DRI-269 for week of 11-10-13: How Business Views Competition

An Access Advertising EconBrief:

How Business Views Competition

Every profession must endure the distortions resulting from the misshapen lens of public perception. Veteran economists know the specialized meaning of terms like “competition” and “efficiency.” They know the attitudes and mental habits formed by businessmen. And they know what happens when the mind of the businessman is forced to coexist with the vocabulary of economics. What happens is that the businessman perceives economics through the subjective prism of his own wants and expectations. This produces a view that is wrong in predictable ways.

By appreciating how intelligent, single-minded businessmen go wrong, we can better calibrate our own understanding with the truth. Recent published examples provide excellent case studies in the pathology of business misunderstanding of economics.

iK9 – Establishing “Standards” for the Detection-Dog Market

The current (11/4/2013) issue of Bloomberg Business Week tells the story of iK9, a detection-dog business started by a man named Tim Dunnigan. In the article “The Bomb Squad: Building an Empire on a Dog’s Nose,” author Josh Dean explains Dunnigan’s attempt to build a security firm around the olfactory talents of bomb-sniffing dogs.

Detection-dogs use their highly advanced sense of smell to locate everything from explosives to drugs to malignant tumors in humans. Their talent is inborn but requires extensive training and direction. Most of this training is done by individuals working alone or within small businesses, but one of the largest institutions devoted to this purpose is Auburn University’s Canine Detection Research Institute. This subsidiary of the university’s veterinary research school trains some 200 teams of dog and handler every year for corporate and government clients. Associate Director Paul Waggoner has perhaps the best view of the dog-detection market.

“Detection-dog training has been a vocation where most of the knowledge has been handed down in master-apprentice manner. That’s led to a lot of unproven ideas and ways of doing things,” Waggoner observes. “It’s still a young field,” a “trust-me” kind of business.

It’s no wonder, then, that “the detection-dog marketplace is fragmented, and no one knows for sure how large it is,” according to Josh Dean. Estimates range from $400 million to $700 million. So far, the big-ticket buyers have been government and the military, with private security a distant third. In principle, though, “any high-traffic location or corporate headquarters is vulnerable” to the threat of terrorism or criminal activity, so “the potential market is immense.” On the other hand, the service is quite expensive. Effective security requires round-the-clock surveillance and dogs need constant care and supervision. Demand has fluctuated wildly, skyrocketing after the 9/11 attacks and the Boston Marathon bombing but nosediving in between.

Tim Dunnigan’s business plan calls for reaching $200 million in revenue as quickly as possible. He projects about $300,000 in annual revenue from each dog-and-handler team, so his game plan requires employing hundreds of dogs and trainers. Competing in the marketplace poses special problems because the scope for cost-cutting is minimal; any reduction in quality could be fatal to the firm’s competitive position.

What is Dunnigan’s strategy for rising to this competitive challenge? According to author Dean, it would seem that Dunnigan is instead planning on cutting competitors down to his size. “As much as anything, Dunnigan’s strategy seems to be to raise the industry’s profile anddemand that anyone offering canine detection adhere to standards that have yet to be formalized [emphasis added]. One challenge, he says, is that ‘everybody thinks his technique is the best.'”

It is worthwhile noting that even the federal government – thus far the leading purchaser of detection-dog services – has so far feared to tread the line of standardization. “Detection dogs are such a freewheeling business that a U.S. government training standard does not exist among the many departments deploying them in the field,” Dean admits. The watchword of government is coercion and compulsion, so at first glance Dunnigan seems foolish for rushing in.

In a free market, Dunnigan is at liberty to promulgate whatever standards he chooses – for his own firm. He can advertise them in accordance with his inclinations and financial resources. He can contrast them with those of his competitors – or with those they lack.

