DRI-305 for week of 3-17-13: What is Behind the New ‘Sharing Economy?’

An Access Advertising EconBrief:

What is Behind the New ‘Sharing Economy?’

The once-distinguished British weekly The Economist highlights a new Web-based economic phenomenon in a recent (03/9-15/2013) issue. The name assigned by the magazine to this activity is the “sharing economy” – a dreadful misnomer that conjures up images of 60s counterculture and communes. But however misnamed, the transactions it denotes are a sign that cannot be ignored.

In his Wealth of Nations, Adam Smith explained the growth of markets by citing man’s innate “propensity to truck, barter and exchange.” Ever since, these words have received both veneration and ridicule. Smith’s admirers saw in them a beautifully realized portrait of human nature. Opponents of free markets have scoffed. They long since rejected whatever validity Smith’s “higgling and haggling of the marketplace” might have had in favor of Thorstein Veblen’s picture of “shadowy figures moving in the background;” they see corporate power, not voluntary exchange, as the dominant motif in the market. Since 2008, the Left has pooh-poohed the notion of rational choice by citing the financial collapse as proof of the irrationality of crowds and the infeasibility of deregulated markets.

But now comes The Economist to point out that even as world financial markets were imploding, unregulated private markets were springing up to enrich the daily lives of billions of the world’s citizens. Alas, the magazine itself misses the significance of its own reporting.

The “Peer-to-Peer” Rental Market

Every night some 40,000 people around the world rent rooms from a service that operates throughout the world – 192 countries, 250,000 rooms in 30,000 cities. The customers choose their rooms and pay online. But the provider is not a commercial business chain like Hilton, Marriott or even Motel 6. Instead, a San Francisco-based firm called Airbnb matches up customers with rooms in homes owned by private individuals. The company has operated since 2008, attracting roughly 4 million customers. Room renters choose and pay for their rooms online.

This is perhaps the largest business in the “peer to peer” rental market. Individual consumers rent assets like beds, boats, and cars directly from other individuals rather than from businesses. The rationale for these practices is quite straightforward. You may wish to cut your automotive transportation costs by earning income from giving rides to people whose destinations coincide with yours. Or, viewing the same situation from the other side of the market, you may wish to cut your costs by paying a peer to chauffeur you to a common destination rather than calling a taxi or riding the bus.

Boat ownership is commonly likened to owning a hole in the water into which you pour money. One way to offset this outflow is to rent the use of the boat to peers. The intermediary and clearinghouse for all this activity is the World Wide Web.

Observing and noting this market is easier than pinning a descriptive label on it. The Economist calls it “the sharing economy.” This is surely wrongheaded, if only because we do not associate “sharing” with commercial transactions. Carpooling arrangements, for example, involve a spatial arrangement for the pooling of transportation services. Participants “share” a common space inside a single vehicle for the purpose of reducing joint transportation expenses. But each vehicle’s owner is commonly responsible for fuel purchases. Pooling equalizes travel responsibilities and costs among participants; the net exposure should be zero. The benefits are symmetrical, both in quantity and kind. This is sharing in a true, meaningful sense; the benefits are objectively equal and depend on the shared use.

Charity is another conventional form of benefit sharing. The owner of income or assets shares it (them) with others with no reciprocation except, perhaps, a “thank you.” The mutuality derives from the satisfaction gained through helping.

But the peer-to-peer market is simple commerce, unlike the genuine sharing examples just cited. There is an exchange of money for goods-or-services. The buyer gains the usual consumer surplus – the excess of the maximum price he or she would have been willing to pay over the price actually paid. The seller gains better utilization of existing capacity, whether the capital good is a personal automobile, spare bedroom or pleasure boat. Sellers are no more “sharing” than are taxi drivers, motel owners or charter-boat skippers. Indeed, a better descriptor would be the “utilization” or “capital-utilization” economy. Of course, this clinical language lacks the warm and fuzzy feel of “sharing” but it compensates in accuracy.

The Economist also tosses out the term “collaborative consumption,” which is just as inapropo as “sharing.” Fairness and full disclosure require noting that the terms “sharing economy” and “collaborative consumption” date back several years. They are particularly associated with left-wing authors like Rachel Botsman, whose communitarian views are hostile to capitalism and private property. But The Economist, of all publications, should know that private ownership is essential to the preservation and maintenance of capital goods, without which the peer-to-peer market would vanish into thin air.

Come to think of it, why not follow current buzzword practice and adopt digital vernacular, using The Economist‘s own phrasing? Call it the P2P market.

