Early in the twentieth century two prominent Americans, one a capitalist, the other a socialist, enunciated surprisingly similar views on the relationship between product differentiation and consumer welfare. The capitalist, Henry Ford, had revolutionized the young automobile industry, using mass-production techniques to provide cheap cars to American consumers. But Ford did not believe in offering product variety. He produced only one model, the famous Model T, and, in his typically blunt way, stated his policy on consumer choice of colors as: “Any color, so long as it’s black.”¹

During the same era the socialist novelist Upton Sinclair published a popular and influential novel, The Jungle (1906), which stated his views on the unimportance of consumer choice. Sinclair felt variety in consumer goods was a frivolous waste of resources, which could be eliminated under socialism. One of his socialist characters says, “consider the waste in time and energy incidental to making ten thousand varieties of a thing for purposes of ostentation and snobbishness, when one variety would do for use!”² And another socialist speaker says, “Since the same kind of match would light everyone’s fire, and the same-shaped loaf of bread would fill everyone’s stomach, it would be perfectly feasible to submit industry to the control of a majority vote.”³

Ford and Sinclair both actively opposed variety in consumer goods. How did their ideas fare in their respective economic systems, capitalism and socialism?

Sinclair dabbled in politics, but never acquired enough power to implement his ideas. However, his socialist brethren later took control of Russia, Eastern Europe, China, and Cuba, as well as other countries. Thus while there were no socialist economies when Sinclair wrote The Jungle, the world since has seen many actual socialist economies at work. None used democratic votes to determine the kind of matches or bread produced, but all used government to make these determinations, and all offered consumers very limited choices within product categories.

Socialist governments adroitly rejected majority rule in consumption decisions. If everyone wants the same kind of bread, why even have a vote? Everyone knows what everyone wants, so just let anyone make the decision. Well, not just anyone: officials of the Socialist Party should make the decision. The argument that socialists with the interests of the masses at heart could easily make decisions for them was often advanced as a rationalization for the political dictatorships that dominated socialist economies in the twentieth century.

Although rejecting majority rule, the socialist elite did institutionalize the one-size-fits-all consumption doctrine espoused by Sinclair and others. Socialist governments forced consumers to all consume the same goods, or none at all. Perhaps the most compelling image is that of millions of Chinese communists, all dressed in the same drab, ill-fitting clothing.

But the one-size-fits-all doctrine is rather odd, and raises an interesting question: Why should it be assumed that everyone wants the same things? Where is the evidence for this? In fact, there is plenty of evidence against Sinclair’s assumption. When people are given choices among kinds of matches, bread, cars, houses, and so on, as they are in market societies, they do not all choose the same things. They choose a variety of products, revealing that their tastes and preferences are not identical. And in economies where variety in consumer goods has been limited by central planners, people quite eagerly pursue it when it becomes available.

Stories of Russian consumers trying to buy blue jeans and other personal belongings from Western tourists were commonplace for many years before the fall of the Soviet Union. In the early 1980s when communist China liberalized its economy to allow more consumer choice, Chinese consumers immediately began to reveal the variety of their tastes. Drab clothing was among the first things to go. A Chinese newspaper cheerfully reported: “The times of greys and blues and uniform dressing are gone forever.”⁴ Another observer reported: “At the television counter of the No. 1 department store, a salesman named Wei Teng Jun referees while his customers debate the merits of the 10 brands made in Shanghai. ‘They are very brand conscious,’ he says.”⁵

A longing for both plenty and variety in material goods was certainly an important element in the social and political unrest that brought down the socialist systems of the Soviet Union and Eastern Europe. The one-size-fits-all doctrine did not serve consumers well, but once institutionalized in socialism, it stayed in place for decades. Thus, socialism was quite kind to Upton Sinclair’s anti-variety doctrine.

