational Safety and Health Administration, despite what legitimacy they may have with citizens and journalists, are a bane to all Americans. Scholarly research, especially by economists, clearly concludes that these regulations do more harm than good. The FDA is probably the worst. To illustrate this point I have gathered quotations from 13 economists who study the FDA and believe FDA power should be scaled back. I am not aware of any published defense or justification of the FDA by an economist—and I have gone looking for one.

Let us also learn from traditional markets something about supposed privacy violations. Some activists have attacked the credit-reporting industry for making up marketing lists. Actually, consumers’ credit information is not disclosed to marketers. The marketers usually do not even see the list; instead, a third-party fulfillment house sees it and remains perfectly discreet. The privacy “violation” decried so indignantly amounts to nothing more than the nuisances of receiving junk mail. The issue is thus insignificant. Besides, mail is really a mailbox problem, which persists because the mailbox and delivery are not handled by free enterprise. The U.S. Postal Service fails to give customers the option of refusing unsolicited commercial mail at the most logical and convenient point: the point of delivery. It is unlikely that free-market mail delivery would continue to waste resources and the customers’ time delivering unsolicited, unwanted commercial mail.

Finally, a note on the term “privacy.” The prevalence of that term in these matters is unfortunate. In so many cases where it is used the issue would be more aptly discussed as one of confidentiality in transactions or in information shared in completing a transaction. Confidentiality is more clearly understood as a matter of agreement and understanding. That is what most of the Internet issues are really about.

In the United States, transit services have long been in decline. Despite federal, state, and local subsidies to municipally owned bus services, ridership has been dwindling and productivity has declined. The traditional approaches to running transit systems—government planning or operation of bus and rail, government subsidization of private operations, and heavy regulation of all transit modes—have failed, and there is little hope of their coming right.

Street-based transit in the United States today is predominantly bus service, but at other times and places streets have also been serviced by smaller vehicles that follow a route but not a schedule—called jitneys. Jitneys have numerous advantages over buses. They are smaller and speedier, stopping less often and negotiating traffic more adeptly. They are highly flexible in their entry and exit from the market, and can respond immediately to market conditions. A jitney may be nothing other than an ordinary sedan driven by a commuter on his or her way to work, stopping to pick up paying passengers. American transit policy has forsaken jitneys.

International events of the past ten years have been an object lesson in the limitations of government enterprise. The whole world moves toward the market economy. Yet in urban transit in the United States, we still have heavy government intervention and, if you will, socialism. How do we make a “transition” to a market economy in urban transit?

Establishing Private Property Rights

A functioning market depends on private property rights. A fundamental resource of the transit sector, a resource too long ignored by transportation scholars, are the curb areas, bus stops, and sidewalk areas where passengers congregate and vehicles stop. Scholars have taken for granted the government ownership and management of these resources. But why not let these resources be governed by market forces operating within the rule of law? The way to give a sound foundation to a bona fide market in urban transit is to establish privately held rights in curb zones and bus stops.

Local officials must not only encourage private management of these resources, but also give legal definition to the resources and enforce rights held therein. Local policymakers need to discover a legal framework within which a system of free enterprise will function. Even the free-market theoretician Friedrich Hayek sees an important role for legal constructivism on the part of government: “The functioning of a competition . . . depends, above all, on the existence of an appropriate legal system, a legal system designed both to preserve competition and to make it operate as beneficially as possible.”

An important feature of transit service is generating passenger congregations, that is, sufficient riders at scheduled stops to form a kind of critical mass of ridership. But to succeed, a service provider’s investment in cultivating passenger congregations through dependable service, advertising, and so forth, must be recoverable. It must be protected from interloping by jitneys. This protection depends on the nature of curb rights. Variations in curb rights explain a wide diversity of transit experiences.

Many studies of transit markets show that transit services are gored by one of the two horns of a dilemma. Some markets enable scheduled operators to appropriate the value of passenger congregations, but this is achieved by granting them exclusive rights, not only to waiting passengers at specified curb zones, but to the entire route. This is the predominant arrangement in the United States today. Thus the first horn of the dilemma is transit monopoly.