But the phrase “demand that anyone offering canine detection adhere to standards” has a sound that is both familiar and worrisome to the veteran market watcher. It smacks of the classic American business strategy: get the government to suppress your competition. In this case, it would mean that Dunnigan is lobbying for passage of industry regulations that a fragmented industry of smaller operators would find costly and cumbersome. After all, they don’t have the resources of a CDRI or Auburn University to call upon. These regulations would raise costs in a highly competitive, low-margin industry. (“You wouldn’t believe how thin our margins are,” complains Paul Stapleton, son of the founder of MSA Security, pioneering private-security dog-detection firm and New York-market leader.) In turn, that would drive some firms out of business and reduce the supply of services, raising price for the remaining firms.

To the average person – the man or woman on the street, untrained in economics – a call for standards sounds innocuous and even praiseworthy. All of us have grown up hearing the phrase “the XYZ industry is not regulated by the government” used synonymously for “this industry is inhabited by dishonest, unscrupulous bastards who will take your money and your life without a second’s hesitation.” But to an economist, the “demand for standards” is seen in its true light – as a demand for regulation that will restrict competition at the consumer’s expense and for the benefit of one or a few firms in the industry.

Were we to summarize this rhetorical pathology, it would read as follows: “In order to protect buyers from being exploited by sellers, who may or may not possess mysterious means of providing this new and valuable service, standards of performance must be set. Obviously, these must be set by government because…because…well, because that’s just the way things are done. As a would-be leader in this field, I demand that government step in and set standards to save all of us sellers from succumbing to our own shortcomings.”

Evil Street Vendors

The great economist and multi-disciplinary theorist Thomas Sowell has specialized in exposing the logical shortcomings of conventional rhetoric. One of his most incisive exposes has been of the “powerful powerless” – groups of the lowly and disenfranchised whose economic prospects are customarily suppressed on the contradictory grounds that they somehow possess unfair advantages over ordinary people. Street vendors are charter members of this unfortunate fraternity.

The conventional case against street vendors was argued in a recent letter to The Wall Street Journal (11/11/2013). The author, one Jerome Barth, represents a New York business group called the 34th Street Partnership.

“The Journal has steadfastly defended street vendors in the past…It should follow from common free-market rules that this position is sound. However, in the case of street vending, it isn’t.” This stance is a backbone of the rhetorical practice known as “special pleading.” Free markets and competition, it grants, are wonderful things. They work beautifully – except in my particular case/industry/country/state/city/neighborhood. My case is special, exceptional. Why? Well…er…uh…because it’s mine.

“Street vendors are not necessarily the sign of a good economy or a good downtown. They are messy actors who usually have very poor aesthetics and offer a very uniform product of relatively low quality – when it isn’t counterfeit.” No doubt Mr. Barth would take strong exception if somebody referred to his colleagues in collective terms – “the 34th Street Partnership are sloppy businessmen with questionable ethics.” But he does not hesitate to herd all or most street vendors into one corral and brand them with the same iron. They don’t merely offer a uniform product; they offer a very uniform product! (In political rhetoric, nothing succeeds like excess.)

Of course, we all know that you just can’t trust vendors who sell uniform products of relatively low quality, like McDonald’s, White Castle, Wal Mart and Dollar Store. But it isn’t enough that the street vendors be pigeonholed as specialists in inexpensive, homogeneous goods – no, they must be stigmatized as crooks, counterfeiters. This is just another way of saying: “The customers of street vendors are complete idiots, since they cannot detect forgeries of the simplest, least complex goods; instead, they not only fall for the fakes but apparently keep coming back for more!” And since the customers of street vendors are the same people who patronize the downtown shops of the 34th Street Partners, Mr. Barth is stigmatizing his own customers and those of his colleagues.

“Further, they [street vendors] seldom follow rules, often don’t pay taxes, often exploit workers and leave messes behind.” Throughout the world, street vendors are the lowest of the low among businessmen. Often their net worth travels with them in the cart or wagon that dispenses their wares. The working capital with which they purchase tomorrow’s inputs is gained from today’s sales. But in Mr. Barth’s telling, these powerful powerless wield powers unknown to mortal businesses. They ignore laws, evade taxes, exploit workers – does this mean that a one-man hot dog vendor acting as entrepreneur exploits himself acting as laborer? Meanwhile, Mr. Barth would have us believe that police are the powerless ones. In reality, the police typically act in concert with Mr. Barth and colleagues to roust street vendors on the slightest pretext. Of course, nobody disputes that street vendors should pay taxes and respect property rights, and they possess no special rights or immunities that would prevent this.

