Why Encourage Discrimination? The Case of Mandatory National Origin Labels

My argument is two-pronged: information has costs and benefits, but I will address them in reverse order.

First, the benefits. Information economics often suggests that a lack of information can easily make for a less efficient market. Many people would probably prefer not to purchase a watch, for example, if they had access to certain information, e.g. that the watch was made in Apartheid South Africa (ASA). But if that information is not readily available or too costly to obtain, the result will be adverse selection, which I will argue is inefficient.

This lack of information is inefficient because while there is no such thing as demand for ignorance, there is plenty of supply. To continue with the South African watch example, it would be wrong to conclude that because consumers would rather buy a watch of unspecified origin than one labelled “made in ASA,” that consumers demand ignorance, or that they derive some utility from their ignorance. They WOULD rather know, but they have no choice but NOT to know, because there is no incentive for white South African watch manufacturers to label their products accurately, and in fact there might be a disincentive for supplying such information. Hence, due to a lack of information, supply does not meet demand in the free market for watches made in ASA. This S-D mismatch is by definition inefficient.

You might believe that ignorance is bliss, which would be fine for you, but I prefer markets with complete information. I think that most people would agree with me. So that’s my first prong.

My second prong deals with the costs. Complete information would of course be nice (especially for economists who like to model based on the assumption of complete information [*cough* ARNOLD KLING *cough*]), but in reality information has a cost. What is the cost associated with the labeling of national origins? It is probably very low. What does it cost, really, to inform consumers that their watch is being used to finance segregation in SA–the ink required to print the information on the box? The time it takes the designer to get the label on there? The marginal increase in law enforcement required to enforce the law? These costs seem pretty neglible to me.

There is of course the cost to white South African watch producers–but that is like the cost of banning leaded paint to sellers of leaded paint. The benefit to consumers outweighs those costs, as long as we believe that (informed) markets are efficient. Which (mostly) we do.

If private markets tended towards complete information, there would be no role for the government to mandate labels of national origin. But as my Apartheid-watch example tries to show, that is not the case. There is plenty of room for governments to require labels of national origin if the benefits outweigh the costs, which I think is likely. What is the benefit of knowing whether your watch is financing segregation, or your diamonds fueling a civil war, or your olive oil being made by Israeli settlers, or your (possibly leaded) toys being made in China? The marginal gains from this kind of information are real, and the costs are… petty.

So there’s my argument. I hope you like it.

PS. I think a much better argument could be made against requiring certain types of financial disclosure and accounting standards. But that is for another post…

Assume racist preferences in a consumer. Labelling makes it easier for him (“or her” deliberately not included) to choose products produced by his favourite race of producers, while making no one worse off.
“… Americans’ near-religious objections to both taste-based and statistical discrimination” is not, in my experience, a realistic “given”. It is an empirical matter to decide whether there are enough racists around to justify economically the small extra cost of labelling. I would think there are more than enough to meet the Kaldor (I think we called it thus) criterion.

Maybe this is a useful way of promoting free trade policies because consumers will realise how much of their produce comes from other countries and also realise that the ones with “made in USA” often cost more. This might induce consumers and voters to be less sympathetic to protectionist and anti-free trade policies which would obviously have economic benefits.

Jacob: You forgot about the incentives facing the competitors of South African watch producers. If consumers have a preference for the products of free labor, competitors have an incentive to let consumers know where their watches come from.

We should have more detailed labeling laws describing value added by nationality. Why get tricked into paying for, say, Japanese or Italian workmanship when it’s mostly cheap Chinese labor?

Leonard has the best argument, though of course it is less economic than political.

It sounds to me like your agenda is to score points for neoclassicalism by claiming you can have your information asymmetry, and your prices incorporating all information, too. Operating on less information feels disempowering, whether it really is or not. Any number of movements are seeking transparency, and want supply chain information in general to be non-proprietary, or at least effectively leaked to the public, or voluntarily disclosed.

Then again, maybe you’re just trying to be snarky by accusing consumers of discriminatory intent. Is this to criticize consumers as discriminatory or to defend discrimination as OK? I don’t subscribe to the ideology that every private sector entity is an ‘individual,’ so I’m OK with different standards applying to products, businesses and actual individuals (human beings). The latter shouldn’t be discriminated against, and I see plenty of apologetics on behalf of discrimination against people on this rather rabid blog.

Looks like I got here too late. I think Hyena’s third suggestion is very believable, particularly given the prominence of cultural symbols in marketing (think Cyrillic characters on cheap American vodka, or HaraJuku logos on T-shirts from Bangladesh).

I’ll give you one you’ve maybe never thought of. I work as a lawyer in a consumer products business. Hyena’s #1 is important: it tells consumers what product safety standards (for example) have been applied to a product. But an even better one is: you can use it as evidence of a passing off or related lawsuit against a counterfeiter.

The company I work for manufactures all of its goods in the USA. These goods are often counterfeited in China and imported. Importers of the counterfeit product, playing ignorant and hoping we’ll fall for it, ask how they were supposed to know that the products they bought were counterfeit. At which point I can point to the origin labeling notice and ask them whether they really believed they were buying authentic goods marked “Made in USA” but imported from China. This is usually good enough to shut down that argument, and we can use that to leverage them into ceasing import of counterfeit product. In my mind, that’s a win.

I also want to throw in with Hyena’s third suggestion.

National Origin labels are how I found out that English Muffins are made in California, Hagen Daaz in New Jersey, and Dixie cups in Connecticut (think about it).

LOL, SI did the math wrong in support of labeling laws. A watch that last 5 years for 30 dollars, is 60 dollars in 10 years, the other watch is 125 dollars in 10 years, that is 65 extra dollars, not to mention you will be without a watch as numerous points. if you only work 20 minutes, which seems like an extremely long time on average researching the difference, which means you would only research on the internet at a wage of 185 dollars an hour, if it took 4 minutes, your approaching 1000 dollars an hour. SI, this is not mocking you it’s just the number 15 dollars an hour and 185 are not in the same order of magnitude.

Robert Johnson: I think our host is advancing the argument that equilibrium-seeking is an infinitely more powerful ‘force of nature’ than information asymmetry. If he can score an additional zinger like boycott=racism, that’s the icing on the cake. I don’t buy it, but that seems to me to be what the economists mean by ‘strong efficiency.’ Another agenda I sense is the centrality of self interest. In other words, my guess would be that our host would say a consumer taking anything other than the self-interested consideration of ‘bang for the buck’ into consideration is at best a fool, and getting less then their money’s worth. It stands to reason by that logic that information about anything other than product price or performance is irrelevant. What rational consumer would even be curious about such irrelevant things? Likewise investors would be fools to stray from going for the maximum ‘buck for the buck,’ or ROI, hence the irrationality and utter futility of the politically correct mutual funds we’ve all heard of.

In short, I suspect he’s ridiculing the hunger many of us have for a different world being possible.

Statistical discrimination is exactly this plausible argument for mandatory labeling.

And if people want to pay extra for opportunities to discriminate, why not sell such opportunities?

It’s good for both bigots (who pay extra but get what they want), and non-bigots (who buy discriminated product more cheaply).