Last year’s news reports of tainted beef focused public attention on the safety of the meat supply. In August 1997, Secretary of Agriculture Dan Glickman forced Hudson Foods to recall 25 million pounds of hamburger meat produced at the firm’s state-of-the-art plant in Nebraska. The nation’s largest beef recall occurred after several Colorado consumers became sick from hamburgers linked to E. coli contamination.

Examples of illness rooted in unsafe meat are not isolated incidents. Bad or undercooked meat causes an estimated 4,000 deaths and 5 million illnesses annually, according to the federal government’s Centers for Disease Control.¹ Moreover, a single incident of contaminated meat has the potential to affect large numbers of people. In 1993, five hundred people became ill and four children died in the Pacific northwest as a result of eating tainted hamburgers.

Illness and death caused by bad meat (whether tainted or undercooked) inevitably evoke calls for more government regulation. It is ironic that increased government intervention is viewed as an antidote to tainted meat, despite the federal government’s long-standing responsibility for meat inspection in the United States. Indeed, the Hudson Foods incident occurred only a year after President Clinton announced the most sweeping changes in the government’s meat-inspection system. Moreover, a federal inspector was based at the Hudson Foods plant to check the plant’s procedures daily.

Chronic problems related to meat inspection and meat safety warrant increased scrutiny of the most appropriate method of inspecting meat. During recent decades, successful deregulation initiatives occurred in a number of areas including banking and transportation. This shows that market forces may provide an improvement over government regulation of economic activity, even when regulations are long-standing and widely accepted.

Is Meat Inspection Different?

Skeptics, including even many market proponents, might say that the conventional analysis doesn’t hold for government regulations protecting health-where slip-ups can be fatal. Problems of “government failure,” however, may be worse than any market imperfections that government regulation is instituted to remedy.² Thus, government failure would have even graver implications for health issues.

Is it possible that the free market could substitute for, and even improve on, the current system of federal meat inspection? The following analysis demonstrates that the problems in government meat inspection are similar to those that plague all other government regulation of economic activity. There is no way for government regulators to obtain the information and realize the incentives of the decentralized market process, whatever the area of economic activity. Thus, market inspection of the U.S. meat industry, when contrasted with the current system of federal regulation, is likely to reduce the incidence of illness associated with the consumption of unsafe meat.

Federal Meat Inspection-How It Began

The Meat Inspection Act of 1891 was a major landmark in federal regulation of meat and, indeed, of federal regulation of economic activity in the United States.³ A review of the political economy of that era is helpful in understanding the impetus for government regulation. Most government intervention then and now, at least ostensibly, is in response to “market failure”—economic outcomes that fall short of “perfect competition.” (All markets fail, of course, when measured against this criterion.)

Moreover, the 1891 act was instituted under false pretenses. It was a solution to a largely nonexistent problem-contaminated meat. There is no reliable evidence that tainted meat was a major factor in the adoption of the legislation. In a political-economic analysis of the era, Gary Libecap concludes that “the record does not indicate that the incidence of diseased cattle or their consumption was very great, and there is no evidence of a major health issue at that time over beef consumption.”⁴ Government meat inspection, once in place, however, like many other government regulations, was soon viewed as necessary to protect consumers.

There is a great deal of evidence that the political impetus for the 1891 legislation was the consequence of rapidly changing economic conditions. Market dominance by Chicago meat-packers-primarily Swift, Armour, Morris, and Hammond-quickly followed the introduction of refrigeration around 1880. Refrigeration allowed for centralized, large-scale, and lower-cost slaughterhouses because of production, distribution, and transportation advantages. The four large Chicago firms accounted for about 90 percent of the cattle slaughtered in Chicago within a decade after the introduction of refrigeration.