“…The great retail places of the world…don’t have street vending or…limit it to products that enhance the street experience and have difficulty paying for storefronts (flowers, newsstands, shoeshine).” The criterion “products that enhance the street experience” is utterly subjective; it allows would-be cartels like the 34th Street Partnership to restrain trade and restrict competition while holding up a fig leaf of pretense by allowing vendors as long as they don’t compete with incumbent merchants. Any downtown habitué knows that flower stands, newsstands and shoeshine parlors do sometimes operate behind storefronts; this is merely the pretext under which the cartels grant them the special privilege denied to competing street vendors.

If there is even a tiny grain of truth in Jerome Barth’s case against street vendors, it would have to crystallize around the issue of spillover costs resulting from a transient vendor who cannot be traced and braced for costs of cleanup. Presumably, this was the rationale for Atlanta’s awarding a franchise rather than allowing open competition among street vendors (“…in the case of Atlanta’s concession of street vending to a single group. namely General Growth Properties”). However dubious this example and this practice may be, it serves to demolish whatever remains of Mr. Barth’s argument against street vending.

The outlines of this second anti-competitive rhetorical pathology are as follows: “Free markets are wonderful for everybody else, but not for me because my case is special. I am the helpless victim of invidious, evil forces beyond the reach of normal market competition. The law must suppress these competitive forces or they will destroy me. (The fact that these powerful evil forces consist of people who are otherwise the most powerless people in society is a paradox that I do not choose to address or even recognize.)”

It’s the Gypsy (Cab) in My Soul

Although both of the first two examples are recent, the attitudes displayed therein have been around for many years. A classic case amalgamating the two rhetorical stances involves the “gypsy” cab business. Gypsy (illegal) cabs operate throughout the world. Taxicabs are heavily regulated around the globe and gypsy cabs are linked to regulation the way pilot fish are attached to whales.

In its paradigmatic form, taxi regulation limits the number of taxis allowed to operate within a political jurisdiction and also prescribes the specific fare structure the taxis are allowed to charge. In effect, the governmental body regulating taxis functions as a cartel that blocks entry of new firms into the market. This limitation places an upward bound on the amount of taxi service that taxi consumers can receive, thereby bolstering the high price set by the regulators. In turn, this allows monopoly profits to be earned on the supply side of the market. Whether the beneficiaries of those profits are taxi firm owners or drivers or somebody else depends on various factors, some of which we will elaborate below.

New York City is the classic case of taxicab regulation resulting in monopoly profits and the proliferation of gypsy cabs. Beginning with the Haas Act in 1937, operators of New York City taxicabs were required to purchase medallions as emblems of licensure. During World War II, 1,794 of the original 13,566 medallions were returned to the city by entering servicemen. That left 11,772 outstanding medallions – a total that has not increased since then.

Meanwhile, the demand for taxicab service in perhaps the most tightly concentrated population in America continued to increase. There was no way to legally increase the size of the taxicab fleet and no way to legally raise the price of service. Thus, waits for service became intolerably long. Service to poorer neighborhoods deteriorated disproportionately, especially to ghetto communities where the risk of robbery and injury to drivers was thought to be higher. Eventually, local residents responded by reallocating private passenger vehicles to the service of commercial passenger transportation; they installed meters, top lights and lettering identifying the vehicle as a taxicab. These gypsy cabs found a plentiful market for their services inside the ghetto and even ventured into the larger community in search of business.

Sometimes private vehicles were conscripted to serve as livery vehicles or jitneys. In principle, livery vehicles are defined as for-hire transportation vehicles engaged via telephone or appointment only and not responsive to street hails. In practice, though, this distinction gradually blurred and the unmarked livery vehicles became de facto taxis. Individuals who contracted with grocery stores to provide exclusive “car service” for shoppers became the modern-day prototype for jitneys. With very few exceptions, these too have traditionally been illegal in America but have been tolerated by authorities beset by complaints about poor taxi service.