Other transit markets avoid all regulation and have a sort of lawless competition. This occurs in some less developed countries and in illegal jitney markets in New York. Lawless competition precludes monopoly and indeed gives rise to freewheeling services like jitneys. Yet it impales transit service on the other horn of the dilemma. Scheduled service does not cultivate passenger congregations because constant interloping will expropriate the investment. In densely populated markets, transit services are somewhat chaotic and unpredictable. In sparse markets, the interloping totally destroys the market, like a parasite consuming its host; unless there are subsidies to bus service, the result is no service at all.

The horns of dilemma can be avoided, however, by a locally planned system of property rights. American cities can have the best of both kinds of markets—scheduled bus service, and unscheduled but faster and more flexible jitneys. The solution is based on a new idea: create exclusive and transferable curb rights (to bus stops and other pickup points) leased by auction. This way scheduled service would have exclusive protection where its passengers congregate, and jitneys would be able to pick up passengers elsewhere along the route, at curb zones designated as commons. Curb rights holders would be free to contract with bus companies and other service providers. They would do so as they see fit. Once a sound foundation of property rights is established, central planning becomes unnecessary.

The proposed system would give life to transit entrepreneurship. Within the property rights framework based on curb rights, entrepreneurs would be free, able, and driven to introduce ever-better service, revise schedules and route structures, establish connections among transit providers, facilitate passenger interchange, and use new pricing strategies. Alongside scheduled bus service, jitneys would respond flexibly to weather, time of day, special events, and other changing conditions. They would offer service on a short-term basis, fill market niches, provide courtesy door-to-door service, or simply pick up customers on the way to work—whatever the market would bear. Yet the plan would avoid the problems associated with lawless competition, like interloping, chaos, conflict, and lack of trust. Within a suitable framework of property rights the invisible hand will be able to do in transit what it does so well in other parts of the economy.

When an economist stands at the blackboard and draws a supply-and-demand diagram, he pretends he knows all the relevant opportunities. Economists must posit such settings to frame the story. When stories are given an exact formulation, especially when expressed in math or diagrams, they are called “models.” A resolution in such a model is called “equilibrium.” Models teach us much about competition, investment, and many other important topics in economics. But overexposure to models can impair our ability to see other important facets of economic processes. One begins to forget that there is so much that is not known.

Focusing on blackboard models limits our understanding of economic freedom. Economists focus so much on models like supply and demand, rather than on public issues, that freedom is understood only for what it achieves in such models. Equilibrium stories of price ceilings, price floors, and entry barriers lead us to think of markets as neatly characterized procedures, and of freedom as little more than the freedom to choose within these procedures. It may be the freedom of tenants to choose high-rent apartments, of laborers to choose low-wage employment, or of consumers to choose the services of unlicensed electricians. Because equilibrium stories posit the industry, the preferences, and the opportunities, all that freedom accomplishes is a more efficient utilization of given resources.

Economists rarely talk of discovery, imagination, or serendipity, and consequently they tend to neglect these as vital factors of economic progress. They often carry over their habits of mind to public policy. In consequence, they are insensible to the fact that government restrictions on freedom tend to choke off the vital discovery factors.

For example, the economist might think that in making policy for urban transit, government experts can, after much careful study, adequately determine the transit technologies and systems that would suit the city’s needs, and then implement the system. I would dispute that approach, regardless of the particular transit system proposed. We shall return to the example of urban transit throughout this essay.

Freedom to choose among a set of given alternatives is but one facet of freedom. I will discuss three other facets of freedom. Each of them points to a kind of discovery.

Search and Respondence

As consumers we do not know fully what stores are offering or what prices they are charging. We need to gain information and do so by searching. Searching takes time and trouble, but we learn more about the available alternatives.

In other cases, information simply comes to us without our looking for it. Perhaps by chance we encounter advertisements that alert us to valuable opportunities. Perhaps we get into a conversation and learn valuable information we hadn’t been actively searching for. Then we revise our plans and respond appropriately to the new information. I call this experience respondence.