The Key Role of the Internet

Where has this new economy been all our lives? Did it take over a century for people to wake up to the possibility of using their cars as taxis or rental cars? Was there an epiphany, a la Bell and Watson, when a restaurant habitué decided he could pay his bill by ferrying his fellow diners back and forth for a fee?

Actually, P2P has been operating in the background all along. It ran on word-of-mouth or classified advertising, using referrals as its primary security. This guaranteed that its importance would remain marginal. It took the Internet to turn it into a $26 billion annual, growing enterprise.

First, the Internet gave P2P the reach it lacked heretofore, allowing sellers to reach an unlimited audience at extremely low cost. Second, the Internet provided the security necessary to both sides of the market. For example, taxi drivers lead a notoriously precarious existence at the mercy of their passengers. But insecurity runs in both directions when the driver is not a business owner or employee, operating a highly visible vehicle. On the Web, though, the platform fulfills the role otherwise played by the business in vouching for its representatives. Follow-up reviews and ratings ensure that bad trips are not repeated.

The surest sign that P2P really works is that commercial businesses want a piece of the action. The Economist reports that Avis, GM and Daimler have all acquired their own piece of P2P; e.g., acquired P2P assets or entered the market de novo. The magazine speculates that the acquisition may enable the parent to list its excess capacity-assets on the P2P firm’s website. This looks like a clear case of evolutionary adaptation rather than creative destruction; P2P does not rate to destroy its competing industries but rather to modify their operations for the better.

Last April, The Wall Street Journal reported on the hottest extension of P2P in the financial realm – P2P lending. For roughly a decade, at least two P2P firms – Prosper Loans and Lenders Club – have offered individuals a chance to lend directly to their peers. The loans are extended versions of the payday/high risk loan that has long been a staple of the low-income and pawn-loan credit market. These P2P loans have terms of up to five years and principal amounts ranging up to $25-35,000. They are unsecured and assigned a risk rating based on the borrower’s creditworthiness.

The success of these P2P firms has now attracted the attention of Wall Street. Fund managers have started funds organized along similar lines, offering investors the chance to pool investment capital into funds offering the same types of high-risk, unsecured loans. Risk spreading and high returns make these funds an attractive alternative to current low-yield, fixed-income investments. The high risk means that their fraction of the total portfolio should be low. Naturally, the increase in lending activity will improve terms and outcomes for borrowers.

Lessons Learned

Even if we accept that P2P is an adaptive rather than a disruptive force, this should not obscure the powerful message it conveys. The rise of P2P overturns the conventional thinking that had prevailed since the financial crisis of 2008 and the ensuing global recession. That dominant view has been that market participants do not act rationally. They act emotionally, even hysterically. They are stampeded by mob psychology and incapable of gauging their own interests. Without the wise guiding hand of government regulation, free markets will inevitably devolve into chaos.

To be sure, this view is itself hysterical. It offers no clue as to why or how regulators themselves escape the emotional distractions that sway market participants. It doesn’t explain how regulators regulate markets without actually substituting their own decisions for those of markets. It also doesn’t tell us how regulators are able to perceive the interests of market participants who (supposedly) cannot discern their own interests. Nonetheless, this regulatory view won out (essentially by default) in 2008-2009.

Every major regulatory agency in Washington – OSHA, EPA, FDA, SEC, FTC, DOT, DOE, FMCSA, et al – has presided over a reign of terror for the last four years. If federal-government regulation were the key to safety, America would now be the safest nation on Earth by far. There is no logical or empirical case for this regulatory full-court press, other than the fact that the Democrats won the last two Presidential elections and the Republicans did not. Still, asking Democrats not to regulate is like asking a horse not to eat hay.

P2P offers the perfect test case for the new conventional thinking. Here we have both supply and demand sides essentially pioneering a new market all by themselves. According to today’s party line, this is a sure-fire recipe for disaster. After all, taxi regulators in New York
City have spent decades warning consumers to beware of “gypsy [unregulated] taxicabs.” Riders might be placing themselves in the hands of robbers, rapists or even worse. Unfortunately, New York City hasn’t approved the issue of a single new taxi license (they are issued in the form of medallions) since World War II, so its citizens have conditioned themselves to ignore these admonitions. They actually want to get somewhere without waiting for a bus or walking. Well, if an unregulated commercial vehicle is this unsafe, just imagine how risky P2P must be!

No, according to The Economist, “the remarkable thing is how well the system usually works.” Then again, P2P “is a little like online shopping,” where “15 years ago…people were worried about security. But having made a successful purchase from, say, Amazon, they felt safe buying elsewhere.” And there was eBay, which began essentially as P2P and morphed into a vehicle for professional sellers.