Why not simply open up the taxi business for competition? In New York City, the monopoly profits available in the taxi market have been reaped by owners of the medallions. Although it is the drivers who pocket the money derived from the high taxi fares, the value of those monopoly profits is capitalized into the price paid for the medallion. (The medallion is legally transferable, so a retiring driver can cash in his or her investment by selling the medallion to a prospective entrant into the business. The price of medallions fluctuates; it has often reached six figures over the years.) If the city were to suddenly allow free entry into the taxi business, the market value of those 11,772 medallions would suddenly fall to zero – and 11,772 medallion-holders would raise hell when their capital asset suddenly evaporated in their hands. Obviously, New York City politicians fear the volume of this outrage more than they welcome the more moderate gratitude that would flow in from taxicab consumers.

The official rationale for taxicab regulation dates back roughly a century, when the automobile was young and taxis competed with buses and streetcars. City government wanted to protect buses and streetcars from the competition of taxis. But they couldn’t very well say that they wanted to deny taxicab consumers the transportation services vital to their well-being. Instead, they used the same sorts of arguments that survive to this day in the official pamphlets and websites that warn against gypsy cabs.

A famous 1969 New York Times piece warned its readers that, by riding in a gypsy cab, “…you may be putting yourself in the care of a murderer, a thief, or even a rapist [!]. The gypsy driver, by the very fact that he solicits on the street, is at least a crook, but he may have big ideas which include you.” Of course, the inherent contradiction implied by this characterization is never broached. The very thing that makes the gypsy cab attractive is the possibility of earning money by transporting passengers. In order to do this, the vehicle must be made both conspicuous and distinguishable. But driving a big yellow vehicle marked with a number is not conducive to the successful commission of a crime, since it makes its driver both highly visible and easy to trace.

One would suppose that the prospect of traveling with crooks, rapists and murderers would deter prospective passengers of gypsy cabs, but evidence supports the conjecture that gypsy cab operations were and are “flourishing,” to borrow the characterization of black economist Walter Williams. Various estimates have been made of the gypsy cab influx within New York City. One Taxi and Limousine Commission chairman put forward the figure of 15,000, which would have made the gypsy cab business larger than the licit medallioned fleet.

This suggests that gypsy cabs are, in the aggregate, more beneficial than legal cabs. Throughout New York City, but especially in the ghettos and low-income areas, people dependent on commercial transportation are willing to use unauthorized means of transport rather than wait for hours on authorized transport that may never arrive. More pithily put by Wikipedia: “Passengers sometimes find illegal cabs to be more available, convenient or economical than licensed cabs.” Gypsy cabs are often cheaper than licensed cabs in absolute terms. If one thinks of a time delay in obtaining a cab as a form of higher price – foregoing time otherwise available for work or leisure, just as paying a money price entails foregoing alternative consumption goods or saving that could be enjoyed – gypsy cabs are clearly the lower-priced alternative to licensed taxicabs. Consequently, it is the legal taxicab industry that most assiduously demonizes gypsy cabs through propaganda such as that in the quoted New York Times piece above.

Seldom has reality been so at odds with rhetorical pretense as in the taxicab business, where the conventional thinking is bereft of any economic content. Expressing the conventional view compactly would yield something like this: “Crooks are people who violate the law. Gypsy cab drivers violate the law. Therefore, gypsy cab drivers are crooks. Crooks rob, rape and kill people. Therefore, gypsy cab drivers also rob, rape and kill people. You should be happy to wait hours for a licensed cab and pay its sky-high fare rather than risk robbery, rape and death in a gypsy cab.” As with the other rhetorical pathologies we exposed, this one is utterly without redeeming social value. It serves the interest of the taxi cartels and bureaucrats and nobody else.

Business and Competition

These few examples point to a great American truth. American business is devoted to the principles of free enterprise – but not to their practice. American business loves competition – for its rivals. The best way for a business to avoid facing competition is by removing competitors. The best way to remove competitors is by making them illegal or, alternatively, passing laws and regulations making it too costly for them to operate.

