The problems with consumer protection

As Massachusetts senator-elect Elizabeth Warren prepares to be sworn in next month, rumor already has it that she will be assigned to the Senate Banking Committee.

As an involved member of the Senate Banking Committee, Warren is sure to pursue her avowed agenda of increased oversight in the financial industry from the perspective of consumer protection. According to her own written work, Warren seems to view this mission as largely analogous to consumer protection practices in all other areas of the market. “Thanks to effective regulation,” she has argued, “innovation in the market for physical products has led to more safety and cutting edge features. … Consumers can enter the market to buy physical products confident that they won’t be tricked into buying exploding toasters and other unreasonably dangerous products.”

Although Warren could be right—it is, after all, conceivable, if not likely, that government regulation is responsible for increases in the “safety” of consumer goods—she fails to provide any evidence of a causal mechanism that would support her assertion. She begins with the relatively unobjectionable, if also vague and subjective, premise that consumer products are “safe.” From there, however, she engages in a faulty post hoc, ergo propter hoc—or, “after this, therefore because of this”—line of reasoning to conclude that the coincident temporality of consumer product regulation and product safety is enough to prove that the former is responsible for the latter. In other words, she confuses correlation with causation. If it is true that regulation is responsible for product safety, and especially more so than capital accumulation, private organizations like Underwriters Laboratories, and the general tendency of businesses to avoid blowing up their customers, then it is her responsibility as an intellectual and agent of the state to demonstrate it.

In fact, a successful argument in favor of consumer protection practices would also need to demonstrate the philosophical legitimacy of “protecting” consumers in the first place. A simple examination of the exact nature of the relationship between buyers and sellers on the market will reveal certain complications behind this approach to exchange.

In earlier times, for example, economists believed that trades took place between individuals only when both parties to the trade believed that they were receiving a sum of value equal to that which they were giving up. This was exposed as incorrect, however, when it was realized that, under these circumstances, the opportunity cost of physically engaging in the trade itself would preclude a trade of no net value from ever occurring. It has since been recognized as an axiomatic truism that any peaceable exchange between individuals can take place only when both parties feel that they are receiving more in terms of value than they are giving away. The possibility of such an arrangement arises from the fact that goods and trades are appraised by individuals according to their own, unique, subjective scales of value, which do include but are not limited simply to dollar terms. This insight is therefore as true in terms of corporate earnings as it is in those of charitable donations and gift giving.

Now, based on such an insight—which, again, is axiomatically true and is a derivation of the recognition of human action as eternally purposeful—it is clear that there are only two possible outcomes, from the point of view of the consumer, to any given exchange. The first of these is that the consumer is proven correct in his evaluation that he would be better off after the trade than he was before, and the second is, quite obviously, that he is proven incorrect. Since it is the second scenario in which both we and Warren are interested, let’s consider the reasons for which such a state of affairs might arise.

First of all, it’s possible that a consumer is simply mistaken in his appraisal of the trade. He may come to realize, for whatever reason, that he would have been better off had he not made the trade. This can come about as a result of a failure to inform himself, or simply a failure to adequately forecast his own future conditions. Second, it is also possible that the consumer’s preferences have changed between the point at which he made the trade and the present moment, such that a beneficial trade according to his previous subjective value scale no longer appears as profitable. Finally, it is possible that the consumer fell victim to fraud, in which the seller promised a certain good or service with certain conditions but ultimately did not deliver on that promise.

As to the first and second of these three scenarios, it is obvious that the responsibility for present unease falls squarely on the shoulders of the consumer himself. In failing either to accurately appraise the good he received in the trade or to forecast his own future conditions and desires, the consumer finds himself displeased through no fault of the seller. In the final scenario—that of fraud—the jurisdiction of would-be consumer protection is already contained under the law as it relates to fraud, and there are mechanisms in place already for dealing with such a circumstance.