Consumers under Capitalism

How did capitalism treat the somewhat similar ideas of Henry Ford? The answer is found in the history of the U.S. automobile industry in the 1920s and ’30s. Early on, Ford’s simple, cheap, black Model T dominated the automobile market, sending Ford’s market share soaring to 59 percent in 1921.⁶ General Motors, in contrast, was a small firm at this time, with only 16 percent of the market in 1924.⁷ However, unlike Ford, it had embarked on a course of product differentiation, offering cars in “a wide variety of makes, models, colors, interiors, and equipment,” and making annual model changes.⁸ By the mid-1920s consumers were deserting the standard black Model T in droves and buying instead the more varied, stylish, distinctive cars sold by GM. By 1927 GM’s market share had rocketed to 43 percent, while Ford’s had plummeted to about 10 percent.⁹ Belatedly, Ford scrapped the Model T and introduced the Model A, recapturing some of its market share over the next three years. However, in time the Model A became as boring to consumers as the Model T had been, and Ford’s market share began to decline again, never to revive in this era. By the end of the 1930s GM’s market share was approaching 50 percent, while Ford’s was below 20 percent and still falling.¹⁰

In a competitive free-market economy a Henry Ford has no power to force all citizens to consume the same products. Rivals like GM are free to enter the market and compete by offering variety. Consumers, in turn, are free to choose among products. If Ford had been right that consumers were not interested in color and variety, his sales would have gone up and he would have made profits. Since he was wrong, his business and his fortune suffered.

Capitalism versus Socialism

The contrast between capitalism and socialism could not be more pronounced. Capitalism provides a mechanism for testing the validity of ideas like those put forth by Ford and Sinclair. Capitalist entrepreneurs must back up their ideas by putting their money at risk. There is competition among entrepreneurs and thus among the different theories about what consumers want. The market carrot-and-stick mechanism rewards the correct ideas with profits, and punishes the incorrect ideas with losses. Thus consumers are the ones who determine which ideas and economic theories survive in the marketplace.

Under socialism, however, political power determines economic patterns. Political figures and intellectual theorists who gain control are able to impose their ideas on consumers. The people with political power have a monopoly on that power, and thus do not allow other ideas to compete with their own. Ideas like those of Sinclair survive and dominate, not because they have passed a test of serving consumers well, but because they have the backing of the police power of the state, and, sometimes, of a police state. Bad ideas can survive so long as political power survives.

The implications of this contrast between capitalism and socialism were strikingly visible in the hours after the fall of the Berlin Wall. East Germans, victims of a system that had enshrined Sinclair’s vision in drab uniformity, streamed into West Berlin and were stunned by the quality and unimaginable variety of goods available there in the stores. If the Henry Fords of the capitalist world had had their way, West Berlin would have been nearly as drab as East Berlin. But happily, capitalism provided a marketplace forum for more imaginative entrepreneurs to challenge the Henry Ford view of the world. Because the challengers prevailed, what East Germans feasted their eyes on in West Berlin showed the astounding contrast between 40 years of market-driven product development and differentiation in the West, and 40 years of politically driven product stagnation in the East.

Notes

1. Robert Lacey, Ford: The Men and the Machine (Boston-Toronto: Little, Brown and Company, 1986), p. 284.
2. Upton Sinclair, The Jungle (New York: Buccaneer Books, Inc., 1984 [1906]), p. 333.
3. Ibid., p. 331.
4. June Kronholz, “Buying Spree,” Wall Street Journal, October 26, 1983, p. A1.
5. Ibid.
6. Arthur J. Kuhn, GM Passes Ford, 1919–1938: Designing the General Motors Performance-Control System (University Park, Pa.: Pennsylvania State University Press, 1986), p. 312.
7. Ibid., p. 313.
8. Ibid., p. 89.
9. Ibid., pp. 312–13.
10. Ibid., p. 312.

Examples of illness rooted in unsafe meat are not isolated incidents. Bad or undercooked meat causes an estimated 4,000 deaths and 5 million illnesses annually, according to the federal government’s Centers for Disease Control.^[1] Moreover, a single incident of contaminated meat has the potential to affect large numbers of people. In 1993, five hundred people became ill and four children died in the Pacific northwest as a result of eating tainted hamburgers.

