 All right, ladies and gentlemen, in this lecture we're going to get to the second of what I see as the two crucial institutions of a free economy and a free society, and that is freedom of exchange. And we'll contrast it with, at least ostensibly well-meaning, restriction of exchange, restriction of voluntary exchange by government. And again, the argument I'm making, I want you to consider, is that the incentives for people to pay careful attention to the well-being of others are much stronger where we have freedom of exchange than where the government can interfere with voluntary exchange. And I'll get at this initially with a story. Oh, the story comes up in a moment, first of all, just to frame it a little bit. How many of you believe in freedom of contract? That is, how many of you believe that competent adults should be free to make whatever contracts they wish with others? And you, like most of my audiences, say, raise your hand, say, yes, you do, when you ask that question in the abstract. But I like to point out to my audiences that in fact there are many interferences with contract that they believe in very much. For example, do we, do you believe in the freedom of contract to work at whatever wages and hours one wishes? Many will say, many will say no, they believe we should have minimum wages, we should have maximum hours laws. How about workplace safety rules? Should people be allowed to make contracts to work in unsafe factories? Many would say no. How about the selling of stocks and bonds and derivatives? Should people be free to handle those contracts that they want without full disclosure, such as the Securities and Exchange Commission requires? How about the practice of medicine? Should people be free to practice, to contract with whomever they wish to set their broken arm or prescribe medicines for them? Do we believe that lawyers should be unregulated, I shouldn't say unregulated. That lawyers should be unregulated by government, that people should be free to hire whomever they wish to write up a will or a contract for them. Should we be free to hire whomever we want to do electricians work? Or, as I think many people believe, should that freedom of exchange be limited so that only competent electricians are allowed to practice and so on? These are the kinds of questions that I'd like you to consider. And I want you to consider the idea that in all these cases, because of the incentives that are in play, we're going to be better off with allowing freedom of voluntary association, freedom of voluntary exchange. Because the incentives there, even though there will be problems because incompetence will practice and people will distort the truth for one another, even despite that, the incentives in freedom of exchange and that institution of freedom of exchange are very strong for people to pay attention to others' well-being. And by contrast, when we allow governmental interference with voluntary exchange, even for good reasons, that interference tends to be abused. People tend to take advantage of the governmental power to interfere and use it to their own advantage at others' expense so that on the whole we'd be better off allowing full freedom of exchange between competent adults. Alright, and I'd like to get at that with a story that illustrates some of the problems of interference with freedom of exchange, and this comes from the area of hairdresser licensing. And this is the area that I choose because just by chance I was told a really interesting story by an eighth grader about hairdresser licensing, which I then wrote up in one of my first articles published in a national publication. Here's the situation. I was new to this philosophy and this economics. I'd been invited to speak to an economics class at a local school, and while I was there, the teacher said, would you want to speak to some other classes? I said, sure. I was in an eighth grade history class. This was at an all-girls school in suburban Baltimore. And I was describing some of what my professor Walter Williams says in his wonderful book, The State Against Blacks, about how occupational licensing laws get rigged against competitors, especially competitors who don't have the educational advantages. And as I was describing this, a very thoughtful looking black girl in the second row with a little smile playing about her face, raised her hand, and she said, something like that happened to me. I said, well, tell me what was it? She said, well, one of the five-year-olds in my community in my neighborhood was going to have a birthday party, and all the little girls wanted to get their hair done for the birthday party, and some of them wanted their hair done in gold braid, and I'm good at that, so I agreed to do it for them. Now, as I understand it, gold braid was popular at the time. This is the 80s, I think. It was braids close to the scalp and gold thread woven amongst the braids in decorative patterns. And she was good at it. And so she charged $5 a pop, keep that number in mind. She charged $5 a pop, and the little five-year-olds came to her house and she did their hair. She said she had an outfit she wanted to buy, and so she wanted to make some extra money, and she agreed to do it. So Charissa was happy because she had the income and the little girls were happy because they had their hair done, and it seemed for a while that everyone was happy until one of these five-year-olds before the party was stopped by a woman in the community who said, who did your hair for you? Charissa said the little girl's name was Devin, so Devin says, Rissy did it. And that night, Rissy's mother, Charissa's mother, got a phone call from a neighbor saying, I understand that Charissa is doing the little girl's hair for pay. She should realize that she's not a licensed hairdresser, and so what she's doing is illegal. And if she keeps it up, she's going to get in trouble. So I looked at Charissa. I said, well, what did you do? And she said, basically, what do you think I