WHAT IS IN THE CONSUMER ' S INTEREST?
James N. Morgan, University of Michiganl
a tt e ntion to solving each problem in such a way
that the good work of Cons ume r s Union could
continue. The issues and crises continue, a nd we
can only hope that the ethos developed during
Colston's long Presidency wil l continue, even
with the kind of strong-minded often legalistic
people who serve on such Boards. Recent years
have seen ad4 itional proof of the failure of
rigid r ule s in a complex and changing society .
Many social experiments, bowing to scientists'
insistence on proper design of experiments, have
seemed t o fa il because any rigid set of rules,
particul arly in starting something new, is almost
sure to fail. Our society needs other new
organizations and institutions to deal with old
and new problems, and Co ls ton's probl em solving
approach may well provide the model for a kind of
meta-experiment where we combine criteria,
measurement, and controls with flexible
expe rimenting, not testing operating rules, but
developing problem-solving procedures.
Benefits to consumers must come from somewhere.
An examination into various approaches ranging
from information and education through increasing
competition to government regulation or
protection or direct provision of goods a nd
services reveals difficulties in concluding what
is best. We suggest a few possible new
approaches, and of course call for more research
on what would be worth doing.
We honor Colston Warne today, so it is
appropriate to start with a few personal
reco llections. I first met Colston Warne in 1954
when he asked me to run for election to the Board
of Directors of Consumers Union. He told me that
they had just been cleared by the U.S. Attorney
General's Office and removed from the Attorney
General's list of subversive organizations, one
of the very few ever removed from that list.
Consumers Union remained on the notorious list of
the House Unamerican Affairs Committee--remember
McCarthy? Some years later, a Professor of
Mathematics at the University of Michigan who
insisted on a particular brand of appliance
beca use, as he explained to the c lerk, it was a
Consumer Reports best buy, was told by that clerk
that Consumers Union was a Communist
organization . The Professor responded, "It is?
I s hall have to look into this Communi sm, for
that is a very good magazine."
Colston was also a warm and friendly person,
interested in people as well as problems, and
never self-serving. In one crisis when a hostile
Board member insisted on disclosure of his income
and wealth, we were all a ppalled at how little he
had kept for himself. The problem is that
Colston is so forgiving that it is difficult to
get him to admit just how difficult many Board
and Staff members have been over the years, or
how absurd some of the positions. We all owe him
a great deal.
I was elected, and minutes before my first Board
meeting started, Colston took me aside and
mentioned that there was a bit of division on the
hoard. That turned out to be an understatement.
The current director, Arthur Kallet and his
assistant were both voting Board members, and
they were making direct payments for services to
some other Board members who always seemed to
vote with them. Through this and many s ubstantive
pattles of the Board over issues ranging from
testing noxiou s products like liquor , guns, or
cigarettes t o deciding whether CU s hould register
as a lobbying organization, Colston never seemed
to lose his Yankee cool. At first I wondered why
h e did not passionately espouse one side or the
other of these controversies. Then it dawned on
me that Cols ton had more sense t han the r es t of
us, and an overriding principl e--the survival of
the organization. Through the years, many
excellent organizations have gone down the drain,
split up over some issue which in retrospect
seems trivial or irre levant in t he long run.
I could go on, but my task is to say something
about what is in the consumers' interest, and
hopefully start a di scussion on that question.
In order to be sure we are doing good well rather
than badly , and that good will is matched by good
judgement, we must ask tough questions about a ny
proposed action, rule, law, or change: what the
benefits and costs are, and to whom. It may be
impossible to do a complete cost-benefit
analysis, but we can at least ask where the
benefits are to come from. Are there excess
profits to be tapped, inefficiencies to be
eliminated, or what? Even when there are monopoly
profits, they are commonly converted into rents
by selling the rights to them to other people.
This makes it difficult to eliminate the
resulting inefficiency without the possibility of
creating new inequities . It may be someone's
lifetime savings t hat bought the taxi license, or
the right t o grow tobacco, hops , or the A T & T
stock. The great contribut ion of welfare
economics to thinking about problems was to
insist on separating issues of ince ntives and
efficiency from those of equity and
redistribution of income. The second set set of
issues, those of fairness, mostly involve zerosum games wh ere one person's gain is someone
else's loss.