Whether the individual searches for information or simply receives it in the course of pursuing other goals, let’s assume that the newly acquired information fits into his original plans or intentions. He now pursues his plans somewhat differently in response to the new information, but he does not change his basic interpretation of what he is doing.

Search and respondence are similar and are treated here together. Economists can incorporate both into their formal models. But search and respondence certainly complicate the model, and typically such complications are not worth the trouble. In practice, economists usually leave such features out of their storytelling, unless search and respondence are the very focus of their investigation.

Some economists explore the importance of respondence and freedom. They explore how uncertainty gives rise to economic practices that economists might otherwise have difficulty explaining—practices like queuing, order backlogging, second sourcing, and vertical integration. Ronald Coase has emphasized the importance of special opportunities and business idiosyncracies, such as “differences in the point of time at which payments are made and receipts obtained.”^[1] These points often show an appreciation for individuation (uniqueness) and uncertainty in local conditions, and suggest that infringements on freedom prevent proper respondence.

Unrestricted respondence carries not only a flexibility in making one’s choices in isolation but also the freedom to form elaborate contracts that grant one flexibility in relations with others. Though hoping to follow plan A, one might contract in advance for the option of pursuing plan B, or plan C, or whatever plan would best respond to the contingency. For example, Arthur DeVany and Ross Eckert tell how, in the golden age, motion-picture companies worked on a contract system with film stars and other talent, and vertically integrated into the movie-house business, because of severe and pervasive uncertainties on both the supply side and the demand side of the industry. They argue that the Supreme Court’s Paramount decision (1948), which broke up the production-house system, was based on an oversimplified notion of “restraint of trade,” and resulted in losses for filmmakers and audiences alike.^[2]

In our example of free-enterprise urban transit, severe uncertainty and individuation might be fundamental, and adaptation crucial. Carriers might not expect current conditions to persist. New competitors might invade their routes or current competitors drop out. The carrier companies may wish to abandon certain routes or add others. For such reasons they may wish to lease their buses and vans, and form contracts that permit them to alter on short notice how they use their vehicles. They may form flexible contracts with their drivers, allowing the company to alter hours and remuneration. In unregulated private enterprise, such flexible respondence, as is common practice, is an important source of both cost containment and effective service. But it is seldom captured in equilibrium storytelling.

Epiphany

It is one thing for the entrepreneur to greet fortune when it comes knocking. It is something else to apprehend fortune in its hidden forms and seize it. Here we have the distinction between responding to the realization of events within a framework of recognized variables and relationships and the discovery of a fresh opportunity to embrace a new and better framework. This element of epiphany, of finding fortune by interpreting the world differently, is the subtle and vital element in human decision-making. Yet it is absent from equilibrium model-building.

An example of epiphany is found in W. Somerset Maugham’s short story “The Verger.” A new vicar came to St. Peter’s, Neville Square, and called in the church verger to discuss a troubling matter. “I discovered to my astonishment that you could neither read nor write,” he told Albert Edward Foreman, the verger of 16 years. When directed to learn to read and write, Albert Edward replied, “I’m too old a dog” and bid the vicar a friendly farewell. He hung up his verger’s gown and went into the street. He was a nonsmoker, but with a certain latitude, and it occurred to him that a cigarette would comfort him. He looked up and down the long street without finding a shop that sold cigarettes.

“I can’t be the only man as walks along this street and wants a fag,” he said. “I shouldn’t wonder but what a fellow might do very well with a little shop here. Tobacco and sweets, you know.”

He gave a sudden start.

“That’s an idea,” he said. “Strange ‘ow things come to you when you least expect it.”

He turned, walked home, and had his tea.

“You’re very silent this afternoon, Albert,” his wife remarked.

“I’m thinking,” he said.