did? My mother said, we can't have this. We're not going to get in trouble. You cancel the other appointments. She said, and that was the end of it. She said, but I did learn that that woman who stopped Devin and said, who did your hair for you was the mother of a licensed hairdresser who had had a $32 hair appointment canceled by the mother of one of the five-year-olds. Now, what is the ostensible purpose of hairdresser licensing? Officially, what's supposed to be the purpose of hairdresser licensing? Safety. Public health. To protect the public health and safety, exactly. Fewer scissor deaths. Pardon me? Fewer scissor deaths. Fewer scissor deaths, yes, or pieces of your ear cut off, or your hair scalp burned by dyes and so on. Yes, that's the ostensible official purpose. Based on Charissa's story, what is the actual purpose of hairdresser licensing? To form a cartel. To form a cartel? To raise the income of the hairdressers. To raise the income of which hairdressers? The ones who are licensed. The established licensed hairdressers. It's to cut out competition. That little story indicates the danger of even well-meaning government intervention for the best purposes. That intervention can get taken hold of by special interest groups and used in ways that are not for the public interest, but against the public interest. A little bit more detail on this. I was fascinated by what Charissa had said, so I did some research. I went down to the Baltimore Board of Cosmetology and asked for a copy of the test, because I wanted to see if what Walter Williams said was true, that the test was rigged against poorly educated people, because the practical part of the test they could get through, but they couldn't get through the written part, because the written part was too difficult. Well, of course, they looked at me like I was nuts. They weren't going to show me the test, and I realized that was sort of a stupid request. But I said, well, could I see the regulations? And they said, yes, sir, and gave me a 56-page booklet of regulations about who could do hair under what conditions in Maryland. And in that 56-page booklet, there were four pages that had anything to do with health and safety regulation, as far as I could see. And that was in two virtually identical passages, one for the beauty salons and one for the beauty schools. The provisions in there, and I was not cherry picking here, the provisions in there meant to protect the public health and safety that I could see where as follows. I'm quoting here. Salon employees must wear clean clothes, wash their hands, and keep their, I'm quoting now, keep their curling irons, quote, free from rust, grease, and dirt, close quote. I read that, and I thought, is it necessary to write that down that curling irons should be free from rust, grease, and dirt? Should the public thank the regulators for putting that in there, because otherwise they'd be going to beauty salons with rusty, greasy, dirty curling irons? It didn't really seem plausible to me. Here's another one quoting further. A minimum of 12 combs and four brushes shall be available for each on-premises employee licensed to perform beauty culture. Implement, this is my favorite, listen carefully. Implements to be used for pressing and thermal waving shall be adequate in quantity and variety to perform the complete service. Implements to be used for pressing and thermal waving shall be adequate in quantity and variety to perform the complete service. What I make of that is that you need to have enough to do the whole head, so that women don't walk out of the salon with only half of their hair done. Doesn't seem to be a very necessary requirement to me. And guys, I'm not cherry picking. These are all the ones that had fundamentally to do with health and safety. So what was in the other 52 pages of that booklet? If it wasn't about health and safety, what was it about? Certain skills the hairdresser had to have, no. Not skills. Qualifications. Qualifications. It was about who was allowed to practice. And there were various limitations such as limitations on age and that sort of thing here, just a couple of them. There was a 17-year age limit. No one was allowed to take the examination until having already put in 1,500 hours of training. We're serving as an apprentice in an approved beauty shop for at least two years, full time. All these little qualifications, which appear to be right along the lines of what the economists who have studied this have said, these regulations get captured by the regulated group and used to exclude competition. You're with me? Okay. That's the term you want to remember is the capture theory of regulation. The idea that the experts in a particular field are the ones that the legislatures go to in order to pass the proper regulations. After all, what are the right regulations for electricians or for hairdressers or for plumbers and so on? Who's going to know why the electricians, the hairdressers and the plumbers? And so in the drafting of the legislation, they influence them in their favor to cut out the competition. Is it a little bit facile for me to suggest that we shouldn't have hairdresser regulation? I want you to consider that for a moment. Because in the absence of government regulation of hairdressing, would there be no regulation at all? Or would the market process, would market forces regulate in some way? If hairdressing licensing laws were sunsetted in your state wherever it was, would you be worried when you then went to get a haircut? No. If not, why not? Take a moment and think about that. We'll do this just briefly because then we'll get to a harder case. What are the kinds of forces, the kinds of incentives in the market process that would lead to public health and safety in hairdressing? We're talking about getting rid of hairdresser regulations, but not about getting rid of tort law. So if someone burns me or cuts my ear off, then I can sue them. Good for you. I mean, presuming the lawyer doesn't cost an