So , I can at test, the survival of Consumers Union
is largely the result of the farsighted and selfsacrificing devotion of one person, Colston
Warne. A careful recital of the many and varied
crises that arose would reveal that no formula,
no appeal to one principle, would have
worked. What worked was tirele ss and ingenious
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t axpayers' revolt. There are othe r situations
where the benefits of competition may be
exaggerated, a nd perhaps telephone service is an
example. But there are also cases like trucking
where regulation benefits largely the regulated ,
and the resista nce to deregulation should ale r t
us all to its benefits.
There is a large and somet i mes discouraging
literature on cost-benefit analysis and its
offspring with the dismal acronym PPB (pla nn ingprogramming-budgeting), where the criterion is
not the consumer interest but some presumably
broader public interest . It is discouraging
because appl ication often involves so many heroic
assumptions or decisions that "ac tual
measur ements are but concealed preferences " .
(Peter Steiner, " Pub lic Expe nditure
Budgeting"[6]). But we do need to spell out the
objectives of any proposal, and the conflicts
among them rather than leave issues and
conflicts concealed, and policy makers with too
much discretion. Even if the consumer interest
is not quite so comprehensive as the publ ic
interest, l et's return to it . What can we point
to that promises net gains to consumers?
There are clea rly large potential gai ns in
letting competitive markets drive out the bad
buys and reward thos e who offer better bargains.
Would better consumer information help, or are
insights and understanding also needed? Perhaps
the largest potential gains to consumers might
come if they understood hetter the implications
of their own choices, and had the information
they needed to make choices they would not
regret, and the insights how to assemble and
interpret that information. Insight may be more
important than facts, and is surely necessary to
reveal when facts are needed, and which ones .
Her ber t Simon once dramatically pointed out that
in a world where time is a scarce commodity,
information may be a nuisance, diverting ou r
attention from what matters to what does not.
There can be real gai ns, where everyo ne can be
better off , and we can gain in both credibility
and efficiency if we can identify them. \.le
might, for instance, focu s on preventing the
creation of new monopoly rights, since the old
ones are s o difficult to abolish without hurt ing
innocent victims. Is the strict r egulation of
nursing homes so restricting entry that existing
ones make large profits, then sell out to othe r
buyers who then must continue charging high
prices in order to earn a modest r et urn on their
investment?
Ult imately we face a choice of strategies--should
we rely on informed co ns umers so long as markets
are competitive and disclosure regulations assur e
adequa te information? That assumes that consumers
or at least some critical mass of them, have the
insight to know what facts they need and how to
integrate them into a meaningful analysis of
benefits and costs. If we believe that the vast
majority of consumers are unable to cope with the
complex economic decisions they must make, t hen
indeed we may want to turn to various
regulations, protection agenci es or even
governme nt provision of goods and
services. However, I have the uneasy feeling that
t he slow process of developing rules and laws is
unlikely to keep up with the rapid inven tion of
new deceptions and types of fraud.
\.le can think of two kinds of gains : First,
consumers can gain from making better choices,
not better because I say so , but hecause they do
not regret t hem, and would not do so even if they
had better information or unde rst a nding. Second
there a r e gains , even to the most sophisticated
of consumers, from laws or institutions that
assure they will not be defrauded, exploited,
overch arged, misled, endangered, or unduly
r estricted in maki ng those wise choices.
With such a benefit/cost focus we ca n talk
rea sonably about the proper role of government
regulation, of consumer protection, of consumer
information and competitive markets, and of
government provision of goods and services
(sociali sm if you will). And we can ask whether
disclosure legi s lation and anti-monopoly
activities can be sufficient for markets to
assure a high correlation between price a nd
quality , i.e., efficient markets.
In all this we must account for the sheer cost of
deci sion-maki ng . Many of us rebel at the
confusion and complexity of t he decisions we are
asked to make about telephone service. We have
the uneasy feeling that we have not really
reduced the total profit of the deliverers of
telephone service, mere l y divided it up among
more companies, while increasing the possibility
of bad decisions that we shall regre t, like
buying a cheap phon e t hat doesn't work . We may
even have arranged it so that the large u sers can
get things ch eap while the majority end up payi ng
more. We may have given up the technical
efficiency of a single large system and gotten
more inequity in the bargain.
There are cases wh ere market competition cannot
possibly assure either efficiency or eq uity,
particularly when the customer has no recours e ,
as with government services or monopolies . You
cannot go to a different Internal Revenue Service
if you do not like the se rvi ce you get.
