Overruled


Libertarians Are Dumb, or Why We Eat Heinz Ketchup
March 14, 2009, 3:50 pm
Filed under: Ian | Tags: ,

ketchupMatt Yglesias considers the libertarian conceit that we don’t need government oversight of product safety, because “consumers want to buy safe goods. This means that producers want to be able to credibly signal the safety of their goods. That means that there ought to be, in a [regulation] free world, a market opportunity for [] firms that rate the safety of consumer products.”  Matt’s discussion of this conceit focuses on the credit rating industry, but the libertarian premise was debunked over a hundred years ago in a much simpler market: food.

The Nineteenth Century saw the rise of processed food.  Urbanization meant the the growth of population centers which were too large to be supported by the crops grown on nearby land, and railroads allowed food grown many miles away to be proceessed and shipped to Chicago or New York or Philadelphia.  With processed food being rather new and the federal government being rather unambitious by modern standards, however, there was no federal regulatory apparatus governing this industry.

As a result, consumers had no idea what they were really getting when they went to buy groceries.  Products sold as “strawberry jam” were actually a mixture of glucose, food coloring, grass seed, and gelatin.  Rotten eggs and rancid butter were often pulled from the shelves, deodorized, then sold to unsuspecting families.

Among the worst offenders was the ketchup industry.  Not wanting to let rotten tomatoes go to waste, ketchup producers discovered that, with enough vinegar and spices, the taste of moldy tomatoes in ketchup could be completely masked, and the result was a product that was only slighly more watery in consistency than ketchup made with fresh tomatoes.  If the color was off, red food coloring would do the trick.

Against this background, the H.J. Heinz Company was formed.  Heinz’ first product was horseradish, which they marketed in a clear jar to show off the fact that their horseradish had no visible impurities.  A few years later the company began selling ketchup, and much of their marketing focused on the fact that Heinz ketchup did not contain any rotten tomatoes—in stark contrast to many of their competitors.  A relatively recent publicity piece about Heinz claims that “Henry Heinz recognized before most of his peers that pure food is not only good for you, but is also good business,” but the truth is that Heinz’ promise of a safe product was not itself sufficient to capture the ketchup market.  By the start of the Twentieth Century, Heinz was a major ketchup producer, but so were several companies who padded their bottom line by mixing rancid tomatoes into their product.

Seeing an opportunity, Heinz joined the chorus of scientists, consumer advocates and government officials who were clamouring for federal oversight of the processed food industry, even sending future Heinz CEO Howard Heinz to lobby President Theodore Roosevelt in favor of a the Pure Food and Drug Act, which prohibited some of the processed food industry’s most revolting practicies and gave enforcement authority to the agency which would later become the FDA.  In 1906 the Act passed, and most of Heinz competitors were pushed out of business.

Because Heinz was one of only a handful of major ketchup producers who were already in the business of mass producing ketchup solely from fresh tomatoes, they quickly capitalized on the vacuum that formed as the rancid ketchup industry collapsed.  Heinz became the market leader, and it remains so today.  60% of American ketchup sales are controlled by Heinz.

My point in telling this story is not to give publicity to the H.J. Heniz Co., although if their marketing department would like to thank me, I’m happy to accept a check.  My point is simply to indicate that, despite Heinz’ belief that “pure food . . . is good business,” the truth is that thousands of American consumers bought rancid ketchup for decades, even though they had the option to choose Heinz’ safer product.  Market forces left thousands of Americans sick from tomato mold.  It wasn’t until the federal government got involved that rotten tomato ketchup left the shelves of local groceries.

UPDATE: Natasha Chart has more.

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14 Comments so far
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I would tend to agree with you that we may need some government intervention, not to protect consumers against the free market, but to protect the free market so consumers can play their proper roll.

Inherent in a free market is the ability to understand exactly what you are buying. Consumers who are lied to cannot make proper choices. That isn’t a failure of the free market, it’s a failure of human morality.

If ketchup containing some rancid tomatoes doesn’t make me sick, and is cheaper, I may very well choose to buy it. But I have to know what I’m buying and be able to make the choice.

The problem with mortgage-backed securities is that no one was willing to admit that they didn’t know what they were selling. They thought they were mitigating increased mortgage risk (encouraged by the government) by splitting up mortgages in tinier fractions. To use a ketchup analogy, they thought they could throw a little bit of rancid tomatoes in their ketchup, hoping that dilution was the solution.

The only problem was, riskier mortgages/rancid tomatoes were easy to make, and soon the ketchup was nothing but rancid tomatoes, and their was no dilution going on.

When congress and industry agreed that mortgage backed securities were so complex they weren’t worth explaining, they both were operating against free market principles.

You would never see a food label that said “This food is too complex to list here, but it is five-star-rated.”

There is a fundamental misunderstanding by many that free markets encourage lying and cheating to increase profit. That’s crap.

Free markets are about making things people want to buy, being honest about your product, and charging the price you want. It’s not economical anarchy.