exorbitant fee, but we should get rid of that lawyer regulation as well. Well, yes, to be consistent, there should be freedom of exchange in the law also. So we get rid simultaneously of hairdresser licensing and lawyer licensing. That's worth considering. Tort law, yes, there would be that fundamental institution of a free society. If you harm someone, you must make him whole. I mean, even if we go outside the legal system, if I walk into a place and see greasy, rusty, dirty curling irons, I will say, I will get my hair curled somewhere else, thanks, and walk out. Or if my friend says, oh, I wouldn't go to that place. They've had like 30 thither deaths this year. I also wouldn't go there. So word of mouth is a very important regulating factor. But then the companies know, okay, well, to get Tucker in the door, we need to have clean curling irons and not kill people with scissors, and they'll compete to make sure that their stores are safe. So companies have an incentive to provide good quality in order to get repeat business. Dakota? I was just going to say that the internet has forever changed competition. Good for you. When I want to eat somewhere, or for instance, if I'm going to take an Uber driver or pick an Airbnb, I do it often based on rating and comments. And so that's a system which almost regulates itself. If you have bad comments or bad ratings, people won't even walk in the door. I think you've made a profound comment. I've written a couple of blog posts and an article on that. The development of this rapid feedback through the internet, I think has made a lot of regulation just completely obsolete. And the Public Service Commission could simply go away now that we have the real-time two-way rating of drivers and riders. Nothing more is really needed, I think, to regulate that. We could debate that. But let's stick with hairdresser licensing. Other things that would give you confidence that you get a good haircut. Who else has an incentive? You mentioned the salons have an incentive to establish a good reputation. Who else has an incentive to establish a reputation? The hairdressers themselves. The hairdressers themselves. And how might they do that? If we're worried about hairdressers having good credentials for some reason, they could note those on their application. Sure. Go to beauty schools. Beauty schools have an incentive at presumably with maybe a little bit less than 1,500 hours instruction to give somebody a certification. So, you've got the ones I was thinking. The salons who provide information. Beauty schools provide the certification. Information vendors such as on the internet that you're talking about to Dakota. One other kind of institution I would mention would be insurance companies. What role might they play? Well, they would diffuse the risk among lots of people. Yes, but I'm thinking of actually reducing the risk, reducing the harm. What I have in mind is that if you own a beauty salon and you apply for insurance, the insurance company is likely to ask you, well, they don't want to pay damages to people who have these scissor problems. They might say, well, we'll ensure you as long as you give us some assurance of the quality of your stylists and your barbers. So there are those incentives in the market to keep up the quality of hairdressing. But hairdressing is too easy because there's too little at stake. So let me ask you to do a similar kind of thought process with the much tougher issue. And here we're very much focused on this question of if we had real freedom of exchange, which would mean regulation just by market forces, would that be adequate? So let's take what I think is probably the most emotionally worrisome topic for all of us, and that is pharmaceuticals, drugs. What I'd like you to do is to take a few minutes and think, suppose the FDA's authority to forbid exchanges when, say, a pharmaceutical company has a drug that it's ready to put on the market, the FDA can say, no, you may not put that on the market until we've put it through our tests. If that ability to forbid exchanges was eliminated and the pharmaceutical companies and the doctors or their hospitals or their patients were free to buy and use the drugs, what assurances might we have? What forces would there be in the market that would tend to lead toward the public health and safety with respect to pharmaceuticals? Or would it be horrible and people would be getting poisoned and having horrible side effects all around? What are the things that come to mind? Again, take a moment and think, what are the various things that come to mind that might provide good regulation from the incentives of the private sector? So aside from the ones we already mentioned for hairdressing, which I think play a big role. Well, let's review them then, okay? Let's review them. Tort law. Tort law. If a pharmaceutical company misrepresents or is negligent in their testing of a drug and is harmed, they can be sued. That's going to be quite significant, okay? Let's attach that to their insurance companies. Drug companies like to get insurance, right? What role do you think the insurance companies might play in this? Merck or Pfizer goes to them wanting insurance. What restrictions might the insurance companies put on them? They want to know what's being cooked up in the lab and whether it's dangerous. Whether it's been properly tested. Yeah, what are we ensuring? So the insurance companies would have a strong incentive to make sure that the pharmaceutical companies were putting safe and effective drugs on the market, right? Good. Next. What else? Oh, ones we've already done? Well, yeah. There's word of mouth also. And interestingly, word of mouth among doctors is very, very significant. They write in the journals about the success of different procedures for treating people. The success or the difficulties they've had with things. And that serves in large measure to regulate what drugs are prescribed. And then you mentioned the internet and reputation. Certainly