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05/18/2008

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Michael F. Martin

Judge Posner:

Have you completely forgotten about trademark law, which effectively requires sellers to incorporate the consequences of negative externalities into their pricing? Wouldn't that be just as or more effective than any other regulations you suggest?

Also, I have been working on the problem lately, and I believe that bubbles can be explained without resort to any theory of psychology by taking into account dynamic price fluctuations that are the result of Schumpeterian creative destruction in the market for an older good. With slowly varying price, liquidity, external money supply, and transactions costs, one can produce a "resonance" effect equivalent to a bubble. No psychology needed.

http://brokensymmetry.typepad.com/broken_symmetry/2008/05/schumpeterian-c.html

This reminds me also of why Law, Pragmatism & Democracy was the most compelling of your books: it was the only one to incorporate a dynamic equilibrium theory of the markets it described. Too much of your analysis (including your analysis of consumer goods here) is trapped in a static world in my humble opinion.

whatmortgage

Mortgage payment protection insurance is increasing in popularity in the UK. This is mainly because monthly mortgage payments are very high, because of the high cost of housing in the UK.

YoungActuary

Government must act as a vein for the of information to the public?

Two words Dr. Posner: Consumer Reports.

Thomason

Since food is one example used, consider this. Purveyors could label produce "organic." Produce cannot be inorganic, so labeling it "organic" is not false. Then, one criticism was the latent presence of inorganic or synthetic substances on some produce, for example, residues of pesticides, fertilizers, or washing/waxing. So, regulations are imposed that allow the label "organic" to be applied only to produce from farming done without the use of inorganic or synthentic substances.
This regulation clearly increases the cost to the consumer for the "organic" produce. That consumer does know the regulations or how far its requirements go, and may not know anything about "organic" farming. In other words, the regulation does not make for "more informed" consumers. All it does is give the consumer a choice, to buy and pay more for "organic" produce, or to buy something else. Regulation does not always equate to information, but standardized labeling is desirable to consumers, even if it adds costs.

David  Friedman

You appear to be ignoring the possibility that the authorities making the rules might themselves be in error, either because they are subject to the same cognitive deficits as the rest of us or because their incentives are not consistent with our interests. For the obvious historical example of the latter, consider the past pattern of state regulation of margarine sales, motivated not by considerations of health but by the political influence of dairy farmers.

For the former, you might remember that for a very long time, the official wisdom held that one ought to substitute margarine for butter. We now know that this wisdom was wrong, that the margarine being substituted contained transfats and was much more dangerous than butter. If your solution 2 had been applied in that case the result would have been a very large number of unnecessary deaths--I'm guessing in the hundreds of thousands.

Or in other words, your arguments as given are about forty years out of date, so far as economic thought is concerned. You are committing the old fallacy of implicitly assuming the government will make the right decisions, instead of applying the same assumptions of self-interest, imperfect information, cognitive deficits, and the like to the political system that you apply to the market.

Finally, I would like to offer a much simpler explanation for the increase in obesity. Humans evolved in and are thus "designed" for an environment where food was often scarce. We have a pattern of tastes and behavior adapted to such an environment. We are now in an environment where calories are almost costless and where what used to be particularly scarce forms of nutrition, in particular fats, are readily available.

I suggest that your alternative explanation is subject to a very simple empirical test. Ask people who are very much overweight whether they know that being very much overweight has adverse effects on their health. If a substantial number reply that they do, you have good evidence that ignorance is an inadequate explanation.

Scott Wood

Hayek has observed that if you assume that outside experts can always make the best decisions for people, then there really is no rationale for freedom. The arguments for banning X, Y, and Z founder on the understanding that each individual is the world's best expert on his own tastes and desires. The nanny state is a crude instrument to use to deal with the idiosyncratic desires of hundreds of millions of individuals.

Brian Davis

Judge, I'm perfectly willing to live with Option 3 - enlightened caveat emptor. Just reopen the common-law courthouses of America, rebuke federal administrative agency pre-emption of State injury compensation law, and protect trial by jury, class actions where they make sense, and punitive damages where the defendant has earned them. Able trial lawyers, thoughtful courts, and a few State attorneys general on the cutting edge back in the '60's and '70's gave us the foundation of the considerable improvements in consumer product/service safety improvements we've seen since. Unfortunately, we couldn't get to everything that deserved an uprooting - e.g., over-the-counter sale of nicotine delivery devices. "Rule of law" has to mean as much for ordinary people as it does for wealthy interests. That's where we've gone off track and we need to do better.

David Heigham

Judge Posner,

You have probably met more successful bankers than I have; but very few of my banking acquaintances would be likely to make good bookmakers. I suspect that one of the underlying factors leading to recurring financial crisis is that many people in charge of financial institutions are rather poor at getting their minds round probabilities. Judges, as a class, seem much better at sorting out the odds.

More fundamentally, is not the proper role of consumer protection regulation preventing rogue traders (those who are not looking for repeat business and are therefore unconcerned with loss of reputation) from making routine commerce impossibly burdensome? To be fit for purpose and therefore acceptable in routine trade, goods and services must at least meet known minimum specifications.