Well, gol-l-l-l-l-e-e, Sgt. Carter, could it be that old Adam Smith was right – not just about mankind’s inherent affinity for trade but also about the self-adjusting character of mutually beneficial voluntary exchange? So it would seem.

Yet The Economist‘s liberal knee cannot help jerking towards regulation. “The main worry,” they declare gravely, “is regulatory uncertainty.” Yes, politicians in America have cast lascivious glances at Internet trade for years, longing to tax it under a guise of benevolent regulation. Since The Economist sails under the banner of …er, economics – where a tax discourages the taxed activity, creates a welfare burden and reduces the well-being of the taxed – it should come out forthrightly against Internet taxation, right?

Wrong. “People who rent out rooms should pay tax, of course [of course!], but they should not be regulated like a Ritz-Carlton hotel. The lighter rules that typically govern bed-and-breakfasts are more than adequate.” Mere readers – being only consumers, humble recipients of The Economist‘s sunbursts of illumination – needn’t expect any illuminating insight on why tighter regulation of Ritz-Carltons is either necessary or beneficial, because none is forthcoming. The editorial’s anonymous author has the wit to notice that incumbent taxi firms are even now mobilizing the forces of regulation to protect their monopoly position. But the magazine’s leftist editorial stance is so ossified that it cannot permit that admission without an accompanying qualification that “some rules need to be updated to protect consumers from harm.” Taxicab regulation is probably the most notorious textbook example of regulatory harm to consumers in the history of economics, but The Economist is bowing its knee to it. (Elsewhere, the magazine laments the absence of even more Keynesian stimulus spending policies to create jobs.)

This is an old story. A precursor to P2P sprang up in black communities throughout the U.S. during the early and mid-20th century. Taxicab service was often sparse in these areas, not merely because of racial discrimination but also because high crime posed serious risks to drivers. Taxi regulation typically prevented black taxicab companies from entering the market or expanding to meet demand. It became common practice for private individuals to frequent grocery stores, barber shops and other high-traffic areas in order to provide “car service.” This service consisted of informal, unmetered charges (sometimes on a flat-rate basis) in return for carriage to and from shoppers’ homes. Carrying of bags and escort duties were usually included in the service.

Researchers have applied the term “jitneys” to the unregistered, unlicensed vehicles used to provide this service. Research is conclusive on two points: Consumers benefitted unambiguously from the service, and jitneys were legally hounded by taxi and bus companies in their jurisdictions. They were made illegal because taxi and bus owners feared and resented the competition and loss of income that this low-cost alternative form of transportation inflicted on them. Amazingly, jitneys still survive today in inner-city America; they are the “missing link” connecting modern P2P with its ancestral forebears.

When the worst that The Economist can cite is that “an Airbnb user had her apartment trashed in 2011,” you can rest assured that today’s P2P system is working extraordinarily well. It is a measure of our times that even a single complaint instantly triggers the demand for more regulation. When abuses occur despite the presence of tight, heavy regulation – as in financial markets – it should be clear that regulation is the problem rather than the solution. When complaints are rare, it hardly suggests a need for regulation.

The word “regulation” itself has become a rhetorical refuge of first resort precisely because its meaning is so vague. There is no clear-cut theory of regulation to explain why it is necessary, exactly what it does or how it does it. To a bureaucrat, this may constitute a highly desirable sort of flexibility. But it is not conducive to favorable outcomes.

All the News That’s Fit to Decode

Readers of The Economist should probably be grateful that the magazine deigned to notice P2P at all. The fact that we have to hack our way through the magazine’s ideological bias and occupational ineptitude to glean any value from the article is a journalistic scandal. Still, these days students of economics have to take our good news where we find it and our sources as we find them.

DRI-380 for week of 8-26-12: Markets, Government, Law and Truth

An Access Advertising EconBrief:

Markets, Government, Law and Truth

You listen to the radio regularly. A manufacturer of health-oriented dietary supplements prefaces their infomercials with this disclaimer: “This product is not intended to diagnose, treat, prevent or cure any disease.” During each program, you note that the attributes of the products discussed and promoted are clearly intended to do one or more of the above. Is the disclaimer a lie, or are the products fraudulent?

You often browse business-related magazines and websites. In articles devoted to job interviews, you are startled by the asymmetrical advice given to employers and job applicants. Why are employers legally ordered not to ask many questions, while applicants are encouraged to ask as many questions as they wish?

You are a student of economic regulation of business by government. You followed FDA regulation of the cigarette industry from its inception to the agency’s recent proposal for large graphic warnings to appear on cigarette packages. You are unable to discern any logical thread unifying the series of agency rules and court rulings that have followed the onset of regulation. What is FDA trying to do?