The former verger set up in business as a tobacconist and news agent. Soon he set up more shops, and in time accumulated a small fortune. The distinguished gentleman went to the bank to put his wealth into securities and startled the bank manager by announcing that he could not read or write. “Good God, man, what would you be now if you had been able to?” “I can tell you that, sir,” replied Mr. Foreman. “I’d be verger of St. Peter’s, Neville Square.”^[3]

Maugham’s story tells of a man who not only discovered something he wasn’t looking for, but discovered something he quite possibly might not have discovered at all. In Israel Kirzner’s terms, the verger was alert to a profit opportunity.^[4] The verger’s apprehension of the street as a bad place to find a cigarette was a realization in his working framework. Apprehending it as a good place to set up a tobacco shop was not. The opportunity could have been missed entirely or noticed only fleetingly.

Economists give some attention to innovation in the sense of significant and identifiable technological advance. But they give very little attention to alertness or epiphany in all their buzzing, blooming—yet very often mundane—manifestations. The verger’s story is material for neither a news headline nor an elegant model. Nor is it captured by any variable called “education” or “R&D.” It is nonetheless the kind of small breakthrough everyone makes now and then, and which, in aggregate, accounts for significant economic improvement. It is creativity and imagination, achieved countless times over, in the individuated worlds of individuals. Whereas search/respondence explores the individual’s adaptation within his individuated world, Kirzner’s alertness is the individual’s reformulation of that world.^[5] This human experience of reformulating, or reinterpreting, one’s world, this element of epiphany, is by its very nature virtually impossible to capture within an equilibrium model.^[6]

Too often economists neglect the effects of public policy on alertness and the discovery process. Kirzner however queries: What economic and political institutions can be expected most successfully to evoke entrepreneurial alertness?

In the Somerset Maugham story, the verger noticed something that was now in his interest to notice. At the heart of Kirzner’s distinctive argument for economic freedom is his recognition that two people walking down the same street will see different things. That difference, he writes, “can be ascribed, in part, to the interests of the two individuals. Each tends to notice that which is of interest to him.”^[7] The claim is natural enough and beyond doubt. It implies that profit opportunities will be best discovered and seized in a legal framework that gives individuals an interest in discovering them.

In formal models, economic freedom (and a host of other assumptions) leads to perfectly efficient outcomes. But Kirzner’s argument for freedom is totally missed by such logic and arises only because the ancillary assumptions of the model do not hold. In real life, many opportunities lie hidden from view. Not only are preferences, constraints, and opportunities individuated in minute detail, but each actor’s interpretation of them is individuated.

The market process generates a system of human activities each of which is performed in partial ignorance. There are always discrepancies between available opportunities and market recognition of them. We therefore value, Kirzner argues, a legal system “which offers entrepreneurs the required incentives for the discrepancies to be noticed and corrected.”^[8] The legal system that best does so is economic freedom, which keeps individuals alert to profit opportunities because it grants them an interest in seizing them. To Kirzner, the most impressive aspect of the free market is not its ability to generate efficient allocations within a framework of fully recognized ends and means. Rather, “the most impressive aspect of the market system is the tendency for [previously unrecognized ends and means] to be discovered.”^[9] Yet this most impressive aspect, which cannot be captured in the language of mainstream economics, is poorly recognized in academic economic research and poorly imparted in economic education.

Consider again the making of policy for urban transit. It is typical for local governments to fix the price of taxi services and to require official meters in taxicabs. An economist might argue that this policy remedies problems of bad consumer information, infrequent dealings, and cabby opportunism. With a model of supply and demand in his head, he might reason that so long as regulators don’t set the price too far from “the equilibrium price,” the downside of price fixing may not be so bad.

Kirzner would argue that his reasoning is glaringly inadequate. Price competition, he’d say, is crucial to the vibrancy of the market and should not be seen in isolation from other activities in the market process.

Perhaps an upstart company seeks to enter a sleepy local taxi market. It plans to utilize a new maintenance system to keep the cabs in repair or a new dispatching system to provide prompter service to customers. It might offer new stylish cabs and bring this new service to the consumer’s attention by a clever advertising campaign. Finally, it plans on cracking the traditional market by offering—at least temporarily—a well-publicized low price—the lowest in town.