Ombudspersons, or Consumer Advisory Boards lik e
those i n Britain, may help, but a r e unlikely to
be s ufficient . Some of us have proposed a
continuous poll to monitor such se r vices and
publish comparative ratings of them to shame them
into bet ter performance. Publication of
comparative, quantitative ratings seems likely to
excite improvements, if not to avoid future
embarr assment , then because of the threat of a
A majo r proble m in relying on i nf ormed consumers
is that the sources of information, particularly
on complex economic decisions, mostly come from
biased sources with some thing to sell. ( a ) Those
wit h Independent Ret irement Account deals to sell
a r e n ot about to tell you a'b out the possibilities
discussed by Walden [7] in the last issue of the
Journal of Consumer Affairs of inves ting in
capital gains investments instead, so that the
2
manufacturers report the frequency with which
their repair warranti es are exe r cised? Should
there be public informat i on on the value of
various monopo lies -- the prices at which vari ous
rights like t axi licenses or the right to grow
tobacco a re sold -- or the difference in price
between protected and open markets? Should all
capital ga ins on sal es of businesses with any
r eve nue from the government be reported, e.g.
when a nur sing home is bought up by a
conglomerate, or a company making medical
eq uipment is sold? Woul d it be useful to know the
property holdings of all members of the local
zoning board in your town , or the assets of
anyone else with potential con f li ct of
int erest ? Would publicat ion of estimates of how
much import quotas raise the prices of cars he l p,
with or without the important additional insight
that mu ch of the benefit goes to foreign and
domestic producers, without even the revenue to
the US treas ury that a tariff would
produce? Perhaps publicity about dramatic cases
of the latest f rauds and deceptive techniques
would save more of us from trouble than punishing
a few perpetrators at great cost.
ultimate income is not ful l y taxable, either. (b)
Nor will those helping you work ou t wills and
estate problems be likely to promote the trus ts
t hat only come into effect when you die, si nce
other types of trusts earn trust ee fees every
year. (c) No r will banks holding a trust document
written before the Estate Tax law was changed
sugges t that you might now be wise to throw away
that instrument s ince it is not needed and might
only cos t some unnece ssary fees to the trust
department. (d) On the other hand, you might fail
to notice that t he variable interes t mo rt gage t he
ba nk seems to want to sel l you may ac tua lly be to
your advant age, dividing up the ca pital gains and
losses fair l y in pr oportion to your and the
bank 's actual equity in the house at each point
in time. (That is, pr ovided market interest rates
properly reflect a low real interest rate plus
the current rate of inflation, and housing prices
move with the general inflation.) There were, of
course, some unfair types of variable-interest
mortgages, picked up immediately not by the
consumer movement but by the Wall Street
Journal. They tied the mortgage ra t e to the
bank's "cost of f unds" which was sure to ris e
faste r than either market interest rates or
inflation. But the principle of shari ng the
capital gains, or losses, in proportion to
current equity in the mortgaged asset is clearly
equitabl e and a sophi sticated consumer movement
should say so. I i nte r est rates fa ll, consumerbor r owers would benefit immediately.
What abou t more complex disclosures? For
example, financial institutions often write
installment paper at higher-than-market interest
rates, t hen rebate the excess , eu phemistically
ca l led a deale r reserve for bad debts , to the
seller, all owi ng t he sell er to make the sale
pr i ce look cheaper t han it i s . The fi nancial
institution, in t urn , may include some overpri ced
credit life insur ance in the deal , on which it
ge ts a r ebate from the life insurance company ,
allowing t he bank to make the credit look ch eaper
than it is . Would disclosure of the amounts of
those rebates al ert t he customer to the
truth? Would it discourage that kind of
"competition" among insurance companies for the
lenders' business, and among lenders for the
sellers' business?
Up to date information should be worth paying
for, but with the plethora of "f re e " inf ormat ion
it seems doubtful t hat it would sell . It is
particularly di fficult because without the
insight to know when you need what information,
you are not motivated to seek or pay for it .
What this poi nts to is that we need to know what
is in the consumer's interest, and also how to
educate the consumer so that he/she will know
what information is needed and how to act on it.