You are a believer in the value of truth. What are the impact of markets and government, respectively, on the emergence of truth?

The Market, the Government and the Law

Economics is the science of rational human choice. Economists have long faced withering criticism from other scientists (physical and social) and from the general public. The standard criticism is that people do not act rationally – therefore economics is of little practical value.

The conclusion is wrong, but the premise contains a large grain of truth. Economics has tended to assume that producers, consumers and input suppliers possess all relevant information about the present and the future. This makes rational choice easy. Even when relaxing this assumption, the theory has substituted a probabilistic theory of uncertainty that is only slightly less unrealistic. As the late, great Nobel laureate F.A. Hayek pointed out in the 1930s and 40s, economics has ignored the true nature of the economic problem by assuming what the theory should prove. Rational choice demands the evaluation of a vast amount of data. But people don’t automatically possess the information economic theory assumes they do. The data doesn’t exist in one place or even in known information repositories. How are all this data assembled, evaluated and revised over time? How are the actions of billions of people coordinated to produce a coherent outcome?

Markets provide the incentive for individuals to contribute the bits of dispersed information necessary to comprise a functioning market. No individual possesses all the relevant information. Indeed, nobody has a full and complete picture of, let alone intellectual comprehension of, reality. Instead, each of us views reality fragmentarily through our own subjective prism. But markets bring each of us closer to comprehension by refining and revising that subjective view and drawing it closer to objective truth.

Any time somebody’s knowledge is incomplete or their perception is inaccurate, somebody can make a profit by acting within the market to expose the truth. Throughout human history, societies relying on markets have enjoyed more material success than those eschewing markets because objective truth is more productive of material wealth and human happiness than falsity.

By definition, governments exist to constrain human conduct. When governments prevent people from harming each other and violating basic rights, they contribute to wealth and happiness. When governments constrain lawful markets, they hinder the distribution of information and the gradual coalescing of objective truth from subjective perception. The Rule of Law evolved because governments that operated according to its precepts fostered prosperity. They confined themselves to narrowly limited proscriptive rules allowing citizens to understand and predict the impact of the law on their lives. Governments that took the opposite tack foundered, as did the totalitarian regimes of the 20th century.

This perspective on markets and truth helps us understand the relationship between government and truth.

Dietary Supplements

Throughout recorded history, man has eaten, drunk, sniffed, poulticed, smoked and otherwise consumed the bounty of nature to yield pleasure, reduce pain and promote health. Since the dawn of science and medicine, he has extracted vitamins, minerals, proteins, fats, carbohydrates, acids, alkalis, enzymes and various other substances for the same purposes. If all human beings were carbon copies and reacted identically to stimuli, the production of health and happiness would be straightforward. The actual range of human variation makes it anything but easy to ascertain the value of available substances for human purposes.

The success of science has posed a tempting pitfall. The temptation is to assume that scientific experts know – or can easily determine – what is safe and effective for human consumption. This implies that by giving a committee of experts legal dominion over this realm, we can avoid the problems associated with free-market provision of medicines, supplements and the like. Such problems include unfavorable reactions by individuals to products as well as products that do not live up to the billing of producers or the expectations of consumers.

Unfortunately, safety and efficacy are not only hard to determine, they also vary with each individual. Really, the only practical approach is to allow individuals and their physicians to make these determinations. Doctors will employ judgment informed by years of practice and results of continuing research. Research will be directed toward areas indicated by consumer demand, much as any other investment is guided by demand. The alternative is to put the process in the hands of government, which assumes that a small number of men are wise enough to know better than the mass of people what we want, what we should want and how to produce it.

Currently, “medicines” are controlled very strictly by the Food and Drug Administration (FDA). “Dietary supplements” are not. But the disclaimer noted above is included in advertisements to fend off product liability lawsuits. Failure to include it would allow consumers to sue the producing company because the supplements did not cure a disease, prevent its onset or ameliorate its spread. The question is: Does the disclaimer serve the cause of truth or hinder it?

Even the most casual observer of health and nutrition knows that thousands of health supplements are legally available to consumers. These range from fish oil in liquid and capsule form to resveratrol extract to vitamins A, B, C, D, E and K, including the various B subsidiaries. Ongoing research continually discovers new uses for known substances and devalues old uses. Currently, for example, research now suggests that vitamin D – long considered of secondary importance and easily obtainable with very modest exposure to sunlight – is vastly more important and difficult to maintain in optimal quantities without supplementation. The high hopes once held out for vitamins C and E in curing colds and preventing heart disease have been revised downward after considerable study and experience.