the drug companies care about their reputation. So I've interrupted you twice already. Go ahead. So I guess the difference between drugs and hairdressing is that I can't really tell at first sight whether or not a drug is safe or not. Good. So I think that an important knowledge surrogate that a lot of customers have, especially for over-the-counter drug, is brands. So yesterday I walked into a store I'd never been to before and picked a package of Tylenol off the shelves. And I didn't take time to read the warning label. And I bought it without a second thought because that brand and the reputation that they have served as a knowledge surrogate for me. Good for you. Are you guys too young to know the story of the Tylenol that was tampered with before you were born? Some wacko injected cyanide into Tylenol tablets. And people died. A couple of two or three people died, I think. Is that right? Two or three people died. What do you suppose Johnson & Johnson, the maker of Tylenol, did? They had to mobilize this huge public relations campaign to save their brand and talk about how they were doing all of these new things. And as I understand it, as I remember it, they didn't need any public relations campaign other than what they just did. They recalled every bottle of Tylenol in the world and threw it away. And then they didn't issue any more until they had invented or had someone invent for them and developed the safety caps that we now see all the time. Before that, there were no safety caps. After that, the safety caps were ubiquitous. So Johnson & Johnson took a terrible financial hit to save their reputation and assure their customers of the quality of Tylenol, which is right down the lines of what you're saying. So there's reputation and the brand names. What else can we think of? Well, you talk about brands, but there's also certification. Good for you. And certification where maybe you don't trust a company to have like, well, we're Pfizer and the Pfizer Board of Scientists say this drug works perfectly effectively and it's completely safe. Like, you know, that's not, especially trustworthy. They have their own hidden outs. People say it is. So they need independent third parties. Something like Underwriters Laboratory. That's where I wanted to go. Tell us what Underwriters Laboratory does. So Underwriters Laboratory is an independent, essentially, certification agency that will look at any kind of electronics charger, microwave you plug in, almost anything that goes into the law these days. Insulation, but also insulation, bulletproof vests, all kinds of, as of 2000, 14,000 different types of product. Wow. Underwriters Laboratory certifies. And now why would, in a setting of free exchange, why would a manufacturer go to the extra expense of paying Underwriters Laboratory because that's what they have to do. They go take their product and pay Underwriters Laboratory to test it for safety. Why would they go to that extra expense if they can market their product without getting the certification? You know, a sort of naive answer might be like, well, the customers themselves would look at the seal and see if it was there or not. But it's like with Underwriters Laboratory, most customers don't even know what it is, but it's the wholesalers and it's the retailers who look at those things and if they saw that it didn't have that kind of certification, they probably wouldn't want to stop you. Hilton Hotels buys probably literally hundreds of thousands of irons and they won't buy an iron unless it has that stamp on it because their insurance company tells them if you don't buy this and have a safe building, then we won't insure you and the whole chain of responsibility works pretty well. You all have done beautifully with this, better than I could. See if there's anything on my list that I left out. Underwriters Laboratory, Consumer Reports again, the use of the internet and insurance. All right, good job. So that... I mean, I would just say that this private system would have... we were talking a lot about preventing bad products from getting to consumers, but I think that one thing that a private market does that the government regulation might not do as well is they would allow good things to go through easier, whereas... I shouldn't have been hired to give this lecture. We should have let this crowd do it. You're getting right to the point that I want to get to next, which is the comparison. Let's compare the imagined regulation by market forces we've just been talking about with the facts of the regulation by the Food and Drug Administration. What are some of the downsides of that? So, I know Milton Friedman was famous for making this point. He says that if you are at the desk of the FDA and you're deciding whether to approve or deny a drug, you know that if you approve a good drug, or if you approve a bad drug, your name and face is going to be on the front page of every newspaper in the world saying, this guy lets a little mind through. Good for you. Let me just repeat that for emphasis to make sure everybody has said it. Those people in the Food and Drug Administration do not want to be guilty of letting a bad drug go through that causes birth defects or something else like that. They're very cautious about that. Continue. But if I deny a good drug, not that many people, maybe a few doctors will know and a few people with rare diseases will know, but ultimately, there's little cost to me. So, if I'm on the border about letting a drug through, I should always reject. It's kind of a game theory thing. I should always reject a drug if I'm unsure. All right, that's right. You've got it exactly right. The term is type one and type two error. The type one error is to let a bad drug through. Type two is to don't let a good drug through. The point is that the personal consequences for the people in the FDA and the institution of the FDA are quite severe. They're very bad consequences to let a bad drug go through because there are