Illness and death caused by bad meat (whether tainted or undercooked) inevitably evoke calls for more government regulation. It is ironic that increased government intervention is viewed as an antidote to tainted meat, despite the federal government’s long-standing responsibility for meat inspection in the United States. Indeed, the Hudson Foods incident occurred only a year after President Clinton announced the most sweeping changes in the government’s meat-inspection system. Moreover, a federal inspector was based at the Hudson Foods plant to check the plant’s procedures daily.

Chronic problems related to meat inspection and meat safety warrant increased scrutiny of the most appropriate method of inspecting meat. During recent decades, successful deregulation initiatives occurred in a number of areas including banking and transportation. This shows that market forces may provide an improvement over government regulation of economic activity, even when regulations are long-standing and widely accepted.

Is Meat Inspection Different?

Skeptics, including even many market proponents, might say that the conventional analysis doesn’t hold for government regulations protecting health—where slip-ups can be fatal. Problems of “government failure,” however, may be worse than any market imperfections that government regulation is instituted to remedy.^[2] Thus, government failure would have even graver implications for health issues.

Is it possible that the free market could substitute for, and even improve on, the current system of federal meat inspection? The following analysis demonstrates that the problems in government meat inspection are similar to those that plague all other government regulation of economic activity. There is no way for government regulators to obtain the information and realize the incentives of the decentralized market process, whatever the area of economic activity. Thus, market inspection of the U.S. meat industry, when contrasted with the current system of federal regulation, is likely to reduce the incidence of illness associated with the consumption of unsafe meat.

Federal Meat Inspection—How It Began

The Meat Inspection Act of 1891 was a major landmark in federal regulation of meat and, indeed, of federal regulation of economic activity in the United States.^[3] A review of the political economy of that era is helpful in understanding the impetus for government regulation. Most government intervention then and now, at least ostensibly, is in response to “market failure”—economic outcomes that fall short of “perfect competition.” (All markets fail, of course, when measured against this criterion.)

Moreover, the 1891 act was instituted under false pretenses. It was a solution to a largely nonexistent problem—contaminated meat. There is no reliable evidence that tainted meat was a major factor in the adoption of the legislation. In a political-economic analysis of the era, Gary Libecap concludes that “the record does not indicate that the incidence of diseased cattle or their consumption was very great, and there is no evidence of a major health issue at that time over beef consumption.”^[4] Government meat inspection, once in place, however, like many other government regulations, was soon viewed as necessary to protect consumers.

There is a great deal of evidence that the political impetus for the 1891 legislation was the consequence of rapidly changing economic conditions. Market dominance by Chicago meat-packers—primarily Swift, Armour, Morris, and Hammond—quickly followed the introduction of refrigeration around 1880. Refrigeration allowed for centralized, large-scale, and lower-cost slaughterhouses because of production, distribution, and transportation advantages. The four large Chicago firms accounted for about 90 percent of the cattle slaughtered in Chicago within a decade after the introduction of refrigeration.

The Chicago packers fundamentally changed demand and supply conditions in the meatpacking industry. Small, local slaughterhouses throughout the country were rapidly displaced because they could not compete with the lower-cost Chicago packers. Local slaughter firms, in response, charged that Chicago packers used diseased cattle and that their dressed beef was unsafe. The disease issue, as bogus as it apparently was, threatened both domestic demand and export markets for U.S. meat. Cattle raisers, especially those in the midwest, backed federal meat inspection to promote demand.^[5]

Cattle producers were also concerned about falling prices. Prices fell because the supply of cattle grew rapidly. But producers attributed the fall to their declining market power versus the Chicago packers—a charge that seemed credible because of the packers’ size and concentration. Ostensibly to deal with the largely spurious allegations of unsafe meat and collusion by the Chicago packers, cattlemen, and local packers called for federal meat inspection and antitrust legislation. Enactment of the Sherman Act in 1890 and the Meat Inspection Act of 1891 were thus closely tied legislatively.^[6]