Unfortunately, we know that there are areas where
consumers appear to have persistently biased
perceptions or risk, or notions about what costs
to count. They may not believe the odds in a
gamble even if they are told. And there is
plenty of evidence that in spite of what
economists say they pay attention to past (sunk)
costs. Kahneman and Tversky provide many
experiments and a recent article by Arkes and
Blumer summarizes the evidence. [l]
In thinking about these issues, I seem to see a
choice we face between going for small gains in
the short run and often for a few people, or more
global and lasting improvements. Many of our
battles seem to me to be of the first kind, and
may even be sub-optimal, blinding us to larger,
more long-lasting benefit possibilities. I do not
mean to belittle the heroic efforts of consumer
activists, whose devotion and energy and courage
and skills I admire. I even try to do some of
that myself. Rather than quibble about who is
doing what, let me paint a somewhat olympian view
of possibilities and perhaps we can focus the
discussion on whether they can be achieved:
Even where it has seemed clear that government
action was called for, so many mistakes have been
made that there is understandable resistance to
any more action. We controlled some aut o
emissions, but reduced mileage when gas was
getting scarce, and left the emissions that
produced the acid rain. We suggested insulation
methods that were da ngerous, and changes in
detergents that produced other problems.
NATIONAL ACTION
At the national l evel , it is clearly in the
consumer's interest to have many things we now
have: Consumers Union publishing Consumer
Reports, various health and safety programs and
laws , both public a nd private protections against
monopoli zation , regulation of natural monopolies
like the pub l ic uti l ities , and protection against
fraud and deception. Would more disclosure
Is it possible that our best bet in the near
future is to focus on di sc l osur e as the one clear
area of potential benefit to cons umers? Should
state lotteries tell what fractio n of the total
amoun t bet ~et.s paid out in prizes? Should
3
investments . Another problem is that the cons umer
nee ds to understand the time pattern of his
ins ura nce needs - -how they drop as time pas ses .
The s i mple commonly-heard recommendation of
renewa ble t e rm ins urance might easily le ad t o the
wrong lifetime pa tt e rn of cove rage !
legislation do more good than exte nding the
prese nt set of pr otections? What i s di s closure,
and what might it do?
Example s may s e rve here better than r esounding
s tat e me nts of principles. Suppose any option
offe red to co ns umers tha t involved s ome ri s k or
gamble was r equire d t o give a n es tima t e of t he
proba bilit ies i nvolved. In the case of a lotte r y
tha t could take t wo f o r ms : t he numbe r of t i c ke t s
i ssued, or th e a ve r age r a tio of pr i zes paid ou t
to total a mount wagered. The second i s mor e
gene r al, s ince it is est ima ble even whe n there
a r e va r ied payoffs or prizes or t he number of
l ottery ti cke ts t o be so ld is unknown . Notice ,
howe ve r, that the cons ume r has t o unders tand the
not i on of expec t ed va lue , a nd be a ble to
unders t a nd t ha t if the average payou t r a tio i s
50% , t he expected va lue of his $1 bet i s 50
cents, a nd tha t if he keeps on be tting , he ca n
e xpect t o lose a n amount equal to ha l f the amount
he be t s.
Rat he r than wagi ng individua l bat tles about
a ll owable cos ts in r egu la t ed ac t ivities fr om
utilities to n11r s i.nP; homes, we mi gh t argue for a n
overall rule that says what wheneve r a
s ubstanti al f r action of the income of a busi ness
comes from governme nt expe nditure or is from a
pr ice-r egulat ed ac tivi ty, then the onl y a llowa ble
basis for de precia tion cos t s in calc ulating tax
l i abi lity or allowa bl e prices s hould be or i ginal
cos t of the phys ica l capita l. No one could t hen
buy up a bus iness at the ca pi ta lized va l ue of i ts
exces s profits, the n use tha t price as bas i s for
de prec i a t ion cha r ges to reduc e their taxes . The
l ogi c i s clear : wh e n we ca nnot really control
prof its, the marke t va lue of a busines s i s no
jus ti f i cation for its tax treatme nt . A r ece nt
r eport on nurs ing home cos ts sees the problem but
does no t sugges t the tough a nswer. (John
Hola han), How Should Medicaid Pro grams Pay for
Nurs ing Home Care? [4 )
Bu t s ince eve n in the bes t of cas~ s we would not
l ike to depend on t he sellers of goods or
servic es to give us unbiased advi ce about them,
a ll the advant a ge s of free market competition-c h oice , efficie ncy, innovation--will only come if
the consumers can ha ve confidence in their
choices. A va st expa ns ion of information combined
with the essential insights for its us e is called
f or.
