Questions For Libertarians – Corporate Deception & Regulation

A combination of two related question from @simonr916

a).Without regulation, what is to stop companies from acting
in amoral or immoral ways to the detriment of all

b).Without regulation and controls, how can we avoid being
deceived and make meaningful choices?

A libertarian world would permit snake-oil salesmen to tour from town to town, making fantastical claims to the poorly educated citizenry (no state education remember) but would also allow big companies to say what they liked.

So tobacco companies could still be telling us that smoking cures asthma, and we’d have no way of knowing how much fat, salt and sugar there is in a happy meal.

Perhaps the first thing to point out is that even with state regulation and controls we are not protected from deception. Homeopathy practitioners, Tarot card readers, psychic healers and all manner of nonsense peddlers continue to operate in our state regulated society. Exploiting the wise state educated citizenry on a daily basis.

Tobacco companies carried out their historic deceptions in a statist society not a libertarian one and  we have recently had the joys of horse meat in our “beef” despite the state funded Food Standards Agency regulating this industry.

You cannot prevent people from saying things that are untrue, unless you are an omniscient dictator.

What matters is how you deal with people who knowingly deceive.

Lets compare the statist and libertarian response to a hypothetical example of a company selling a pleasant tasting drink, Brand X. The company knows it causes cancer, but it is very addictive, causing customers to buy 20 to 40 cans a day and once they start they will be brand X drinkers for life. It is highly profitable product and all the executives are on six figure profit related bonus schemes.

In the regulated statist world
People start to get cancer.
People start to make connections and start to suspect that the problem is with Brand X. They call the authorities who have limited fixed budgets and decide that it is not cost effective to investigate this now, they have other priorities.
More people start to get cancer and more people call the authorities.
Eventually they decide the matter must be investigated and schedule some research.
The research is state funded, budgets are tight and it may take many years to be started. Finally the evidence is in and the case is overwhelming that Brand X is to blame.
Unfortunately the state is earning large amounts of tax income from the sales of Brand X and has a conflict of interest in banning the product.
The chairman of the company is also a big donor to the political party in power and entertains many politicians on his luxury yacht in the Bahamas each year.
A compromise is reached and they negotiate some laws that mean the packages of Brand X have to carry a warning and fine the company several hundred million pounds for deception.
The company pays the fine by missing a dividend to the shareholders.
The executives get to keep the six figure bonuses they made in each of the ten years before the problems were identified and action taken.
Other company executives see this and decide that the punishment for deception is nothing compared to the bonuses they can earn from the extra profit.

They launch brand Y the following week and Brand Z the week after. Incidences of unexplained cancer continue to rise.

In the libertarian world 
People start to get cancer.
People start to make connections and start to suspect that the problem is with Brand X. They call a private law firm.
Seeing the opportunity for a profit from a contingency fee arrangement, the private law firm hires a private research firm immediately to do some preliminary research.
The results look damaging so they pay to have a full study done immediately.
The evidence is overwhelming against brand X and the law firm takes action.
Since there are no limited liability corporations in a libertarian society the individual executives and investors are held personally accountable.
Libertarian justice operates on the principle of restitution for the victims. Those managers or investors the court is satisfied knew brand x caused cancer are guilty of murder. Libertarian punishment is set by the victims or their heirs and for murder the maximum punishment is the death penalty.
The injured parties signed an agreement with the law firm allowing many of the more junior guilty parties to buy themselves out of their punishment by selling all their possessions including their homes, with the money being paid in compensation to the victims and their families after covering the legal and research costs.

The managing director and senior executive team are executed at the request of the victims. The share price plummets costing individual investors most of their life savings.

Other executives see this and decide that deception is very risky.
Investors see increased risks in the food and drink industry and refuse to get involved with any company unless they hire an independent research firm to confirm the safety of all products before launch.
Junior managers and employees refuse to work for food companies that don’t allow staff association appointed researchers to check product safety before launch.

In the coming months Brand P, Brand Q and Brand R are retired and withdrawn from the market. Incidences of unexplained cancer fall steadily.

 

To be clear there is no system that will ensure nobody is ever deceived.
You cannot regulate and investigate everything so you need consumer or academic suspicions to uncover potential malpractice.
Private, profit motivated law firms and research companies are structurally more responsive then fixed budget bureaucracies.
There are no conflicts of interest between a victim and the criminal who has harmed them, these are possible between criminal and state.
State regulation and limited liability protection creates moral hazard for Executives, employees and investors. Libertarian restitutional justice and personal liability removes this.

 

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  • @simonr916

    In a world with regulation, individuals can and do sue companies. And criminal charges can be brought against directors of companies.

    The beneficial affects of the system you propose rely upon ending limited liability and increasing civil and criminal penalties for corporate misdeeds.

    I absolutely agree that regulatory systems are not perfect – in particular, as they are being stripped back by the current government.

    Whilst your proposed system may provide an effective deterrent against the most significant misdeed – knowingly selling lethal products by deception – but would be leas effective for lesser misdeeds. Your system also places the onus entirely upon the individual victims, whereby regulation acts on behalf of all in society, protecting the weakest and going some way to addressing imbalances of power.

    • @simonr916

      Also, whilst the penalties of misdeed in the system you propose (additional measures which could be introduced without abandoning regulation) the Libertarian writings I’ve seen on the subject of tobacco suggest an impossibly high burden of proof.