The Jungle and the Meat Inspection Act of 1906

The famous Meat Inspection Act of 1906 also was heavily influenced by false charges. Ideas have consequences, and public policy can be influenced by a popular book, such as Upton Sinclair’s The Jungle—regardless of its merits. The muckraking novel focused on greed and abuse among Chicago meat-packers and government inspectors.^[7] The characters in The Jungle tell of workers falling into tanks, being ground up with animal parts, and being made into “Durham’s Pure Leaf Lard.”

Sinclair wrote The Jungle to ignite a socialist movement on behalf of America’s workers. He did not even pretend to have actually witnessed or verified the horrendous conditions he ascribed to Chicago packing houses. Instead, he relied heavily on both his own imagination and hearsay. Indeed, a congressional investigation at the time found little substance in Sinclair’s allegations.^[8]

Nevertheless, the sensational allegations dramatically reduced the demand for meat. U.S. exports fell by half. Major meat-packers saw new regulations as the way to restore confidence, and they strongly endorsed the Meat Inspection Act of 1906, which expanded the scope of federal inspection to include smaller competitors.

Economic conditions back then were much different from today’s. However, there is a lesson to be learned from that early period concerning government and free-market approaches to meat inspection.

The early legislation, for the most part, was not a response by government to a legitimate public-health threat. Congress enacted the 1891 act in response to political pressure by local meat-packers and cattle growers who felt victimized by the rise in power of the Chicago packers and by lower cattle prices. This legislation along with the Sherman Act and the Interstate Commerce Act, all enacted within a four-year period, represented a significant break with what had previously been considered an appropriate role for the federal government.^[9]

The 1906 Meat Inspection Act, too, was largely a response to the meat industry’s financial problems rather than to a health threat. The earlier spate of interventionist legislation, however, had provided a new mandate for government regulation of economic activity that facilitated the passage of the 1906 act. Thus, the case of federal meat inspection is yet another example of Ludwig von Mises’s insight that government intervention almost inevitably leads to further intervention.

Pitfalls of Government Regulation

Thus government meat inspection, like most other economic regulation, was instituted mainly because of favor-seeking: the use of time and money to harness the power of government for private ends.^[10] Favor-seeking is a negative-sum activity. The nation’s output of goods and services decreases as resources are used to restrict competition rather than to expand production and exchange. Favor-seeking is just one example of “government failure.”

Government intervention often is counterproductive because of information and incentive problems. The crucial economic problem confronting society is how to use people’s specialized knowledge to best satisfy consumers. As Nobel laureate F.A. Hayek emphasized, government officials cannot obtain the information that motivates individual choice because that information, much of which is never articulated, is strongly linked to a particular time and place. Consequently, officials must base decisions on something other than the “public interest,” if that term means the interests of the people who comprise the public.

Moreover, even if the information could be known, it is unlikely to be used most effectively. Government officials lack appropriate incentives because power and responsibility are separated. Those who make and administer laws do not bear the consequences of their actions, at least not to the same extent as private individuals. As shown below, markets generally are superior to government regulation because they cope better with information and incentive problems.

Dealing with Change

Related to the incentive problem is another flaw in the current system of meat inspection: the adverse effect of government regulation on innovation. That flaw is found in all alternatives to the decentralized market process.^[11]

In the absence of the profit motive, individuals have less incentive to discover and implement new technology in the inspection and handling of meat. No one knows, of course, which new technology will ultimately prove beneficial in meat inspection or in any other area. However, in the marketplace, if an innovation proves to be profitable the person responsible for it will receive a large part of the reward. Things are quite different in a centralized system. Under government regulation, the government employee who discovers or adopts a potentially superior technology is likely to receive only a small amount of additional compensation. On the other hand, if the innovation doesn’t pan out, he will lose much less than the entrepreneur in a profit-and-loss system.