But the FDA wields tight control over the language that can be used in selling and advertising all these substances. And unless FDA-approved studies have been conducted specific to the treatment, prevention and cure of disease, the disclaimer noted above must appear on packaging and in advertising.

The undeniable drawback to this requirement is that the disclaimer is a lie.

Even a child knows that the purpose of all these products is obviously to treat and prevent disease. In some cases it is to cure disease. (It is unclear what health supplements would purport to diagnose disease; presumably this word is included so as to apply to devices and test kits as well as supplements.) Instances of this are legion.

When Linus Pauling began to promote vitamin C as the discovery of the age, it wasn’t merely in order to fulfill man’s daily requirements. No, he maintained that megadoses could cure colds and prevent cancer. Aspirin’s analgesic properties have been known for thousands of years, but it wasn’t until its blood-thinning action was touted as a preventative for cardiovascular artery closure that it became a therapeutic medicine. Subsequently, its active ingredient, salicylic acid, was implicated as a potential preventive of colon cancer as well. St. John’s Wort has been a folk remedy for prostrate enlargement for decades. Cranberry juice has been “prescribed” for urinary discomfort and kidney stones since time immemorial by old wives and do-it-yourself physicians.

How do people react when they read or hear the disclaimer? They are confused. One has only to peruse comments online to confirm this. “What’s the good of your product if it doesn’t ‘diagnose, treat, prevent or cure any disease’? is a typical question. The stock answer is that, in effect, the FDA mandates this disclaimer. This does nothing to allay fears of the timid and does nothing to deter the incautious. In short, it does nothing good. In turn, this begs one more obvious question: If the disclaimer does nothing good, what’s it doing there?

The answer is that the disclaimer protects sellers from product liability. By not promising anything, sellers cannot be held responsible if the product does not deliver anything. The fact that the sellers are lying does not seem to concern anybody. Everybody knows they are lying – except of course for the confused ones, who do not know. It is easy to blame tort lawyers for the confusion. But they are merely responding to the law as written or interpreted by the government. Why does this law exist?

When producers knowingly sell products that do not deliver stated benefits to consumers, that is fraud. A time-honored duty of government is to prevent and punish fraud. Presumably the law mandating the disclaimer exists because the government thinks it is wrong for producers to sell substances that may not always deliver their full intended benefits to consumers, even when producers knowingly intend and anticipate that outcome. But the effect of the disclaimer is to deceive consumers by lying to them about the intentions of producers and the benefits of their products.

The government’s position is as follows: It is terribly wrong for producers to deceive consumers by selling them non-existent benefits. But it is not wrong for producers to lie to consumers by deceiving them into not buying actual benefits; in fact, it is mandatory for producers to do this. (This is an implicit position, not an explicit one; it follows from the law governing FDA policy and the acquiescence to the course of tort litigation.)

An ancient principle of common law is salus populi suprema lex, meaning “the welfare of the people is the supreme law.” In other words, the overarching purpose of law is to improve the happiness and well-being of the citizenry. Does FDA policy do this? It is reasonable to suppose that FDA policy prevents some unhappiness resulting from unintentional deception of consumers by producers. It is worth noting, however, that markets themselves punish producers who promise benefits that they do not deliver. The punishment takes the form of lost customers, reduced revenues and foregone profits. The prospect of such losses acts as its own deterrent to laxity by producers in accurately describing and truthfully advertising product benefits.

Counterbalanced against the gains from the FDA policy are the losses from deceiving consumers by hiding or obscuring product benefits. Organizations like the Independent Institute and Economists Against FDA have told the story of the FDA’s ban on advertising the cardiovascular benefits of taking aspirin in response to first-heart-attack symptoms. The director of Cardiovascular Medicine of the Florida University College of Medicine estimated that as many as 10,000 lives per year could be saved if aspirin manufacturers were able to advertise these benefits. That estimate was made in 1995. As recently as 2008, the FDA was still threatening aspirin manufacturers who tried to market aspirin with labeling that claimed this benefit. And this is only one of the thousands of products with benefits that go unadvertised or that live under the cloud of the disclaimer.

Some may object to the characterization of the disclaimer as “confusing.” “Everybody knows that it doesn’t really mean what it says,” they may say. But if this is really true, then exactly what is gained by saying it- or rather, by having to say it? Let us leave aside the fact that there are clearly some people who are confused by the disclaimer. Compelling reasons exist for not insisting on a disclaimer that nobody takes seriously. When the law manifests itself in trivial, counterproductive and confusing ways, respect for the law in general declines. People begin to pick and choose which laws to obey, because they come to realize that they cannot know or hope to obey the complete body of laws. It becomes harder to law to perform its fundamental tasks. This shows up in small, seemingly random trends such as mounting disobedience of traffic and tax laws.