DRI-424: The War on Big Soda

Some moments in the course of human events bear the imprint of destiny, as plain as if stamped by the USDA. Such a moment was last week’s announcement by New York City’s Mayor Michael Bloomberg of a ban on commercial sales of high-calorie beverage servings in excess of 16 ounces.

Every public-policy proposal has virtues and drawbacks. But historic significance is often gauged more by reaction to the proposal than by its intrinsic worth. This applies to Mayor Bloomberg’s so-called “Big Soda Ban” (hereinafter, BSB) – a reference to the oversized servings at which the measure is targeted.

While the measure itself has attracted widespread reaction, it has mostly been visceral and superficial. Yet it is the BSB’s implications, rather than its literal impact, that should concern us most. They tell us how far down the road to serfdom we have come.

BSB and its Effects

On May 31, 2012, Mayor Bloomberg announced that he would propose a ban on 16-ounce or larger servings of beverages containing 25 or more calories per 8 ounces of volume in restaurants, delicatessens, arenas and by street vendors. Curiously, convenience and grocery stores are exempted from the proposal. Calorie content in beverages results from adding carbohydrates in the form of various sugars, so the incidence of the ban falls on large servings of sugared drinks. Violators of the ban would face $200 fines.

The ostensible intent of the ban is to reduce the incidence of obesity among New Yorkers. The rationale apparently runs as follows: carbohydrates contain calories and large amounts of sugared drinks contain large amounts of calories – therefore, banning large servings will reduce consumption of sugared drinks, thereby lowering total calorie consumption, resulting in weight loss.

If only life were that simple. But then, if life were that simple, totalitarian countries would be the happiest and most prosperous nations.

Opposition to the Mayor’s proposal was full-throated and immediate. One vocal contingent highlighted the futility of the BSB by listing its omissions. For example, the proposal left untouched sugared beverages like fruit juices, which contain naturally occurring fructose as well as added sucrose. Milk shakes and malts were unmentioned; these contain not only sugar but high concentrations of fat, and are offered in large servings. Alcoholic drinks, which contain very high concentrations of nutritionally dubious sugars like maltose, were ignored.

Another common reaction noted the ease with which BSB could be evaded. The proposal does not prevent consumers from buying multiple smaller servings, either simultaneously or in succession. Indeed, the Mayor’s focus on restaurants and delis seems especially quixotic since the custom is to provide (one or more) free refills, thereby vitiating the need to order the larger serving in the first place. Meanwhile, convenience stores – where marketing gimmicks like Quik Trip’s “Big Gulp” were devised precisely to counter competition from fast-food and sit-down restaurants – can blithely continue supersizing their beverage offerings as before.

Recognition of BSB’s clumsiness and incompetence seems to have dulled appreciation of the pain it would inflict. One potential advantage of larger orders is economy; for example, you might well pay a lower price for one 16-ounce soda than the combined price for two 8-ounce drinks. Not any more! It is easier to make one visit to a concession stand than two – oops, too bad. The fact that some types of businesses are harmed (arenas, street vendors) relative to others (convenience stores) is more evidence of the gains and losses randomly distributed by the BSB.

Opposition to the BSB is miles wide but only inches deep. The unspoken consensus seems to be, “This plan is so confused and contradictory that it will never work.” This holds open the possibility that a better plan – perhaps more comprehensive and coercive in nature – would succeed. Few people are willing to come right out and say that Mayor Bloomberg had no right to act as he did – either because he trespassed on the sacred domain of individual choice or because he exceeded the constitutional powers granted a municipal executive.

Government as All-Purpose Problem Solver

The BSB further cements a widely shared perception of government as all-purpose problem solver, the Mr. Fix-It of First Resort. We associate this attitude with the Left. The plain truth is, however, that liberals and socialists are an underwhelming minority. Our current complacency with government intervention of all sorts could never have developed without tacit acceptance by conservatives.