This fundamental difference between markets and government is highly important to innovation in the meat industry. The heart of U.S. meat inspection continues to be the “poke and sniff” method that relies on the eyes and noses of some 7,400 Department of Agriculture inspectors. In 1997 a small Massachusetts company, SatCon Technology Corporation, working with a North Dakota-based group of ranchers, found a way to use lasers to find illness-causing pathogens such as E. coli and salmonella by scanning animal carcasses in slaughterhouses.^[12] Such technological innovation has the potential to revolutionize meat inspection in the United States.

But it is more likely to be adopted in a free market than in a government-regulated market. Since it has the potential to dramatically reduce both the amount of labor currently used in meat inspection and the rationale for government regulation, it is inconsistent with two important goals of any bureaucracy: maintaining jobs and expanding its operation.

Market Competition Versus Government Regulation

The experience of government control of economic activity shows why government meat inspection is likely to be inferior to free markets. Private inspection firms, which must meet the market test, have a greater incentive to be effective than do government regulators. A private firm providing information to consumers about meat quality will reap profits when successful and incur losses when not. Thus, if a private meat-grading service were to become lax in satisfying consumers, meat firms no longer would be willing to pay for the service. Consequently, the private firm not only has an advantage in obtaining the necessary information; it also has a greater incentive to use it in the interest of the public weal.

Moreover, profit-seeking firms are likely to have a greater incentive than government regulators to adhere to quality standards. Government inspectors get to know the people operating the plants they regulate. Strict enforcement of standards might create hardship for those people. For example, if meat is considered to be of marginal quality but not to pose a significant health threat, regulators may be inclined to overlook such infractions. In short, when contrasted with market regulation, government regulators have a smaller incentive to enforce safety regulations.

Who Will Protect the Consumer?

Numerous studies have shown the benefits from privatization. It is quite likely that problems of food safety would be dealt with better through the decentralized market process, which provides a greater opportunity for both business firms and consumers to achieve their goals. Stated differently, the market process provides a greater incentive than government regulation for private firms and consumers to discover, disseminate, and use information about the quality of meat.

For one thing, government regulation gives consumers a false sense of security.^[13] It leads them to assume that they are being protected by the government, reducing the incentive to do their own checking. Market methods of inspection, in contrast, give consumers a greater incentive to acquire information about the quality of meat. Consequently, they are likely to be more alert to potential problems of food safety.

It is true, of course, that meat may be contaminated when it appears to be safe. If sellers of meat have more information about quality than consumers do, can consumers look after their interests? Yes; uneven information does not imply that sellers have an incentive to sell unsafe meat. Consumers are protected by the sellers’ economic interests.

The use of brand names, such as Armour or Swift, is one way that private firms assure quality standards for meat.^[14] A brand name enables consumers to identify a firm’s meat product and choose it over competitors. Hence, a firm with an established and valuable brand name has a strong financial incentive to adhere to quality standards.

A company responsible for selling contaminated meat can be quickly ruined by adverse publicity about its products. The recall of Hudson beef in 1997 left Burger King branches across the midwest without hamburgers. Following the recall, Burger King canceled their contract with Hudson Foods and announced that it would never buy from the company again—showing that it is strongly in the financial interest of business firms not to sell tainted meat.

Where quality is difficult for consumers to evaluate, little-known firms may benefit from the services of private inspectors to certify safety. There is considerable evidence that market forces can assure product quality without government regulation. Best Western, for example, is a private certification agency that enables travelers to identify motels that meet specified quality standards. Underwriters Laboratories establishes standards for electrical products, and tests them to see if they meet those standards. These examples show that firms frequently are willing to pay to assure customers that their products meet prescribed standards. The success of Consumer Reports and similar publications is further evidence that consumers are willing to pay to be informed.