Job Interviews

Freedom of speech is commonly cited among the bedrock freedoms safeguarded by the U.S. Constitution and the American way of life. Thus, it is shocking to review a list of questions that employers and their representatives are legally forbidden to ask job applicants during an interview. Generally speaking, employers cannot inquire about applicants’ age, race, national origin, or status relative to marriage, disability or parentage.

Readers approaching retirement age will be stunned to discover that what once was small talk is now a crime. That includes conversational starters like “Where were you born?” and “Are you married?” The former is verboten because it might be a sneaky way of determining the applicant’s national origin, the latter because the employer might be trying to find out if the applicant’s home life might interfere with their work – an issue that they are entitled to probe only in government-approved ways. Similarly, “What is your native language?” is an obvious non-starter, as are “Do you have children?” and “Do you plan to get pregnant?”

“How old are you?” used to be one of the first questions asked of applicants whose age did not appear on their resume. Now it is taboo, prima facie evidence of the crime of ageism or age discrimination. The government is saying one of two things: Either employee productivity is assumed to remain constant with increasing age rather than falling or, alternatively, the employer has no right to get information about the employee’s productivity in advance of employment.

“Do you observe [insert name of religious observance day or days here]?” is a definite no-no, while “Are you available to work on holidays or weekends?” is permissible. This raises the potential for conflict by allowing the applicant to define a holiday. A Jew may treat Yom Kippur as a day of atonement but not a holiday, and may or may not choose to limit availability for work.

“Do you smoke or use alcohol?” is an infringement of the applicant’s rights because it “discriminates” against the use of a legal product consumed off the job and the business premises. The fact that the product has an obvious potential to affect job performance is irrelevant because the employer has only a limited right to inquire about the applicant’s productivity. Likewise, “Are you in the National Guard?” overlooks the fact that the employer has no unbounded right to inquire about the applicant’s availability/productivity. Viewed in this light, “Do you have a disability or chronic illness?” is a veritable abomination. After all, the employer can always ask if the applicant could perform particular tasks – “with reasonable accommodation,” of course, since each employer has a unilateral responsibility to create a level playing field between competing workers in the labor market.

After a suitable refractory period for recovery from the shock of seeing the burden placed on the employer, the student of job-interviews changes perspective 180 degrees and sits in the applicant’s seat. He expects to meet a comparable array of rules and prohibitions to those confronting the employer.

But there are none. Whereas the employer is verbally gagged like a juror at a murder trial, the job applicant enters a recumbent ACLU paradise of unhindered self-expression, free of legal duties, responsibilities and taboos.

As if this state of affairs weren’t incredible enough, the student who dips into characterizations of the interview process in the business press is whisked down Lewis Carroll’s fabled Rabbit Hole. Jacquelyn Smith of Forbes Magazine (7/6/2012, “Questions You Should and Shouldn’t Ask in a Job Interview”) informs us brightly that “A job interview is a two-way street. The employer asks questions to determine if the employee is an ideal fit for the job, and the smart candidate uses the interview [analogously].” She quotes “workplace expert” and author Lynn Taylor: “The fact that this is a two-way interview is often lost on many candidates, especially in this period of high unemployment when it seems like employers hold all the cards” [emphasis added].

The so-called “two-way street” of the job interview consists of clear, unimpeded driving on the applicant’s side of the road, while the employer’s side is lined with barricades, barrels and road hazards that a Joie Chitwood or Evel Knievel could hardly negotiate successfully. Not only do employers not “hold all the cards,” the federal government has marked the deck and stacked it in an effort to prevent the employer from accomplishing exactly what the magazine admits should be the objective of the interview – finding out if the applicant is an ideal fit for the job.

After all, in order to find out if the applicant is an ideal fit, the employer must be able to ask any and all questions deemed necessary. That must be true because that is what the word “ideal” means. But if there is one process in economic life that is implacably, unalterably opposed to truth, it is the job interview. With malice aforethought, the federal government has driven an Orwellian wedge between employer and applicant that has foreclosed all possibility of full informational disclosure.