A few example s of the proble m:
An even more difficult a r ea where the pot e ntial
intelle ctual burden on consumers may be great is
i n any area of risk . Rachel Dardi s [2] ha s an
interes ting article on pr oduc t safety pointing
out the advantages of relying on inf ormed
consumer s, who can take account of their own
attit udes toward risk a nd a bility to take risk,
and can be induced to be careful, as against t he
regu l atory approach. But s he also point s out
tha t regulation may ha ve advant a ges where others
are affected . Mandating the use of seat belts
might s ave money for a ll of us who pay i ns urance
premiums, and other regulations like thos e on
smoking would reduce ri s k to others and their
tax-s upported hospita l costs.
Take the rat e of r e turn on alternative
investme nts. A numbe r of authors, including Dick
Morse , and Gl asgo et al in a recent issue of ove
J ourna l of Consumer Affairs [3] , have argued for
an annua liz ed effective yie ld assuming
reinvestment a t the same rate , so that all
investments are directly comparable, without
requiring individuals to be able to recalculate.
A related ared is li fe ins urance, which commonly
combi nes i ns urance with a savings - i nves tment
f e ature. Belth and ot hers have long a r gued t hat
it is misleading to assume some int e rest rate,
a nd t hen derive a net c ost of the insurance,
s i nce any interes t rate other than the cu rrent
ma rket rate allows i nsurance companies to design
policies wh i~ h play games with the appa r e nt net
c ost of t he insurance. But life expectancies are
r easonably stable, so one can (with a n it e rative
computer program ) take out the cost of the
i ns ura nce , a nd est imate the r ate of return on the
savings part of the po lic y. The Federal Trade
Commission once issued a study arguing t hat in
most policies this rate was around 2% and that
compa nies s hould be required to inform cu stomers
what the rate was. But just to illustrate the
importance of economic i nsight , c ustomers wou ld
also have to be informed tha t since t he
accumulation in an i nsura nce poli cy i s not
subject to income taxes, a fair comparison with
ot he r inve stment s would r equire translating the
rate into a befor e-tax rat e , the size of the
adjustment depending on each individual's own
marginal income t a x rate. Once adjusted ,
however , that rate is simply a nd easily compared
with r a t es of return on other
Most recently, it took some gl a ring facts, and
complaint s from technical economis ts, as well as
political conservatives, to make us awa re that
the quotas on impo r t s of cars were producing
excess profits for J a panese car makers , allowing
American car-make rs to r a ise prices a nd ma int~in
higher wages than comparable jobs pay e ls ewhe r e ,
hurting car buyers without even producing any
tariff revenue to help r educe the Federal
de ficit. It will be instructive if the Japanese
maintain t hem when we say t hey don't have to.
ACTION AT THE LOCAL LEVEL
The local community level may well be t he place
wh ere there are large potential gains because of
market ineffi ci encies, particularly with s ervices
l ike r epai rs . When Scott Maynes a nd Greg Dunca n
a nd I first s t a rt ed thinking of the po tenti al of
local cons umer information services, i t was t he
low correlations between price and quality that
impressed us . However , mature consideration
convinced us that pr i ces not on the efficiency
f rontie r ,that i s , not the lowes t available fo r
4
that quality , did not measure the actual losses
or the pot ential gains from improved information
and improved market functioning. The r eason is
simple and is revealed when we ask where the gain
is to come from. Since many repair services and
retailers make only normal prof it s , their
inability to continue "overcharging" some
customers would force them to raise prices to
others, cutting out some sales or bargains. So
one sour ce of the be nefit to the previously
overcharged would be the previous bargain
hunters. It is difficult to evaluate this
redistri bution from the smart-careful to the
dumb-careless , but it does not seem worth
fighting for. Bu t there are also real net gains:
once people discover they can trust the market,
they can reduce their shopping time and effort ,
or repair things they might otherwise have
replaced. And vendors can devote less resources
to advertising, salesmen, and negotiating. And
information about customer complaints might well
allow businesses to improve their efficiency too.
Of course there might be some vendors driven out
of business, hence some othe r redistributional
effects.
n eeds to agree on n(n- 1)/2 exchange rates ! A
hundred services require ninety-nine prices, but
bilateral bartering of pairs of such services
would require agreeing on and setting standards
for 4950 rates of exchange! So a new paper
currency would hel p.