The Chicago packers fundamentally changed demand and supply conditions in the meatpacking industry. Small, local slaughterhouses throughout the country were rapidly displaced because they could not compete with the lower-cost Chicago packers. Local slaughter firms, in response, charged that Chicago packers used diseased cattle and that their dressed beef was unsafe. The disease issue, as bogus as it apparently was, threatened both domestic demand and export markets for U.S. meat. Cattle raisers, especially those in the midwest, backed federal meat inspection to promote demand.⁵

Cattle producers were also concerned about falling prices. Prices fell because the supply of cattle grew rapidly. But producers attributed the fall to their declining market power versus the Chicago packers—a charge that seemed credible because of the packers’ size and concentration. Ostensibly to deal with the largely spurious allegations of unsafe meat and collusion by the Chicago packers, cattlemen, and local packers called for federal meat inspection and antitrust legislation. Enactment of the Sherman Act in 1890 and the Meat Inspection Act of 1891 were thus closely tied legislatively.⁶

The Jungle and the Meat Inspection Act of 1906

The famous Meat Inspection Act of 1906 also was heavily influenced by false charges. Ideas have consequences, and public policy can be influenced by a popular book, such as Upton Sinclair’s The Jungle—regardless of its merits. The muckraking novel focused on greed and abuse among Chicago meat-packers and government inspectors.⁷ The characters in The Jungle tell of workers falling into tanks, being ground up with animal parts, and being made into “Durham’s Pure Leaf Lard.”

Sinclair wrote The Jungle to ignite a socialist movement on behalf of America’s workers. He did not even pretend to have actually witnessed or verified the horrendous conditions he ascribed to Chicago packing houses. Instead, he relied heavily on both his own imagination and hearsay. Indeed, a congressional investigation at the time found little substance in Sinclair’s allegations.⁸

Nevertheless, the sensational allegations dramatically reduced the demand for meat. U.S. exports fell by half. Major meat-packers saw new regulations as the way to restore confidence, and they strongly endorsed the Meat Inspection Act of 1906, which expanded the scope of federal inspection to include smaller competitors.

Economic conditions back then were much different from today’s. However, there is a lesson to be learned from that early period concerning government and free-market approaches to meat inspection.

The early legislation, for the most part, was not a response by government to a legitimate public-health threat. Congress enacted the 1891 act in response to political pressure by local meat-packers and cattle growers who felt victimized by the rise in power of the Chicago packers and by lower cattle prices. This legislation along with the Sherman Act and the Interstate Commerce Act, all enacted within a four-year period, represented a significant break with what had previously been considered an appropriate role for the federal government.⁹

The 1906 Meat Inspection Act, too, was largely a response to the meat industry’s financial problems rather than to a health threat. The earlier spate of interventionist legislation, however, had provided a new mandate for government regulation of economic activity that facilitated the passage of the 1906 act. Thus, the case of federal meat inspection is yet another example of Ludwig von Mises’s insight that government intervention almost inevitably leads to further intervention.

Pitfalls of Government Regulation

Thus government meat inspection, like most other economic regulation, was instituted mainly because of favor-seeking: the use of time and money to harness the power of government for private ends.¹⁰ Favor-seeking is a negative-sum activity. The nation’s output of goods and services decreases as resources are used to restrict competition rather than to expand production and exchange. Favor-seeking is just one example of “government failure.”

Government intervention often is counterproductive because of information and incentive problems. The crucial economic problem confronting society is how to use people’s specialized knowledge to best satisfy consumers. As Nobel laureate F.A. Hayek emphasized, government officials cannot obtain the information that motivates individual choice because that information, much of which is never articulated, is strongly linked to a particular time and place. Consequently, officials must base decisions on something other than the “public interest,” if that term means the interests of the people who comprise the public.

Moreover, even if the information could be known, it is unlikely to be used most effectively. Government officials lack appropriate incentives because power and responsibility are separated. Those who make and administer laws do not bear the consequences of their actions, at least not to the same extent as private individuals. As shown below, markets generally are superior to government regulation because they cope better with information and incentive problems.

Dealing with Change

Related to the incentive problem is another flaw in the current system of meat inspection: the adverse effect of government regulation on innovation. That flaw is found in all alternatives to the decentralized market process.¹¹

In the absence of the profit motive, individuals have less incentive to discover and implement new technology in the inspection and handling of meat. No one knows, of course, which new technology will ultimately prove beneficial in meat inspection or in any other area. However, in the marketplace, if an innovation proves to be profitable the person responsible for it will receive a large part of the reward. Things are quite different in a centralized system. Under government regulation , the government employee who discovers or adopts a potentially superior technology is likely to receive only a small amount of additional compensation. On the other hand, if the innovation doesn’t pan out, he will lose much less than the entrepreneur in a profit-and-loss system.