Kirzner’s point is that when the government fixes taxi rates, besides running the risk of getting a shortage or surplus, we run the risk of regimenting the industry and choking off the vital process of discovery. If the upstart company cannot offer a new low price, then it is likely to forgo the campaign altogether. Society loses not merely some “quantity supplied,” but an entire foray into a local economic terrain, a vital entrepreneurial investigation into new services and new ways of producing them. In carrying out the would-be campaign, the upstart company would have undergone a series of fresh decisions, each of which would have involved entrepreneurial discoveries. The overtrained economic perspective fails to appreciate this larger social loss from government assaults on freedom.

Serendipity

In our discussion of search and respondence we saw how freedom allows individuals to adapt to individuated conditions by responding to changes in those conditions and forming contracts to cope with them. In our discussion of Kirznerian alertness we saw how freedom sparks individuals to adapt their interpretations of local conditions, to incorporate available but undiscovered profit opportunities into their interpretive framework. There is yet another facet of freedom that helps match appropriate behavior and opportunity.

In a famous article entitled “Uncertainty, Evolution, and Economic Theory,” Armen Alchian pointed out that in a market not only does behavior tend to adapt appropriately to opportunity, but opportunity tends to adopt appropriate behavior. The survivors in a market, he explains, “may appear to be those having adapted themselves to the environment, whereas the truth may well be that the environment has adopted them.”^[10]

Alchian gives an unreal but useful example:

Assume that thousands of travelers set out from Chicago, selecting their roads completely at random and without foresight. . . . [O]n but one road are there any gasoline stations. . . [T]raveler will continue to travel only on that road; those on other roads will soon run out of gas. . . . If gasoline supplies were now moved to a new road, some formerly luckless travelers again would be able to move; and a new pattern of travel would be observed, although none of the travelers had changed his particular path. . . . All that is needed is a set of varied, risk-taking (adoptable) travelers. The correct direction of travel will be established.^[11]

Alchian asks for an economic understanding that does not limit behavior to the tidy forms of optimization that make equilibrium models cohere. He asks for a more evolutionary understanding that allows “imitative, venturesome, innovative, trial-and-error adaptive behavior.”^[12] Such behavior, even though not neatly rational, may nonetheless be fortunate enough to find serendipity. Serendipity is a major discovery that one was not looking for, that alters one’s own interpretation of what one is doing, and that is obvious to the discoverer. Unlike the epiphany, serendipity does not depend on alertness or insight. It hits you in the face.

Alchian’s idea of opportunity adopting appropriate behavior points us toward another facet of economic freedom, again a facet eclipsed by equilibrium model-building. Alchian’s point tells us to value freedom even for human behavior that is foolhardy, romantic, or arbitrary. Economic freedom carries the freedom to act regardless of permits, licenses, certification, or other forms of government permission to use one’s own property or to enter consensually into dealings with others.

In conjunction with the freedom to experiment comes the responsibility of failure: only if the individual or firm carries the responsibility of failure will the selection mechanism of the competitive market operate to adopt appropriate behavior.

Once a particular type of behavior—be it a way of providing a restaurant, of distributing auto parts, or of manufacturing textiles—hits upon success, that behavior is imitated and the social benefits increase. Behavior that does not hit upon success perishes. Alchian introduces a ballistics metaphor to make the point: “[s]uccess is discovered . . . not by the individual through a converging search . . . [but] by the economic system through a blanketing shotgun process.”^[13] I think of Jed Clampett, the television character of “The Beverly Hillbillies,” who inadvertently discovered crude oil while out shooting for some food.^[14] That epitomizes serendipity. Freedom produces the widest and fullest blanket of buckshot, and the honest dollar rewards the shots that hit the mark.

Sometimes serendipity comes about not by random shotgunning but by mistake. Many of us have had the experience of making a mistake in using our word-processing program, and, in figuring out how to fix the mistake, discovering some wonderful feature we hadn’t known about. The mistake turns out to be a blessing. The historian Samuel Eliot Morison tells of such a case in the early pages of The Oxford History of the American People: “America was discovered accidentally by a great seaman who was looking for something else; when discovered it was not wanted; and most of the exploration for the next fifty years was done in the hope of getting through or around it.”^[15] Alchian points out that a great deal of “pioneering and leadership” in the economic realm occurs by failed attempts at imitation.^[16] Because economic freedom presses entrepreneurs into contact and experimentation with their environment, it best generates serendipity.