Particularly if used in retirement communities to
recognize things people can do for each other,
such payments would be almost i mposs ible to tax,
would preserve equity and the freedom to say
"no", and would encourage productive activities
of older people. Communities could also "tax"
their paper; and use it to pay members to do
things for the community. An insurance-type
company could collect premiums in the paper
currency, and use it to pay for emergency help
when people get sick or are injured. In a
r etirement community, one could even think of an
annuity arrangement, since hours of time a r e not
eroded by inflation, where a constant premium
would pay for an increasi ng amount of emergency
help as one got older . The basic paper-currency
notion has been used successfully for many years
in baby-sitting cooperatives, avoiding
bookkeeping and many extra phone calls . Of course
labor differs in quality, but you can decide whom
you hire with this new currency, and vary the
number of bits of currency you offer for a job.
We proposed calling them AMPS rather than
quarter-hours to emphasize the fact that the
market should determine t he wages even in the new
currency.
Such a local cons umer information service
promises not only real gains to consumers and to
society, but an interesting contribution to
research and public policy. Two st r ikingly
different outcomes are possible: The distribution
of information might so improve market efficiency
that consumers could use price as an indicator of
quality and would not need additional
information . The system cou l d "work too well "
and could then not be self-supporting. But i t
would then clearly have a claim on public funds
(taxpayer suppor t ). A more likely outcome would
be enough change and sufficiently slow consumer
response so that the up-to-date information would
still be valuable to those who purchased and used
it. A self-supporting system could survive and
be expo rted to other communities . And those who
did not support and use the information system
would still benefit from its existence, including
the vendors who would have efficient ways of
monitoring and improving their own performance.
In either case the same continuous polling of
representative samples that collect ed the market
price/q uality information would provide the
research data on consumer behavior and market
responses.
Bu t l et's come hack to the issue where the gains
come from. Are they redistributive, taking from
excess profits or the Rich? If so we need to
justify them as such and spell out di stributive
imp l ications clearly. Hopefully there are
possible changes where there is some gain that is
not offset by someone else's loss . Often it is
not easy to spell out what the result will be .
Life insurance companies are not excessively
profitable, so what would be the result of better
disclosure of the real costs of ins urance, and
the rat es of return on the savings pa rt of
policies? Perhaps there would be mo re price
competition and less competition by selling-fewer agents and even lower agents'
fees? Ultimately there would be conver gence of
rates. Hence , peop le would not have to shop
around much--only a few would need to do so. So
people could spend less time deciding about
ins urance, and they might design both a better
insurance program for themselves, and a better
saving-investment plan. I do not mean to
denigrate these gains , they may well be
substantial , but it is impor t ant to notice that
it is not lower prices for insurance tha t we
expect, or that measures the gain , but something
much more difficult to specify and quantify .
The consumer interest might benefit from other
new institutions at the local level . Take for
example the possibility of a new medium of
exchange that is us ed to purchase, and earn, and
save, hours of work , not money. In an era of
unpredictable pr i ces this can have advantages as
an inflation-proof s tore of value . When used to
buy and sell personal services to others, it
allows a great deal of mutual he lp in a communi ty
without the coe r cion and potential inequity of
"volunteer" systems, or the restrictions of
barter arrangements where one must s t ay in
bala nce with each other person. Scitovsky's
brilliant tribute to Abba Lerner [SJ points out
that with n commodities or services , one needs
only n-1 prices to settle, but with barter , one
Take another example, the regulation of public
utility rates . One could argue that without
regulation , a utility could charge whatever the
market would hear, and the stock would appreciate
in value to recognize those yields. Then any
attempt to reduce the rates wou ld produce capital
l osses to stockholders, onl y some of whom would
5
be the original stockholde r s who had realized the
(unjustified) capital gains. Would careful
monitoring to assure only a modest r ate of return
be worth while? Clearly a pr ecise control would
remove from the utility all incentives for
efficiency or improvement , since there would be
no reward for the effort expended or risks taken.