The latent disposition was always there. From its earliest days, modern conservatism often deserted free trade in favor of tariffs and quotas. Anti-communism resigned the movement to the permanence of a lavish, wasteful Pentagon, fighting its way through red tape. The drug war and consequent evolution of local police toward paramilitarism were tolerated as part of a cultural pushback against the permissive Left.

Gradually, the Right discovered that big government came in downright handy in enforcing its own prejudices. That attitude emerges in support for Bloomberg, as evinced in comments like “It’s about time somebody did something about those people – I’m tired of paying high health-insurance premiums and taxes to subsidize their overeating.” A subset of the Right has given up on getting government out of health care and settled for co-opting it as their proxy nanny.

Bloomberg on Bloomberg: Grasping the Enormity of His Action

Rather than comparing Mayor Bloomberg to Huey Long, commentators have been more likely to liken him to Huey of Huey, Dewey and Louie. Reading the Mayor’s own comments on his soda ban is the surest antidote to this complacency.

“We’re not taking away anyone’s freedoms.” Exactly how does a head of government ban the sale of a popular consumption item without taking away somebody’s freedom? One suspects Mayor Bloomberg is trying to suggest that, after all, the whole issue of soft drinks is pretty trivial. But he can’t have it both ways. Elsewhere, he refers to studies showing the calorie consumption from soft drinks is a leading contributor to obesity. Now he’s trying to defuse criticism by undercutting his big point.

“It’s not something the Founding Fathers fought for.” They didn’t “fight for” soft drinks, but their writings referred specifically to the niggling, unwarranted intrusions of the British into their commerce and affairs.

“In moderation [soft drink consumption] is fine… You tend to eat all of the food in the container. If somebody put a smaller glass or plate or container in front of you, you would eat less.” By his own logic, Mayor Bloomberg would be fully justified in next limiting the physical volume of food served in restaurants, delicatessens, arenas and on street carts. Indeed, we should expect the delivery of just such limitations as soon as the BSB fails to relieve the nutritional emergency invoked to justify it. Can’t you already hear the Mayor at his press conference? “Well, the soda ban didn’t work the way we wanted to, so we had to try something stronger. When somebody puts less food in front of you, you eat less, right?”

“We’re just forcing you to think about what you’re buying.” Aside from the fact that government has no warrant or authority to force its citizens to “buy twice so they’ll think twice,” there is the implicit premise behind this claim to consider. Mayor Bloomberg’s theory of consumption – if one may so dignify his megalomaniac diktats – is that we buy and eat on impulse, so government regulators have no choice but to interdict our impulsive actions. But what makes Mayor Bloomberg – or the regulators or academicians who support him – a superior breed of human who is somehow immune to the irresistible impulses that cripple the rest of us? Come to think of it, how do we know that it isn’t Bloomberg himself who is irrationally acting on impulse? Given these comments and the surrounding analysis, that conclusion is surely indicated.

The Roots of the “Obesity Epidemic”

Mayor Bloomberg clearly understood his own action to be extreme. When the time came to justify his actions, he played the post-9/11 trump card: emergency measure. After all, we can’t just stand here and do nothing in the face of this obesity epidemic, can we?

Our reflexive deference to government has blinded us to the fact that obesity is not an epidemic. Obesity is not transmitted contagiously between individuals; it is not even an illness. It is the result of over-nutrition – too much of a good thing. Stopping an epidemic may require government coercion in order to stop the spread of contagion and administer vaccine. In contrast, government intervention in the area of obesity is not only unnecessary, it is counterproductive.

A recent Wall Street Journal editorial claimed that most obesity is caused by excess caloric intake. This would make BSB a trivial exercise since a 16-ounce soda contains fewer than 300 calories. The Journal is doubly wrong. The evidence continues to accumulate that the dominant cause of obesity is blood-sugar irregularity, not caloric excess per se. Consumption of carbohydrates that are absorbed too rapidly into the bloodstream triggers the release of insulin into the bloodstream, which in turn signals the body to store fat rather than consuming it as energy. This is the condition known as Type II diabetes. Sugared sodas can be a key contributor to this disease – if you happen to suffer from it or be predisposed to it. Carbohydrates that do not contain fiber – ranging from simple sugars to white potatoes to processed breads – are culprits. Fiber, fat and protein play the beneficial role of slowing down the conversion of carbohydrates to glucose in the bloodstream.