Compare Alchian’s idea of shotgunning with Kirzner’s theory of discovery based on interest. In his example of two individuals who walk down the same city block, Kirzner argues that each tends to notice things that he would best be able to make use of. But even if discovery is not led by interest and is merely random, there is a definite benefit to having two, rather than one, encounters with the environment, since with two it is more likely that at least one will serendipitously discover an as-yet undiscovered opportunity. And Alchian’s shotgunning idea is especially important if discovery depends not only on individual interest, as Kirzner maintains, but also on distinctive talents in perceiving the environment; thus it has been argued that immigrant entrepreneurs sometimes succeed by virtue of their peculiar outlook on things. Each type of mind may have its own special propensity to have happy accidents.

In our example of urban transit, market experimentation might mean new modes, new vehicles, new pricing schemes, new routes, new schedules, new aspects of service, etc. Those changes might come from within the industry, from newcomers, or from entrepreneurs initially based in other industries, perhaps in hotel services, delivery services, or even used-car dealing. A free-enterprise transit policy would invite all comers to take their shot in the market, and let travelers select the most worthy. Depending on their discoveries, niche-finders would survive, or prosper, or induce imitation.

If economists were to allow more attention to the discovery factors, they might find themselves in stronger support of economic freedom. The discovery factors are all linked in their illumination of the following two points: (a) knowledge and opportunity are extremely local and individuated, (b) knowledge and opportunity are constantly changing. These points humble us by telling us that the economy will always be largely unknowable, as Friedrich Hayek argued so powerfully.

If, despite the best intellectual efforts, economic processes will remain largely unknown, it makes little sense for the regulator, aided by the academic economist, to try to alter outcomes by regulating citizens. The wiser course typically is simply to safeguard the rules of property, consent, and contract, and leave citizens free to discover themselves within that legal framework.

Notes

1. Ronald Coase, “Business Organization and the Accountant” (from articles originally published in 1938), LSE Essays on Cost, edited by J. M. Buchanan and G. F. Thirlby (New York: New York University Press, 1981), pp. 95-132.
2. Arthur DeVany and Ross D. Eckert, “Motion Picture Antitrust: The Paramount Case Revisited,” Research in Law and Economics, vol. 14 (1991): 51-112.
3. W. Somerset Maugham, “The Verger,” in The Complete Short Stories of W. Somerset Maugham, Vol. III (Garden City, N.Y.: Doubleday, 1952), pp. 572-78.
4. Israel M. Kirzner, Discovery and the Capitalist Process (Chicago: University of Chicago Press, 1985).
5. “The crucial element in behavior expressing entrepreneurial alertness is that it expresses the decision maker’s ability spontaneously to transcend an existing framework of perceived opportunities.” Kirzner, p. 7.
6. Israel M. Kirzner, Perception, Opportunity, and Profit (Chicago: University of Chicago Press, 1979), p. 155, wherein he says that the distinctive aspect of entrepreneurial activity is “its inability to be compressed within the equilibrium conception of the market.” I believe that the only hope of capturing epiphany within an equilibrium model of optimizing agents is to model the individual human mind as a society of multiple agents; see my paper “Entrepreneurship and the Deep Self.”
7. Kirzner, Discovery, p. 28.
8. Ibid., p. 30.
9. Ibid.
10. Alchian’s article was originally published in The Journal of Political Economy, 1950. It is reprinted in his Economic Forces at Work (Indianapolis, Ind.: Liberty Fund, 1977), quote at p. 22.
11. Ibid.
12. Ibid., p. 32.
13. Ibid., p. 31.
14. The genuine counterpart to Jed Clampett is James Marshall, a frontiersman who undertook to build a sawmill in the Sierra Nevadas in 1848. Instead he struck gold and triggered the California gold rush.
15. Samuel Eliot Morison, The Oxford History of the American People (New York: Oxford University Press, 1965), p. 23.
16. Alchian, p. 30.