On the other hand, looser controls allow
incentives, but at the risk of exploitation of
the customers. Even putting more of the charge
on industrial users and less on home users may
not ultimately benefit consumers. Analysis of
that trade-off requires a sophisticated analysis,
not just of impact but of incidence, of all the
changes after things sett l e down . Keeping
industry in the area may benefit everyone more
than making industries pay a little more of the
utility costs. Do not misunderstand me. I have
great admiration for those who fight the battles
to keep utilities from getting unnecessary
profits and then capitalizing them. Here in
Texas, Carole Barger of the Consumers Union
Advocacy Office is doing a magnificent job for
Texas consumers.
and l ess use of resources? It may depend on how
responsible we feel towa r d future generations, as
wel l as how we weight individuals who gain and
lose.
We need a great deal more research , and more
articl es in the Journal of Consumer Affairs ,
focusing directly on these issues : Where are
potential gains , and what losses go along with
them, including redistributive losses or
temporary transition costs? And we still have
that familiar problem how much we ca n count on
i nformed and insightful consumers to maximize
their own well-being and in the process to
produce the efficiency of f r ee markets, and where
we must still protect, interfere, and even coerce
consumers for their own good. You may have
surmised that I am optimistic about the
possibilities for consumer education and consumer
insight, and then releva nt consumer information,
as the ultimate protection with maximum
efficiency gains .
Have I given too little attention to the exciting
cons umer issues of the day? What about the air
bag controversy, or the costs of medical care, or
nuclear energy? What about the regulation of
advertising, or the quality of used cars, or
itemization of morticians' charges? You may
charge me with indolence , or being chickenhearted, but on issue after issue I find myself
trying in vain to sort out the benefits and
costs , without finding a convincing answer to the
question just where consumers' interests really
lie, or being convinced that the proposed r eforms
wou ld produce a net social gain.
Some changes produce gains to some that are
larger than the losses to others, raising the
possibility of compensating the losers from a tax
on the gainers to leave everyone better off, or
at least no one worse off. Developing such
mechanisms without letting people play games with
t hem, takes some thought .
IMPL !CATIONS
So we come down to asking where are the excess
profits that can be appropriated, or the
efficiency gains that can be realized for the
benefit of consumers? One of the compelling
arguments why the American Association of Retired
Persons s hould have and did open up the
competition for the insurance they recommended to
their members was the extremel y high profits
being made by the company they had chosen, not
offset by the company's gifts to the AARP and
related worthy causes. But there are not that
many such cases, and indeed consumers would
benefit still more i f they understood that after
the age of SS most people do not need life
insurance at all! The great potential gains
probably come from more consumer insight and
from increased market efficiencies, largely in
reduced costs of selling and shopping. Even here
there are some distributional costs or
injustices , as salesmen have to find other jobs,
and t he previously careless or stupid benefit
more than or even at the expense of the
previously smart or careful shoppers. We have
argued, Scott Maynes, Greg Duncan, and I, that a
local consumer information service might also
increase people's willingness to have things
repaired , once they knew whom to trust to do it,
and that might increase useful lifetimes, reduce
the consumption of resources, but also reduce
sales of new replacements, and the incomes of
producers and distributors. How does one
evaluate such a mixed bag of ou tcomes? In
particular how does one add up social benefits
and costs of more repairs and l ess replacement ,
Would the extra costs of air bags be justified ,
compared with passive but automatic seat and
shoulder belts? Is it true that air bags offer
no protection in any accidents othe r than front
end collisions? Should we encourage insurance
companies to encourage use of seat belts by
paying more of the costs if the seat belts were
in in use during an accident? Are the costs of
unnecessary injuries, which we all share through
the insurance premiums we pay, justification for
legal compulsion to force us to use seat
belts? Probably so.
My background in economic theory in general, and
welfare economics in particular, compels me to
say that, however much we may resist and resent
it, only complex technical analyses can reveal
where the consumers' interests lie in most of
these issues. In many cases, extended new
empirical research may be required. Consumers
are not all a like , either as to situations,
behavioral responses, or preferences, so we may
be adding up differential benefits or costs , and
be forced to assume each individual counts as
one , or to assign some weights to individuals.
Home owners with old low-interest mortgages
benefitted at the expense of holders of savings
accounts with low interest rates during
inflation. Would bankrupting the banks have been
better? Technical information of a very complex
nature may be involved. The French have a
massive pr ogram of building fast-breeder reactors
for nuclear power. Physicists say they are
6
economic insights, but those all take money. The
one project that does not cost much, because it
involves printing its own paper money, is the
creation of a s hadow-market for time-exchanges to
encourage more mutual help among friends and
neighbors.
hundreds of times more efficient than our
reactors, and that the fuel is recyclable so that
there is little wa s t e to dispose of. And rumor
has it that political-military considerations led
to prohibition of fast-breeder reactors here-something about the f uel being more easily
converted into bombs . Are French consumers of
power better off?