This fundamental difference between markets and government is highly important to innovation in the meat industry. The heart of U.S. meat inspection continues to be the “poke and sniff” method that relies on the eyes and noses of some 7,400 Department of Agriculture inspectors. In 1997 a small Massachusetts company, SatCon Technology Corporation, working with a North Dakota-based group of ranchers, found a way to use lasers to find illness-causing pathogens such as E. coli and salmonella by scanning animal carcasses in slaughterhouses.¹² Such technological innovation has the potential to revolutionize meat inspection in the United States.

But it is more likely to be adopted in a free market than in a government-regulated market. Since it has the potential to dramatically reduce both the amount of labor currently used in meat inspection and the rationale for government regulation, it is inconsistent with two important goals of any bureaucracy: maintaining jobs and expanding its operation.

Market Competition Versus Government Regulation

The experience of government control of economic activity shows why government meat inspection is likely to be inferior to free markets. Private inspection firms, which must meet the market test, have a greater incentive to be effective than do government regulators. A private firm providing information to consumers about meat quality will reap profits when successful and incur losses when not. Thus, if a private meat-grading service were to become lax in satisfying consumers, meat firms no longer would be willing to pay for the service. Consequently, the private firm not only has an advantage in obtaining the necessary information; it also has a greater incentive to use it in the interest of the public weal.

Moreover, profit-seeking firms are likely to have a greater incentive than government regulators to adhere to quality standards. Government inspectors get to know the people operating the plants they regulate. Strict enforcement of standards might create hardship for those people. For example, if meat is considered to be of marginal quality but not to pose a significant health threat, regulators may be inclined to overlook such infractions. In short, when contrasted with market regulation, government regulators have a smaller incentive to enforce safety regulations.

Who Will Protect the Consumer?

Numerous studies have shown the benefits from privatization. It is quite likely that problems of food safety would be dealt with better through the decentralized market process, which provides a greater opportunity for both business firms and consumers to achieve their goals. Stated differently, the market process provides a greater incentive than government regulation for private firms and consumers to discover, disseminate, and use information about the quality of meat.

For one thing, government regulation gives consumers a false sense of security.¹³ It leads them to assume that they are being protected by the government, reducing the incentive to do their own checking. Market methods of inspection, in contrast, give consumers a greater incentive to acquire information about the quality of meat. Consequently, they are likely to be more alert to potential problems of food safety.

It is true, of course, that meat may be contaminated when it appears to be safe. If sellers of meat have more information about quality than consumers do, can consumers look after their interests? Yes; uneven information does not imply that sellers have an incentive to sell unsafe meat. Consumers are protected by the sellers’ economic interests.

The use of brand names, such as Armour or Swift, is one way that private firms assure quality standards for meat.¹⁴ A brand name enables consumers to identify a firm’s meat product and choose it over competitors. Hence, a firm with an established and valuable brand name has a strong financial incentive to adhere to quality standards.

A company responsible for selling contaminated meat can be quickly ruined by adverse publicity about its products. The recall of Hudson beef in 1997 left Burger King branches across the midwest without hamburgers. Following the recall, Burger King canceled their contract with Hudson Foods and announced that it would never buy from the company again-showing that it is strongly in the financial interest of business firms not to sell tainted meat.

Where quality is difficult for consumers to evaluate, little-known firms may benefit from the services of private inspectors to certify safety. There is considerable evidence that market forces can assure product quality without government regulation. Best Western, for example, is a privat certification agency that enables travelers to identify motels that meet specified quality standards. Underwriters Laboratories establishes standards for electrical products, and tests them to see if they meet those standards. These examples show that firms frequently are willing to pay to assure customers that their products meet prescribed standards. The success of Consumer Reports and similar publications is further evidence that consumers are willing to pay to be informed.