We know all this thanks to the pioneering efforts of Robert Atkins, whose low-carbohydrate diet was introduced almost forth years ago. Atkins was demonized by the nutrition establishment and his diet was panned as unsafe. Meanwhile, the authorities – including the federal government – promoted carbohydrates as the staple of a healthy diet and our primary source of energy. But so many people lost so much weight on the Atkins diet that private researchers were forced to study it. Atkins’ grasp of the underlying science may have been uncertain, but his central principle – that it was not dietary fat consumption but rather carbohydrates that promoted obesity – was vindicated by time and testing.

The devaluation of carbohydrates has been accompanied by a revaluation of fat and protein. We now strongly suspect that low-fat diets may actually be dangerous for those who overproduce a certain type of LDL cholesterol. Protein is once again assuming its rightful place as energy source and building block of muscle. One corollary to this is that meat is no longer verboten.

Hayek on the Rule of Experts

Decades ago, Nobel laureate F. A. Hayek insisted that central governments could not successfully plan an economy, even with the aid of experts in the various industries and professions. The information necessary to coordinate supply and demand was not centralized in the hands of government or a few experts, but rather decentralized in the minds of billions of individual producers and consumers. Only a free market process could unlock it and render it effective.

The new learning on diabetes and obesity is one locus classicus of a Hayekian market process at work. An entrepreneur like Atkins refuses to swallow the conventional thinking of government nutritionists. He puts forward a new hypothesis. The establishment experts loathe it, but consumers love it. It receives the truest of all tests – the market test – and the clamor of consumers forces the reevaluation of the product by researchers.

Milton Friedman once compared the actions of government bureaucrats to that of leader ducks who fly at the head of a V-formation until they look back and notice that their followers have deserted them. Then they scramble to catch up to the formation and resume their place at the head. That is what establishment nutritionists have done. The ones outside government have adopted Atkins’ ideas, or variants of them, without giving Atkins credit for them. The ones inside government or academia are calling for government regulation of consumers’ nutritional choices before everybody becomes aware that government regulation is superfluous at best and deleterious at worst.

Another illustrative case is cancer research. For decades progress was painfully slow. Scientists began to make headway when they tumbled to the fact that cancer is not one disease but many. Even more illuminating is the fact that individuals react to the disease and respond to treatments differently. The best way to proceed is to allow each of us to craft our own therapy in partnership with our personal physician and oncologist. Instead, the federal government and FDA have persisted in imposing a “one-size-fits-all” approach on cancer patients, using tests of statistical significance to gauge the success of cancer drugs and condition their approval. The pretense that doctors treat statistical populations rather than individual patients has killed many thousands of patients prematurely. Now that effective treatments are on the horizon, the prospect of a rising death toll is triggering a veritable mutiny among the community of cancer patients and physicians.

It is not coercion and control by central governments that will overcome obesity and diabetes. Government was a principal stumbling block to enlightenment in these areas. The free market is now succeeding where government failed.

Politics vs. Markets

Mayor Bloomberg is not guided by science or free markets. Instead, he heeds the dictates of politics. In markets, individual patients and their doctors have the strongest possible incentives to find out what actually works and act upon it – patients because their happiness depends on it and doctors because their livelihood depends on it.

But incentives in politics do not lie with uncovering the truth about obesity and diabetes. Millions of Americans are losing weight and controlling their diabetes, but the measure of this success will be taken only gradually over a period of years in the medical journals and epidemiology data. By then, Mayor Bloomberg will be dead or out of politics. The truth will do him no good. He is interested only in what will win him votes in the short-term present – which means looking as busy as possible and pressing the emotional hot buttons of the electorate. And he has succeeded, judging from the numbers of people pounding their fists and yelling, “Somebody is finally DOING something about those gluttons who are getting fat on my dime!”