My main action s uggestion, however, is that we
plan a series of conferences or seminars or
workshops where we bring to ge ther the enthusiasm
and willingness to work of consumer advocates,
the analytical expertise of the economists, and
the technical knowledge of the scientists, to
provide adequate answers to the question this
speech addressed--just what is in the consume rs'
int e rest? To end with the good news: Scott
Maynes and some co-conspirators have secured
funding for the first such conference, which is
to be held in August, 1986. He is to be
applauded for his energy a nd persistence.
Would more competition in lending be more useful
than more regulation of rates? Would be tt er
disclosure of annualized effective yields in both
loans and investments increase competition?
Would alert, informed, smart cons umers defe nd
themselves better against the new frauds and
deceptions that are still to appear? Should we
press for government subsidies for product
testing as in West Germany, or a tax on
advertising to pay for a corrective information
flow on the advertised products ? Instead of
prohibiting advertising of delete rious product s
like cigare ttes, alcohol, or guns, perhaps we
should tax the advertising to pay the victims'
hospital bills?
REFERENCES
I think it is clear t hat we need a bigger and
better Consumers Union to press on all fronts-inf o rmation, insight, and advocacy. And we need
more consumer advocacy, and more private antitrust act ivity, and a larger , better informed,
more sophi s ti cated consumer movement. But we
also need to bring the technical economi sts and
other scientists into the action, however picky
they may sometimes seem, to be sure we are doing
good wel l, and not badly . Above a ll, we need to
keep in the forefront of our minds the crucial
ques tion: Where is the expected benefit to
consumers to come from? If the early cooperative
movement produced great gains because the r e were
monopolies, or s o cial restrictions on talented
individuals, or gros s i nefficiencies in
retailing, will the cooperatives of the futu re
l earn to get around rigid regulations and tax
laws tha t hamper innovation? For example, could
a group of older people arrange to provide
practical nurs ing care and other se rvices for one
another without running into all kinds of wellmeaning r egulations and attempts to tax the
credits they earned working for their friends or
the community?
We also need more research on consumer behavior,
insights, and goals in order to know better how
they might r espond to and benefit from any
changes. Can they use the information we might
disclos e, understand the insights we offer? !low
do they get their information or insights
now? Can they handle economic ideas and insights
even if t hey are presented c learly, or can a
small enough minority do so so that their actions
will make markets work, to the benefit of all?
Some of us have, unsuccessfully, proposed
systematic research into these issues, using
interviews like Socratic dialogues.
1.
Arkes, H. R. , and C. Blumer, "The
Psychology of Sunk Cost", in Organizational
Behavior and Human Decision Processes,
35:124-140 (1985).
2.
Dardis, Rachel , "Consumer Risk Response and
Consumer Protection: An Analysis of Sea t
Belt Usage", Journal of Consumer Affairs,
17 : 245-261 (Winter, 1983).
3.
Gl a s go, Philip w., Li nda E. Bowyer and
A. Frank Thompson, "Truth in Investing: the
Need for Legislation", Journal of Consumer
Affairs, 18:92-100 (Summer, 1984).
4.
Holahan, John, How Should Medicaid Programs
Pay fo r Nursing Home Care? Urban Institute:
Washington D.c., 1985.
5.
Scitovsky, Tibor, "Lerner's Contribution to
Economics", Journal of Economic Literat ure,
22 :1547-1571 (December, 1984) .
6.
St e iner, Peter, "Public Expe nditure
Budgeting" , in The Economics of Public
Fina nce, Brookings: Washington, D.C. 1974.
7.
Walden, Michael L. , "Estimating the
Benefits of Individual Retirement Accounts:
A Comparison to Capital Gains Investments " ~
Journal of Consumer Affairs, 18:296-304
(Winter, 1984).
1Professor o f Economics and Program Direc tor
of the Survey Research Center
What about ac tion? It would be nice t o try some
of the things I have mentioned like local
consumer information systems, or developing and
trying better methods of improving consumer
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