The importance of this divide emerges from looking at just one of the forbidden topics listed above. We know that marital status is perhaps the key behavioral variable for the human female. The biological fact of women’s’ ability to bear children has intractable economic implications. Women are many times more likely to leave the labor force than men. These career detours mean that, in the aggregate and on average, their incomes and longevity-linked achievements will not equal those of men. But this does not mean that any individual woman might not be just as viable as any male job applicant. How can a rational employer, headhunting for a groomable CEO, distinguish between ideal and non-ideal female applicants? Clearly, marital status and/or family plan are the logical determinants. (The precise word is “discriminants,” but this word now has an unmerited pejorative cast – another Orwellian legacy of government policy.) And these are exactly the questions that the employer is forbidden from asking!

Unhampered, unhindered markets tend to promote truth. Truth enhances productivity. It also bolsters morality. In a purported effort to fight discrimination, federal-government labor-market policy harms the ostensible victims. Government regulation crushes truth to earth – and compliance officers are always on the lookout should it try to rise again.

By separating truth from hiring, government has vastly increased the costs of employment. When an input becomes more costly, other things equal, businesses use less of it. Consequently, what economists call the “natural rate of unemployment” rises – and up goes the actual rate of unemployment along with it. In Europe, governments have responded in true totalitarian fashion, much as Joshua ordered the sun to stop in the sky. They have made it incredibly difficult for businesses to fire or lay off employees. And businesses respond by not hiring employees in the first place. Unemployment rates exceeding 10% have been commonplace in Europe for decades.

In the U.S., the government responds in line with the age-old joke about a husband drying dishes washed by his wife: “Am I supposed to wipe off what you don’t wash off?” The U.S. government tries to wipe off with stimulative fiscal and monetary policies what its defective labor-market policies don’t wash off when they create higher unemployment. Unfortunately, contrary to popular belief, there is no successful theory of countercyclical government stimulus policies to fight recessions and end unemployment. And the created unemployment remains.

Thus, in the labor market as well, we are currently reinforcing George Orwell’s insight that a characteristic of totalitarian states is to suppress truth by suppressing markets.

Graphic Labels on Cigarette Packaging

The case of cigarette regulation parallels that of regulation of aspirin advertising. In both cases, freedom of “commercial speech” is subordinated to some ostensible greater good, as perceived by federal-government regulators. Yet despite this surface similarity, the underlying philosophy followed by FDA differed completely in the two cases. The agency’s reasoning was ad hoc; the only consistent thread was the insistence that its will prevail.

Cigarette packages have long carries text warning consumers of health dangers associated with smoking. Proponents of regulation have viewed this as a watershed in economic regulation. In fact, smoking has carried a de facto hazardous label in the market of public opinion since at least the 19th century. Textbooks dating to the early 20th century refer in general terms to its deleterious effects on lungs, breathing and longevity. Although the armed services provided them freely to their personnel, World War II movies like Thirty Seconds Over Tokyo referred to cigarettes as “coffin nails” – a nickname that testifies as strongly as any research study to contemporary public awareness of their dangers.

The impetus to the text warnings was a link between cigarette smoking and lung cancer. The link was forged by statistical correlation; populations and ethnic groups that smoked more had higher incidence of lung cancer. The precise medical pathway between the two was uncertain, primarily because the etiology of cancer itself was uncertain. Cigarette smoke irritates the nasal membranes of non-smokers and smokers alike, though, and this contributed to its growing unpopularity. As the size and strength of government grew, its use as a means of enforcing personal prejudice became more frequent. This was generally cloaked in more altruistic garb, and a public-health rationale for discouraging smoking was a convenient means of disguising prohibition as altruism rather than bigotry.

Gradually, more and more smokers have kicked the smoking habit. This has produced a sizable decline in the total number of smokers. Curiously, this has not prevented young people from continuing to pick up the habit, though. Not surprisingly, the former development has been ascribed to the beneficial effects of cigarette warnings, scientific “discoveries” of harmful effects, no-smoking laws and the like. The latter has been ascribed to the demonic motivations of cigarette executives and the baneful effects of their advertising campaigns targeting the youth market.

The real causes are more prosaic. For over a century, people continued to smoke although generally well aware of the possibility of a lethal result. They treated cigarettes the same way they treated any other tradeoff – by evaluating the degree of benefit and the likelihood of death (e.g., the cost). Lung cancer was not a pleasant prospect, true, but most cancers are incurred late in life. When life expectancy was less than seventy years – and the final years rated to be comparatively unrewarding – many people did not value the risk of losing those years to lung cancer as sufficient to forego a substantial benefit from smoking.

But as life expectancy steadily increased and medical science continually enhanced the quality of life by triumphing over disease and pain, the smoking tradeoff became less and less favorable. The later years of life became more productive and pleasurable, hence more valuable. The potential cost of losing them loomed larger. So people stopped smoking earlier and earlier. This effect operated least upon those for whom the prospective tradeoff was most distant; namely, the youngest prospective smokers.