The vagaries of consumer protection legislation over the last five centuries seem to demonstrate that the temptation to over-detailed regulation is always present; and generally leads to back-tracking. The general direction of the resolution of this question in the nineteenth and twentieth centuries has been to combine minimum specification regulations with reinforced rights of redress for buyers who do not receive what they paid for.

The advance of science has lead to more and more of the minimum specifications being evidence-based. The increasing flood of scientific findings (including those of the "social sciences") provides justification for almost infinite possible elaboration of minimum specifications. The costs of meeting complex specifications have so far proved prohibitive in very few cases; but those costs are on an increasing trend. The costs will have to be contained in due course by some general rule of not regulating when the cost may outweigh the benefits. Properly incorporating that in legislation and practice should keep quite a number of our successors occupied over the coming decades.

The more urgent issue is that the odds are that a substantial proportion of the scientific findings on which new arguments for consumer regulation are likely to be based will be demonstrated later to be wrong or misleading. (This may be even more true in the social sciences than in the biological sciences.) We have the choice of regulating now and chancing both the costs of regulation if our assumptions prove right and the costs of mis-adventure if our evidence for regulation is later proved wrong; all as against the damage that may be allowed if we do not regulate. My guess is that our need to protect confidence in the overall regulatory system will result in some form of presumption against regulating until the evidence on which the proposed regulation is based has been thoroughly tested; but it looks like an interesting time until we get there.

Mike

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Saint Darwin Assissi's cat

"I believe that the obesity epidemic must be due in in part to the ignorance of many consumers, especially if they are poorly educated, of the causes and consequences of obesity." I love your writing but wonder about the use of 'of'-- could 'about' be used here as well ('too' or instead of, ha ha). How come you chose New York restaurants? You may have superior knowledge about whether NYC is the restaurant capital of the world and therefore their behavior would be the benchmark for other citys wishing to emulate a sophisticated, in-the-know and in-the-swing of things cachet. Spending habits correlate to one's overall daily existence and are closely related to one's emotional health (Economist Kenneth Galbraith talked about this)...buying houses with no down and working 3 jobs could be very attractive to someone who has always lived in substandard apartments even if they only get to live there for a little while (like a vacation for their person, mind and spirit)...but anyway, great post...you always attract interesting readers with interesting commentary! How about that long list of web sites to check out products!

ivan

thanks for you !

neilehat

In need of greater information to form a better decision? Certainly not! Just look at all the current drug ads on television these days. I really like the disclaimers about side effects at the end. Some of them are worse than the conditions they are trying to cure. No wonder my Doctor won't prescribe them! As graphically portrayed by Mike above, this is a phenomenon I call "Information Overload". I won't go into the psychological details of how it works, but it's just one technique to implement the "Big Lie".

Information is not not going to solve the problem of protecting the public's health, safety, or even the environment. Direct regulation of industry has had it's beneficial results. Look at the development of the FDA or the USDA (although their having some problems today in regards to meat inspection and prescription drug control). Perhaps we ought to rescind the Pure Food and Drug Act or the Meat Inspection Act. (I hear the Drug Companies have a cure for Human Mad Cow disease that they would love to bring to market).

Or better yet, let's just return to the good old days of "The Jungle", where anything goes that can be sold. Perhaps we'll see the return of Laudanum or the original recipe Coca-Cola. Just one concern, I wonder how many people will end up as opium addicts or how many kids will end up as "Coke Heads"? Oh well, sorry about that minor ethical sentiment, we must keep our eye on profit above all else.

Hillblogger

Appreciate this particular blog post...Thank you Mr Posner.

Hillblogger

Appreciated this blog post... Thank you Mr Posner.

Hillblogger

Appreciated this blog post... Thank you Mr Posner.

verisimilidude

Your discussion about the possibility of a private venture sanitary inspection business can be taken further. If there are multiple such enterprises they will compete for fees from the consumers and the restaurants. Those organizations taking lower fees will succeed in garnering the larger number of clients in a classic network effect. Restaurants would probably be happier doing business with an organization that gave mostly 'A's and consumers would want to give their money to the business that provided information on the largest number of restaurants. Unfortunately the lower fees would require faster, and less complete, inspections. Only at some very low level of quality would restaurants feel they were being harmed by association with a too easy firm, a level where consumers would avoid an information firm that did not warn of a restaurant that had rats running through the dining room. So we have an optimum level of information quality as against cost. If this optimum level is too low to ensure consumer health (as I suspect it would be) the only option I can see is government regulation that raises the costs of everyone but forces the least efficient information producers from the market.

neilehat

versi, Did you know that "If" is the middle word of "Life"? All analyses begin with, "What if this ..." or "What if that ...", meanwhile the public health and safety is held for ransom. Shall we put health and safety at risk while we wait to see whether "What if this/that" really works? Sometimes direct action and regulation pays unforseen dividends.

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