We need to protect the free market, because in a truly free market, consumers can easily protect themselves.

Comment by MartinJ

Libertarians make two basically incorrect assumptions about the world. First, that people always act rationally and in their own interests. Second that people have access to all the information they need to make a rational decision in the first place. Neither of these assumptions are true so in the real world economic Libertarianism fails just as badly as Communism.

Comment by Gordie Howard

“Market forces left thousands of Americans sick from tomato mold.”

Were people really getting sick from tomato mold, or did it just not taste very good? Seems like a pretty big leap of logic.

Comment by Tim

Pure food? Ketchup is made with rotten tomato’s.Also, I’m intelligent enough to make my own decisions. The government has no constitutional right to protect me from myself.

Comment by Dennis

“Libertarians make two basically incorrect assumptions about the world. First, that people always act rationally and in their own interests. Second that people have access to all the information they need to make a rational decision in the first place. Neither of these assumptions are true so in the real world economic Libertarianism fails just as badly as Communism.” Gordie Howard

Great point. I can’t say it any better

Comment by BigBlackMan

” My point is simply to indicate that, despite Heinz’ belief that “pure food . . . is good business,” the truth is that thousands of American consumers bought rancid ketchup for decades, even though they had the option to choose Heniz’ safer product.”

but without regulation of advertising and marketing claims, consumers actually had no real way of knowing if heinz’ product was, indeed, safer.

Comment by AJ

The argument against the possibility of having enough information to make rational decisions in all cases through the free market:

Say we got rid of the FDA, and as libertarians suggested use private firms to rate food.

What happens if two major rating companies give a product wildly different ratings?

How does one choose which company’s rating to accept? (who rates the companies who rate products?)

How would rating companies make money? They sell no product, and if they make money from the products that they rate directly, then there is a conflict of interest.

In our current business environment, big business is less trusted than congress. Who would have the moral standing to create a rating company large enough to deal with the multitude of transactions that happen in America. If it is all small companies, then the effectiveness is extremely diluted because there will be many more ratings to evaluate.

I think the second critique of libertarianism is better than the first for this reason. People can make good decisions. Who would choose rancid tomato ketchup when given the alternative?
However, if people have trouble figuring out if any product they buy might be made with substandard materials, then they will be unable to make that choice. In the absence of government, you have an extremely high burden of proof to show that the free market would or even COULD make all this information known in a way that makes it possible for the consumer to easily find it and use it to make rational decisions.

The argument against people acting rationally:
Young Earth Creationists.

Comment by JK

Libertarians are easy to explain away. These are people who don’t understand humanity, people, or systems. They can’t understand how people can be manipulated, they can’t understand how actors interacting produces behaviour. Because of their lack of understanding in systems, and systemic effects they are attracted to something they an understand: simple, easy to apply rules that aren’t very abstract.

So now they have simple rules but their lack of systems thinking skills means they can’t reason about the system-effects of these rules. This is why they stay libertarian, they can’t comprehend the consequences.

It is really quite humorous!

Comment by Larry Summers

hi

Comment by niss17

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@ Dennis,

A small but possibly salient point. Nowhere in the constitution is the government given any rights–these are assigned to the people. The government is assigned powers. Now that the government is out of it, examine your own rights. You have free speech, right to expedient trial by jury, etc. — but not the right to opt out, unfortunately. So ultimately, if a majority of your neighbors agree, either directly or through representation, that that constituency deserves protection, then the government is enabled with the power to protect.

If you don’t like it, move to New Hampshire and try to affect a libertarian solution there, basically–change is written into the document.

Comment by Nate

“Libertarians make two basically incorrect assumptions about the world. First, that people always act rationally and in their own interests. Second that people have access to all the information they need to make a rational decision in the first place. Neither of these assumptions are true so in the real world economic Libertarianism fails just as badly as Communism.”

I disagree with this statement, Libertarians make these assumptions when discussing how a free market works. Most Libertarians recognize that the government will play a role in safeguarding the free market, whether that is enforcing private contracts between people or enforcing transparency & open honesty in product that are brought to the free market. While this is contrary to some hardcore Libertarians, this would still be a far freer market than the mire of selective and dishonest regulation we have in our current market. Today, the government seeks to “stimulate” the economy by redirecting capital as they see fit. This is entirely contrary to a free market because a group of people (the gov’t) have declared their decisions surrounding capital allocation to be superior to the decisions made by millions of individuals. This process eventually brings disaster to the market since the gov’t’s singular decision will always be worse than the aggregate of millions of individual decisions. (case and point: Communism)

Lastly, your point/proof about acting rationally is a bit of a non sequitur. People can act irrationally in their beliefs, when it comes to their wallet people will typically act in their best interest and if they don’t, they have nobody to blame but themselves for the squandering of their assets. This is the true power of Libertarianism: people having clear ownership of themselves and their actions.

Comment by Eric Gilpin

Hello Sir!
Very interesting article, i have bookmarked your blog for future referrence. Best regards

Comment by invesmeri




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