All this had little or nothing to do with tobacco regulation and health warnings. But the money provided to state governments by progressive more draconian taxes and penalties levied against tobacco companies provided an attractive rationale for continuing the charade of regulation. In 2009, the regulatory zealots of the Obama administration took charge and instituted an across-the-board onslaught against health and pharmaceutical companies, as well as most other businesses. This included a demand for large graphic warnings on cigarette packaging.

The federal appeals court ruling illustrated the utter lack of regulatory coherence and unity across the spectrum of government. FDA was scored by Judge Janice Rogers Brown for failing to “present any data – much less the substantial evidence – showing that enacting their proposed graphic warnings will accomplish the agency’s stated objective of reducing smoking rates.” This does not justify abrogating cigarette manufacturers’ First Amendment rights, claims Brown, because “the First Amendment requires the government not only to state a substantial interest justifying a regulation on commercial speech, but also to show that its regulation directly advances that goal.”

The first thing to be said about Judge Brown’s verdict is that it is patent hooey, since the First Amendment says no such thing. Its five lines merely forbid Congress from “abridging the freedom of the press” – period. If there is more to it than that, it is to be found somewhere other than in the Constitution. Judge Brown’s pretense of solemnly measuring one weighty interest against another according to a formula specified by the Founding Fathers is merely a pretext for substituting her judgment for theirs.

The second point worth making is the inherent contradiction involved in requiring supporting data or substantive evidence for a policy not yet implemented. What sort of data could support that policy? Historic data on graphic images on cigarette packages in some other country? Why, yes, according to a representative of Campaign for Tobacco-Free Kids. Considering that it is already illegal to sell cigarettes to kids, this seems quaint indeed. He is apparently claiming that fear of death in the far future will succeed where fear of violating the law in the present failed.

The most absurd element of the ruling, however, is the idea that obedience to the First Amendment depends on the results of statistical investigation. If the science of statistics were as reliable as chemistry, that would be questionable enough. But social-scientific statistics are about as robust as a grass shack in a hurricane. The notion that we’ll tear up the First Amendment whenever a regulatory agency comes up with some really good numbers would be hilarious if it weren’t so terrifying.

It is hardly surprising that a previous Appeals Court ruling – focusing on the entire 2009 law rather than merely its graphic-warnings component – upheld FDA’s authority in full. The only point of agreement is that ultimate federal authority is unlimited; the warring government factions disagree about who wields it and what triggers its imposition.

The End of Truth

The raison d’être for the FDA is the preservation of lives and promotion of human happiness. In the aspirin advertising/dietary supplement case, the FDA took the position that it was entirely up to industry to demonstrate the benefits of aspirin. Even after the clinical studies did this, FDA continued to rely on First Amendment legalism and insist that expansive legal precedent allowed the agency to restrict manufacturers’ First Amendment rights to advertise benefits in spite of the confirming results of studies. In other words, FDA adamantly refused to take the welfare of consumers as their ultimate criterion of action.

In the cigarette case, FDA demands the right to force tobacco manufacturers to injure themselves by defaming their own legal product, not merely with warning text but now with inflammatory graphic warnings. The FDA asserts a sovereign right to abrogate the rights of individual and corporate U.S. citizens in order to attain a lowered aggregate statistical rate of cigarette smoking. Here, FDA is so obsessed with consumer welfare that they claim to be able to achieve better consumer outcomes than consumers themselves can.

Yet U.S. labor law asserts the individual worker’s right to consume the same legal product – cigarettes – that FDA claims the right to abrogate individual rights in order to discourage. Meanwhile, producers’ rights to produce and promote their own legal products are abrogated. Producers are told they have no right to avoid employing labor made less productive by consumption of the same cigarettes that FDA is moving heaven and earth to discourage.

The composite implications of these cases are roughly as follows: Producers have no rights at all except the right to go broke. Consumers have only the right to take what the government gives them, under the theory that government knows what is good for them better than they do. Workers have the right to do anything they damn please but not the power to do the only thing they really want to do, which is find and hold a job – because government has made jobs so expensive to create that producers have no incentive to offer them.

Finally, government has the right to do anything and everything, without limit. The only issues to be settled are which branch of government exercises that unlimited power and under what competing legal theory.

In markets, the assembling of dispersed information produces a tendency toward truth, owing to the continual incentive to earn profits by correcting error. In government, the only incentive is to accumulate and preserve power. Truth is an obstacle to this process. Orwell’s vision of totalitarianism as the end of truth is unfolding before our eyes.