The Philosophy of Freedom

Commentators on BSB sometimes allude to our “freedom to choose” before dropping the subject in favor of wisecracks about “nanny Bloomberg” or diatribes against the overweight. Yet freedom should be at the heart of the debate.

Philosophers and political scientists have long argued whether freedom is a good thing for its own sake or strictly because its consequences are favorable. Or, rearranging the argument, would we value freedom so much if it did not lead to more material wealth and happiness than the alternative?

However interesting the question may be in the abstract, it is moot in the practical sense. Freedom is preferable both morally and practically. The doctrine of free will allows us to make incorrect moral choices – that is what gives morality its meaning. It surely allows us to err where only our own welfare is at stake. We are not obligated to bail out our fellow human beings out of their personal difficulties, because they would then lack the incentive necessary to pursue the good life. But we are encouraged to help those who fail through bad luck or who express sincere repentance for past misdeeds. Our voluntary choice to help others gives our decision its moral dimension.

The history of the 19th and 20th centuries is a triumph of freedom over totalitarianism, of capitalism over socialism. The positive proof lies in the victories of free trade and anti-slavery in 19th century Great Britain, the rise of U.S. capitalism, the German and Japanese economic miracles after World War II, the resurgence of the U.S. and Great Britain under Reagan and Thatcher, the rise of the Southeast Asian Tigers and the birth of economic development in India and China. The negative proof was provided by the end of communism in Soviet Russia and China, the death of fascism in German, Italy and Japan, the fall of British Socialism after World War II and the suffocation of one-party cronyism and dictatorship in Africa and South America.

In light of all this, government’s place as the default option for every choice is astonishing. Despite being wrong in theory and practice, despite an unbroken record of failure, government nevertheless continues to be tapped to handle whatever comes up. To hear Mayor Bloomberg talk, you’d swear that freedom was hopelessly incapable and government was infallible. Actually, it’s the other way round.

Steppingstones to Serfdom

As noted above, BSB seems so comically inept that it has lulled many into not taking it seriously. That is a grievous mistake, one not made by Mayor Bloomberg himself, who treats the issue with the utmost gravity. He is knowingly engaged in a step-by-step process of reducing our freedom. It began with his ban on trans fats. When nobody thought it worth their while to stop him – probably because nobody wanted to be stigmatized as being in favor of consuming a substance known to be harmful – this established a precedent that set the stage for the nextintervention, and the next and the next. As so it goes. Each new intervention sets the precedent for the next one. That is why it is always worthwhile to defend freedom, no matter how trivial the freedom being defended may seem.

Now Mayor Bloomberg is trying to stop New Yorkers from consuming soft drinks. Few consumer goods are as thoroughly American in their essence. Around the world, Coca Cola is an instantly recognizable symbol of American culture. The amount of happiness we derive from soda pop is incalculable, but palpably enormous. Arbitrarily, on the phony pretext of an epidemic, with no hope or pretense of distinguishing between those actually hurt by soft drinks and the rest, Mayor Bloomberg proposes to establish the precedent of directly meddling in his constituents’ diets.

If, as expected, the New York City Board of Health rubber-stamps the Mayor’s proposal, is there any limit to what he can do? If a city mayor can casually reduce consumer choices without any warrant or medical justification, is there any limit on what any government can do to anybody, anywhere, anytime?

The late Keynesian economist and Nobel Laureate, Paul Samuelson, of economic textbook fame, once lamented the respect accorded colleague F. A. Hayek’s cautionary polemic, The Road to Serfdom. Hayek pointedly exposed the threat to freedom posed by central economic planning and the welfare state. Where are the barbed-wire fences and concentration camps? Samuelson demanded. The West has embraced the welfare state, he maintained, but we have not lost our freedom as Hayek foresaw.

Of course, history does not repeat itself verbatim, but its great themes do recur. Samuelson died in 2009, just in time to miss seeing Mayor Bloomberg at work. From here on, Bloomberg will serve as walking rebuttal to those who doubt Hayek’s thesis.