The 1992 Clean Air Act amendments require local governments in smoggy regions to abide by an array of tough regulations. The most controversial are Smog Check, car-pooling mandates, electric vehicle sales quotas, and alternative fuel programs. Yet it may be time to expunge all of these command-and-control measures.

Consider Smog Check, which requires that cars have their emissions tested every other year. The vast majority of motorists spend a lot of time and money to find out that their car is clean. It’s like making people report for a scheduled checkup to prove that they do not have halitosis.

In the past few years, scientists have developed a new technology called remote sensing, and it promises to be the silver bullet for auto-generated smog. Remote sensors are mobile roadside devices that read tailpipe emissions using infrared and ultraviolet beams. They measure carbon monoxide and hydrocarbons with very good accuracy and nitrous oxides with fair accuracy.

Imagine the following system: government randomly scans your car’s emission levels using remote sensors and reads your license plate. If your emissions are excessive, you get a postcard. Because the technology is so inexpensive, the government can read your car four or even eight times a year. First you’d get warnings. If you continued to drive in a smogsome fashion, you’d get fines. If you refused to pay the fines, you’d eventually get pulled over and your car would be impounded.

Sound scary? Maybe the remote sensor isn’t very accurate. Maybe the license plate identification is faulty. Maybe the remote sensor caught your car during an uncommon acceleration. Big Brother is sniffing your tailpipe!

In fact, there isn’t much cause for alarm. The key point is that more than half of the auto-generated carbon monoxide comes from less than 10 percent of the cars. The same is true of hydrocarbon emissions. The problem is a small number of extremely dirty cars. The roadside sensors can use lenient criteria to make almost certain that only the truly polluting cars receive citations. Furthermore, synchronized radar guns can check your acceleration and infrared cameras can check whether your car is warmed up.

No one wants to be subject to a new penalty or fine. But the bright side is bright indeed. Remote sensing will intrude on your life only if your tailpipe emissions continue to exceed the limits.

More important, a full-scale remote sensing program is all we really need to police against excessive emissions. We’ll have to live with the chance of smog fines, but we can get rid of Smog Check, forced car-pooling, forced alternative fuels, electric vehicle mandates, and meddlesome regulations imposed on engine design in Detroit.

All these programs have been notoriously troublesome, bureaucratic, politicized, and inefficient. My research indicates that a remote sensing program implemented in Los Angeles would prove far more effective than the current Smog Check program—at one-fifth the cost. A recent on-road study in Orange County, California, conducted by the Desert Research Institute, found that a program of remote sensing combined with free engine repairs reduces emissions 10 to 20 times more cheaply than does mandatory car-pooling. With remote sensing on duty like a passive sentinel, we can be free of meddling and hassles and really clean up the air.

Remote sensing challenges the entrenched groups who stand behind all the inefficient programs. Its advancement has been a slow and arduous battle. But no slower than we should expect from the massive and lumbering system of policymaking. Every year remote sensing is in greater usage on the road, and is becoming known to the public. It is destined to change the face of air quality management.

Dr. Klein is Assistant Professor of Economics at the University of California, Irvine.

What would it mean to establish liberty of property, consent, and contract in the area of health care?

It would mean the repeal of FDA drug-approval requirements, prescription laws, drug-development regulations, and restrictions on the dissemination of information. It would mean the repeal of state and local regulations in the following areas: medical schools and hospitals, occupational licensure, diagnosis and referral, the employment of doctors by for-profit firms, nonphysician ownership of medical firms, the use of brand names, the operation of multiple branch offices, the location of health-care facilities, and marketing practices. For prepaid health plans and hospitals, it would mean the repeal of regulations on benefit packages, enrollment requirements, rate setting, and facility expansion.¹

Here I speculate on the desirable features of such a regime.

Education and Training of Practitioners: Private and public institutions would issue degrees, certificates, and other credentials to candidates meeting their requirements. Many training programs would be intensive programs for specific skills. Training would expand and diversify drastically, perhaps even reaching down to basic training for lay people. The profile of practitioners would thus expand. It would permit practitioners the flexibility to adapt their human capital to the opportunities of time and place. Costs to the consumer would drop considerably. To make sense of this blossoming of health services, people would rely on knower intermediaries, information disclosures, brand names, and so on.