Is meat inspection an exception to the rule that private firms generally perform more effectively than government? There are good reasons to think that market-based inspection of the meat industry could improve on the current system. Illness associated with contaminated meat often occurs with federal meat inspection. There is no way, of course, to prevent all food-related illness. Mistakes on the part of buyers and sellers, and some degree of fraud, are unavoidable whatever the institutional arrangement. The goal in meat inspection, as in other areas of economic activity, is to establish an institutional arrangement that provides and uses information in a way that best serves consumers. The free market generally is more effective than government regulation in doing so.

Why Not More Market Inspection of Meat?

We’ve seen that businesses and consumers are willing to pay to assure product quality. And, as emphasized throughout, it is apparent that private inspection agencies “have a lot going for them.”¹⁵ Yet, despite the ostensible advantages of the market approach, there is little reliance on market forces in meat inspection in the United States. Why does the meat industry not rely on market regulation more?

Market-generated information about the quality of meat undoubtedly would be much greater in the absence of government regulation. Government inspection tends to preempt market inspection, much as taxpayer-financed education crowds out privately funded schools, by reducing the incentives of sellers and buyers to look after safety on their own.¹⁶ There is little demand on the part of meat handlers for services that would be provided by private firms in the absence of government inspection. Business firms are, of course, also happy to have the taxpayers pick up the tab for inspection.

Similarly, with assurances by the USDA (and the media) that government regulation is crucial to consumer safety, there is little impetus for consumers to change the current institutional arrangement. Moreover, when problems of meat safety occur, there is no discussion of “government failure.” Instead, regulatory officials plead for more power. In the aftermath of the Hudson Foods incident, for example, Secretary Glickman requested additional authority to shut down food-processing plants and to impose fines of $100,000 per day on any plant not obeying his order.

There can be no guarantees when it comes to food safety. Indeed, zero risk is not a reasonable objective in any aspect of human action. There are two approaches to ensuring the safety of meat-market inspection and government regulation. It is ironic that the public expects government regulation, which has more imperfections than the competitive market process, to provide for meat safety.¹⁷ Few people question the appropriateness of government regulation of the meat industry, even when they fault its effectiveness.

No one has a stronger interest in protecting consumers from tainted meat than the businesses in the industry. Ultimately, safety is best assured when rooted in the self-interest of business firms and consumers.


Notes:

1. Peter J. Howe, “New Laser May Identify Tainted Meat,” The Boston Globe, 1997, http://yourhealthdaily.com/090497_110006_15810.html.

2. William C. Mitchell and Randy T. Simmons, Beyond Politics: Markets, Welfare, and the Failure of Bureaucracy (Boulder, Colo.: Westview Press for The Independent Insitute, 1994).

3. Information presented here on the early history of meat inspection in the United States relies heavily on Gary D. Libecap, “The Rise of the Chicago Packers, and the Origins of Meat Inspection and Antitrust,” Economic Inquiry, April 1992, pp. 242–62.

4. Ibid., p. 246.

5. Ibid., p. 244.

6. Ibid.

7. Lawrence W. Reed, “Of Meat and Myth,” The Freeman, November 1994, pp. 600–02.

8. Ibid., pp. 600–01.

9. Libecap, p. 242.

10. Economists use the term “rent-seeking.” James D. Gwartney and Richard L. Stroup, Economics: Private and Public Choice, 8th ed. (Orlando, Fla.: Harcourt Brace & Co., 1997), p. 102.

11. Milton Friedman, Market Mechanisms and Central Economic Planning (Washington, D. C.: American Enterprise Institute for Public Policy Research, 1981), p. 21.

12. Howe.

13. Randall G. Holcombe, Public Policy and the Quality of Life: Market Imperfections Versus Government Planning (Westport, Conn.: Greenwood Press, 1995), p. 105.

14. The discussion of quality standards draws on Holcombe, pp. 93–106.

15. Ibid., p. 101.

16. E. C. Pasour, Jr., “Consumer Information and the Calculation Debate,” The Freeman, December 1996, pp. 780–86.

17. Mitchell and Simmons, p. 82.