Is meat inspection an exception to the rule that private firms generally perform more effectively than government? There are good reasons to think that market-based inspection of the meat industry could improve on the current system. Illness associated with contaminated meat often occurs with federal meat inspection. There is no way, of course, to prevent all food-related illness. Mistakes on the part of buyers and sellers, and some degree of fraud, are unavoidable whatever the institutional arrangement. The goal in meat inspection, as in other areas of economic activity, is to establish an institutional arrangement that provides and uses information in a way that best serves consumers. The free market generally is more effective than government regulation in doing so.

Why Not More Market Inspection of Meat?

We’ve seen that businesses and consumers are willing to pay to assure product quality. And, as emphasized throughout, it is apparent that private inspection agencies “have a lot going for them.”^[15] Yet, despite the ostensible advantages of the market approach, there is little reliance on market forces in meat inspection in the United States. Why does the meat industry not rely on market regulation more?

Market-generated information about the quality of meat undoubtedly would be much greater in the absence of government regulation. Government inspection tends to preempt market inspection, much as taxpayer-financed education crowds out privately funded schools, by reducing the incentives of sellers and buyers to look after safety on their own.^[16] There is little demand on the part of meat handlers for services that would be provided by private firms in the absence of government inspection. Business firms are, of course, also happy to have the taxpayers pick up the tab for inspection.

Similarly, with assurances by the USDA (and the media) that government regulation is crucial to consumer safety, there is little impetus for consumers to change the current institutional arrangement. Moreover, when problems of meat safety occur, there is no discussion of “government failure.” Instead, regulatory officials plead for more power. In the aftermath of the Hudson Foods incident, for example, Secretary Glickman requested additional authority to shut down food-processing plants and to impose fines of $100,000 per day on any plant not obeying his order.

There can be no guarantees when it comes to food safety. Indeed, zero risk is not a reasonable objective in any aspect of human action. There are two approaches to ensuring the safety of meat—market inspection and government regulation. It is ironic that the public expects government regulation, which has more imperfections than the competitive market process, to provide for meat safety.^[17] Few people question the appropriateness of government regulation of the meat industry, even when they fault its effectiveness.

No one has a stronger interest in protecting consumers from tainted meat than the businesses in the industry. Ultimately, safety is best assured when rooted in the self-interest of business firms and consumers.

Notes

1. Peter J. Howe, “New Laser May Identify Tainted Meat,” The Boston Globe, 1997, http://yourhealthdaily.com/090497_110006_15810.html.
2. William C. Mitchell and Randy T. Simmons, Beyond Politics: Markets, Welfare, and the Failure of Bureaucracy (Boulder, Colo.: Westview Press, 1994).
3. Information presented here on the early history of meat inspection in the United States relies heavily on Gary D. Libecap, “The Rise of the Chicago Packers, and the Origins of Meat Inspection and Antitrust,” Economic Inquiry, April 1992, pp. 242–62.
4. Ibid., p. 246.
5. Ibid., p. 244.
6. Ibid.
7. Lawrence W. Reed, “Of Meat and Myth,” The Freeman, November 1994, pp. 600–02.
8. Ibid., pp. 600–01.
9. Libecap, p. 242.
10. Economists use the term “rent-seeking.” James D. Gwartney and Richard L. Stroup, Economics: Private and Public Choice, 8th ed. (Orlando, Fla.: Harcourt Brace & Co., 1997), p. 102.
11. Milton Friedman, Market Mechanisms and Central Economic Planning (Washington, D. C.: American Enterprise Institute for Public Policy Research, 1981), p. 21.
12. Howe.
13. Randall G. Holcombe, Public Policy and the Quality of Life: Market Imperfections Versus Government Planning (Westport, Conn.: Greenwood Press, 1995), p. 105.
14. The discussion of quality standards draws on Holcombe, pp. 93–106.
15. Ibid., p. 101.
16. E. C. Pasour, Jr., “Consumer Information and the Calculation Debate,” The Freeman, December 1996, pp. 780–86.
17. Mitchell and Simmons, p. 82.