Drug Development and Availability: Costs would plummet, timeliness would improve and the profile of drugs would expand. Strong safety and quality incentives would flow from the umbrella of the pharmaceutical brand name and the tort system. Knower-institutions—perfectly analogous to Underwriters’ Laboratories—would develop to certify safety. Doctors and pharmacists, acting as knowers and middlemen, would use their expert knowledge of drugs in advising the consumer.

The market would serve as an experimentation process–sometimes people would be killed by unsafe drugs (and companies would pay dearly), but such consequences belong to a benign process. There is a saying for people who frequently use air travel: If I never miss a plane I know I’m spending too much time in airports. At present, the FDA is the chauffeur whose pre-eminent incentive is to get the passenger to the airport on time. The consequence is that it gets us to the airport three days before the flight, and charges us dearly for the ride. The deaths of 100 children from Sulfanilamide in 1938 pale when compared with the annual death toll from the FDA’s curtailment of drug availability. One study catalogues 192 generic and 1,535 brand-name tested drugs available abroad but not approved for sale in the United States.² How many thousands of deaths per year does such delay cause? Sam Kazman of the Competitive Enterprise Institute estimates that the FDA delay of just two drugs, misoprostol (which reduces gastric ulcers) and streptokinase (which dissolves blood clots in heart-attack victims), has caused thousands of deaths.³

Information and the Active Patient: Drug information would be improved by freedom to self-disclose in labeling and advertising. At present, consumer access to medical information is expanding, in the forms of health-care literature, medical libraries, online information services like Internet, referral services like Prologue, and services like The Health Resource, which generates for a fee thick packets of medical literature to customers specifying a diagnosis.⁴ In a freer market consumers would have easier access to opportune and pointed knowledge.

Commercialization: Brand-name and franchised clinics, medical groups, hospitals, and insurance plans would flourish. Milton Friedman prophesied in 1962: “[T]hey could organize medical care efficiently, combining medical men [and women] of different degrees of skill and training, using technicians with limited training for tasks for which they were suited, and reserving highly skilled and competent specialists for the tasks they alone could perform.”⁵ Consumers would obtain at low cost gatekeeper diagnosis, referral, and second-opinion. Friedman’s early vision of “department stores of medicine” would be proven prophetic.

Medical Groups and Insurance: Currently, medical groups employ utilization review and peer monitoring to police quality. Intermediaries (such as employers, membership organizations, and so on) serve as middlemen and agents, shopping over medical plans, helping large sets of ignorant consumers discriminate between better and worse health care. In a regime of freedom and enforcement of contract, health plans and insurers could write better patient-enrollment contracts and patient-performance contracts. They could mitigate member-selection problems by using more refined screening and pricing techniques. Perhaps firms would emerge to research, compile, and verify individuals’ medical histories. Health plans and insurers could mitigate moral-hazard problems by requiring flu shots, check-ups, and other programs to promote prevention and early treatment.

Independent Knower Organizations: Data banks, consumer information bureaus, referral services, reporting literature, drugtesting facilities, and auditing firms would evolve more swiftly. Local organizations would emerge to rate health-care providers through undercover monitoring, patient interviews, or treatment reviews. Such a service might be supported by patients, analogous to Consumer Reports, or by physicians, analogous to Under-writers’ Laboratories or Moody’s. Consumers would reward those organizations that help them assess credentials and discriminate among the array of available health services.

Lay Awareness: There would be medical education without sacerdotal restraints. Basic medicine could be part of the high school curriculum. All manner of health-care education and training could be offered in community colleges and private institutes. Entrepreneurs have already developed medical software that responds to a list of symptoms with possible diagnoses and treatments.⁶ This program is based on data that are more extensive, more accurate, and more current than any doctor could hope to command. Informal courses might teach lay people how to use such programs. People would have better information to assess their needs and opportunities, and they would have the power to self-medicate.

In 1963, the famed economist Kenneth Arrow could write: “It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable.”⁷ Nowadays there is no such general social consensus.