congressional hearings, there are faces on the front of the newspapers and the victims are on the cover of us and People Magazine and so on, and there's a big flap and a lot of bad consequences for the people in the FDA. Therefore, they're particularly careful and there's a great deal of research about this that you can see to back this up. So what is the consequence for the public health and safety of this excessive care, excessive carefulness, we should say, on the part of the FDA? One consequence is what's known as the drug lag. It takes a long time to get a new drug to market because there's so many tests to go through. And I recently heard an estimate about what it costs from beginning to end, from the beginning of the research to getting the drug on the market. In round numbers, what does it cost a drug company to get a drug onto the market? I think it's $70 billion. I heard a billion. Oh, a billion? A billion. Maybe it's, I think it's a billion. But it was not in the millions, it got up to a billion. So it's very, very expensive. Now, if it's that expensive to get a drug to market, how eager are drug companies going to be to produce drugs that address a very rare disease that only a few people get? Why bother? They won't be able to get paid the million dollars back by only a handful of patients. So there are fewer drugs brought to market and they take a longer time to be brought to market. Now, what are the consequences for the public health of that? This is negative, those people. They're in their disease. This is grim and this chart I'm about to show you comes from more than 10 years ago and nothing has changed in the interim. Here are some examples of type 2 error by the FDA. Let me, I'll read it to you here. Thrombolytic therapy which dissolves blood clots was delayed for two years and estimated 22,000 deaths resulted. The way this is calculated, I'm pretty sure, is that when the FDA does let a new drug go through, they say this is a good drug. It should save however many lives every year and so on. So you take the number of lives it would save, they say it would save per year times the number of years they have delayed the drug and you can come up with a number of the avoidable deaths that have occurred as a result. Thrombolytic therapy delayed for two years up to 22,000 deaths. Interleukin-2 which was available already in Europe treats kidney cancer 3,500 deaths. Misoprotol prevents bleeding ulcers about 8,000 to 15,000 deaths resulted. And there are many other examples like this. This has led one economist to say that statistically, as he sees it, the number one killer in the United States every year is the FDA. Which is an interesting, it may be too strong, but it's an interesting way to think about it. The point I want to make is this. Of course, unless the listeners to this talk are very different from me, initially on thinking about the idea that the FDA should not be able to ban drugs from sale is a horrifying idea. It's maybe more horrifying for me than for you all because the thalidomide disaster which resulted in deformed babies occurred when I was old enough to see the pictures in Life Magazine. And so I've always been a proponent until I really studied it of the FDA. So the idea that the FDA should lose that authority is scary. And so that's why I emphasize the damage that the FDA's over-conservatism can cause. In no case are we going to get a perfect world with perfect results. Whether we rely on regulation by market forces or regulation by the Food and Drug Administration, there will be problems. The question we need to ask ourselves is, under which set of rules, which set of institutions, will the problems be lower? Will be less? And it looks to me pretty clearly now that I've thought about it for a while that given the incentives in the private sector, people would continue to be very careful. But we wouldn't have the over-caution from the FDA that results in so much unnecessary and avoidable death. All right, I believe we have finished this recapitulation. There are private sector alternatives to government actions. We've got the civil society versus political society. Private ownership and freedom of exchange versus government ownership and restriction of exchange. The incentives in the civil society institutions are healthier. That's the claim that I offer to you and we'll let it go at that and take questions. What do you think about the type of government programs that don't give them the authority to ban something but set certifications for a product that has a certain designated location of origin where authentic cheddar cheese from England where you don't have to submit it to it but you're just not allowed to sell it under the name of whatever certification of quality but it's a government managed program. What do you think about those type of things? I think they're much less problematic. But I still think they're unnecessary and those restrictions about content about how you market something should be handled in the civil law with things like copyright and truth in advertising litigation that sort of thing. I don't see that it's necessary for the government to do that. It's not inherently objectionable but again, there's such a strong temptation if it's mandated that a company get the government's approval to market its product as real feta cheese, say. Then there's a strong incentive for competitors to go and lobby the government to get certain kinds of products labeled as imitation feta cheese or imitation whiskey. There's a true case from that where everybody considers there's two kinds of whiskey. Two processes. One is to put it in the barrels with the charcoal and another is... I don't even remember which maker it was but they wanted to get the other one called imitation whiskey. That process I think would be very much subject to capture and that might be more problems for the customers than just letting people advertise as they see fit and pulling them into court if they seem to be advertising falsely.