      • @simonr916
        • @simonr916

          and where effective protection requires powers of entry and inspection and/or to identify unacceptable risk (rather than to compensate for loss)?

      • http://twitter.com/LibertarianView Murray Rothbard

        I am not an expert on tobacco misdeeds, but two points.
        1. The burden of proof in libertarian courts is set by the market (See later post in response to your questions about libertarian justice)2. Just because a product is dangerous does not make it wrong to sell it. I am fully aware of the health risks of smoking. I still decide to exercise my free choice and smoke Cuban cigars once or twice a week. I am fully aware of the risks, but on my own subjective value scale, the pleasure of a fine smoke outweighs the incremental risk of an early death. I am sure that a good proportion of people who smoke are not mindless victims of “dangerously attractive” packaging but adults, who weigh the risks and make a personal choice. If they (we) subsequently die of cancer, then they (we) have no right to attack the tobacco companies for selling them the product, we made our choice and should accept the consequences.The only relevant issue is deliberate deception, i.e. fraud.  I have not explored the historic position with respect to tobacco companies so do not have an opinion.

    • http://twitter.com/LibertarianView Murray Rothbard

      The weakest are just as well protected by such a system as the strongest.

      No Win- No Fee legal arrangements would be unrestricted in a libertarian legal system and instead of paying fines to the state, the guilty would pay compensation to the victims. 

      The only thing that would determine your access to the law is the strength of your claim, not the size of your wallet. In the current state system a barrister is going to want £2000+  a day, win or lose. (Hardly an option for the poor)

      Minor transgressions would be serviced as well as major. Large law firms would specialize in the significant misdeeds, but smaller one man bands would fill the market gap for smaller compensation claims. In the same way the free market supports large construction firms to build power stations and one man jobbing builders for small home extensions.

      The detection of fraud, etc would also be more efficient. Instead of a disinterested state bureaucracy with a limited budget trying to monitor things you have unlimited numbers of  private individuals and businesses looking for profit opportunities by alerting victims to their suffering and signing them up as clients. The number of people enforcing their rights after accidents increased substantially once no win no fee litigation and “ambulance chasers” where allowed in a more free market.

      There will be some misdeeds for which the damage caused is so trivial or the evidence so tenuous that no private sector business would pursue them. However, it makes no sense to force people to pay to regulate things that cause trivial damage or which there is no strong evidence of damage at all. If nobody will willingly pay, by what logic can you force some to pay?

  • http://twitter.com/voodoo_criminol voodoo_criminology

    I’ve heard this argument made before, in all seriousness, with regard to doctors: there should be no mandatory certification or regulation. The market will decide.

    Problem with that being that the person who, say, unnecessarily had their hand amputated by an unqualified doctor so as to find out he/she was incompetent could have been saved the trouble.

    What you’re essentially suggesting is that we should accept blind “natural selection” in the market, when the option of Lamarckian evolution (http://en.wikipedia.org/wiki/Lamarckism) is available to us – using our reason and foresight to avoid problems occurring in the first place, rather than relying on: http://i1.kym-cdn.com/photos/images/newsfeed/000/403/978/d3d.jpg

  • Rick

    The problem is that companies can profit from doing things that are harmful and unjust. This mechanism causes them to seek the limits of their possibilities, and where ever they find opportunity, they will use it to deceive people and make more profit. Of course there is no system imaginable in which people don’t deceive (except for a possible future system in which privacy of every single individual is non-existant and everybody knows everything about everybody).

    To recognize the failure of free markets in providing a solution to this problem is however the first step towards improvement. It is clear that purely the desire to maximize profit will not result in a a good, working system. Clearly the writer has not thought of preventive measures. To prevent deception is by far better than to (perhaps) punish the baddies afterwards. The damage is already done, and the bad people are being put to death. What does that solve? Any rational person would recognize that this is not the best way to solve it. The solution lies in prevention of deception.

    Now as for the examples the writer mentions. Giving some examples is not ‘proof’ for your theory. It only serves as a way to convince people. There are many other examples in which a company can continue to deceive people without even being punished. Or if they do get punished, it’s already too late. To come back to your example: in our current system every product is checked on harmfulness, so the harmful product (this very toxic but addictive drink) won’t be sold in the first place. Of course there are moments when certain risks are yet to be discovered, but the risks that were known by that time are being prevented. If companies do something illegal they will be punished if the authorities find out.

    In the system the writer prefers a company can harm people without even knowing about it. If they then find out they killed many people by causing cancer, they will get punished by court and put to death. By that time many people have already died, including the people at the company, who didn’t even know about the harm they caused.

    In an other example: there is a company that sells subscriptions. By deception they manage to let people get stuck to subscriptions for a long period and make a profit of 100 euro per person. The people who are being deceived then have to start taking action to get the money back. The amount of effort for getting the money back is in total, let say, 2 days of work. The company knows that the chance that the person will find out and do everything right and spend that much time is low, maybe 20%. The company estimates that they will still make profit because most of the people will pay it and the costs for replying to people who are trying to get their money back is very low. They also know that getting negative publicity won’t likely happen because it is a low amount of money, and the chance of getting such a bad reputation that people will actually recognize the situation they will get in when encountered with this company. Even if the company would get a bad reputation, they will simply start a new company with a clean reputation. This is reality. There are no law firms who think they can make a profit on helping these people out. The government then made a law that made clear when people can stop their subscriptions, so that they won’t loose 100 euro. Only then the people were able to cancel their subscription easily.