ADVERTISING REGULATION AND THE FREE MARKET
Mary L. Azcuenaga
International Congress of Advertising and Free Market
"Freedom: XXI Century; The Century of The Consumer"
May 11, 1995
Buenos dias. I am delighted to join you today and to participate in what promises to be a very stimulating conference. I am one member of the five-member United States Federal Trade Commission. We regulate deceptive advertising. Consistent with that mission, I will begin with a disclosure so you will not be misled. The views I express today are my own and are not necessarily those of the Commission or of any other commissioner.
The theme of this conference, advertising and free markets, should lead us in a number of interesting directions because the link between these two subjects is strong and multifaceted. Some might say that the very idea of regulation of advertising is incompatible with the concept of a free market. In fact, I believe, the opposite is true.
One of the fundamentals of a market economy is the free flow of information about goods and services offered for sale. The underlying theory is that the more fully consumers are informed, the better equipped they will be to make purchase decisions. Unwanted goods and services eventually will disappear from the market, and prices that are too high to induce purchase ultimately will be lowered as firms seek to attract buyers. Most of the time, advertising enhances market performance by transferring useful information to consumers and by enabling firms to promote the attributes of their products and services and, thereby, to compete better with each other. On the other hand, advertising may adversely affect market performance when firms use it to transmit deceptive or fraudulent messages on which reasonable consumers are induced to rely to their detriment. When this happens, we tend to refer to the result as "market failure."
Even a well functioning market economy from time to time may suffer breakdowns, or limited failures, that require curative regulatory measures. Fraud or deception can inject imperfect information into the market that undermines consumers' ability to exercise appropriate purchasing choices. In order for curative measures to succeed in restoring market forces, these measures must focus as narrowly as possible on eliminating the causes of the market failure. Regulatory "cures" that extend beyond simply correcting the problem risk upsetting the balance of forces in the rest of the market and, ultimately, may harm consumers.
Since my task is to discuss the role of advertising regulation in a free market, I will, of necessity, be addressing primarily the darker side of advertising -- those promotional efforts by firms that do not convey truthful and nonmisleading information to consumers and that require some type of government intervention. Nevertheless, I see both advertising and the regulation of advertising in a more positive light, as a means of improving the ability of consumers to make informed purchasing choices. By recognizing that truthful and nondeceptive advertising is a powerful force for good, government regulators can help ensure that the promotional efforts of firms increase the useful information available to consumers. At the very least, regulators should avoid discouraging firms from disseminating the kind of advertising that assists consumers.
Because this is a conference about advertising regulation and free markets, I would like to begin by going back to some of the fundamentals of a free market system and its ability to generate and process information that satisfies consumer wants and needs. Advertising in a free market is a principal means by which useful and material information is delivered to consumers.
Having set the stage by discussing the relationship of information and markets, I will turn to the process by which advertising influences consumer choices and how government regulation seeks to alter this process when the market fails. Here, I will focus particularly on the experience of the United States, with which I am most familiar.
II. THE ROLE OF INFORMATION IN THE FREE MARKET ECONOMY
The free enterprise system that exists in most western democracies is one in which individuals own the means of production and decisions are made largely by individual businesses and consumers, all acting in their own self interest. This free market form of economic organization has convincingly demonstrated its superiority in satisfying consumer needs over alternative forms of economic organization. The most important of these competing systems is socialism, under which the government both owns the means of production and makes all definitive resource allocation decisions. 1
A key element in the relative success of the free market system is its superior ability to generate and process the immense quantities of information that characterize the modern economy -- information, for example, about the tastes and incomes of consumers, about the outputs and costs of producers, and about their multifaceted interconnections.2 As pointed out in a famous economics textbook often used in universities in the United States: Without central intelligence or computation, [the market] solves a problem that the largest supercomputer could not solve today, involving millions of unknown variables and relations. Nobody designed the market; yet it functions remarkably well.3
The ability of a market economy to make use of information results from decentralized decisionmaking and from incentives stemming from private property rights. In contrast, so-called "command economies" have proved far less capable of handling the huge information demands of a modern economic system. It is especially difficult for economies based on centralized decisionmaking to alter course in response to changing conditions of demand and supply. In particular, after the government in such a command system has developed a plan to manage the economy based on certain assumptions about current market conditions, it often finds it difficult to respond to changed conditions that may arise from shifts in consumer preferences, or from improved production technologies, that may invalidate its initial assumptions. The result is a rigid planning process in which the constant flow of new information is either ignored or processed incorrectly. As Janos Kornai has written: "Assembly and processing of that huge mass of information, and coordination based on this information, is too enormous and difficult a task to be undertaken efficiently through centralized planning and management."4
One example may bring this dilemma into focus: Some years ago, producers of many products conducted both their manufacturing and packaging processes without regard to their effect on the air, water and other aspects of the world in which we live, and they made products that themselves were harmful to the environment. Spurred on by public interest groups and others, consumers became aware of the harm that some of these products and processes were inflicting on the environment. Their newly acquired knowledge fueled concern that, in turn, became reflected in their purchasing decisions. Within a relatively short time, products changed, production and packaging methods were altered, and today, markets throughout the United States and much of the rest of the world are filled with products touting their "environmentally friendly" attributes.5
These changes in products and methods of production and packaging occurred almost entirely because consumers began to demand products less likely to damage the environment, and market forces compelled manufacturers to respond to that demand. Such changes would be rare and, at best, much slower to occur in a managed economy in which decisions have been made, perhaps years ago, based on assumptions that protecting the environment was not important or was too costly and in which neither consumers nor producers can exercise sufficient influence to compel the changes absent government fiat. 6
As a number of commentators have observed, attempts to reform the socialist economies of Russia and eastern Europe in the 1980's by introducing some elements of a market economy, but keeping ownership of key resources in the hands of the state, did not work but, instead, worsened the situation. 7 An important reason for this failure appears to have been the lack of proper incentives for managers of the state enterprises. Markets by themselves do not solve the information problem for government managed economies: because property remains in the hands of the state, enterprise managers do not have the appropriate incentives to use the information generated by the market effectively. 8 Placing greater autonomy in the hands of socialist managers, in fact, may have compounded the information problem. Murrell and Olson, for example, argue that socialist managers at the industry level used their newly found freedom to collude among themselves for personal profit at the expense of the state. In so doing, these managers apparently restricted and falsified information they supplied to the central planners. 9
It is difficult to overstate the importance and interrelationship of information and private incentives in the functioning of modern market economies. Information and private incentives also are closely related to advertising, which is an important means by which firms communicate with their customers. 10 Firms convey information to consumers, who, in turn, provide feedback through their reactions to advertising as well as other information available to them.
III. ADVERTISING AND INFORMATION
Let me turn now to the usefulness of information that advertising conveys. I will begin this part of my discussion with two quotations about advertising: The first is from one of the founding fathers and early presidents of the United States, Thomas Jefferson, who said, "Advertisements contain the only truth to be relied on in a newspaper." The second is from a noted British author, H.G. Wells, who said, "Advertising is legalized lying."
As these quotations suggest, controversies over advertising are not a recent phenomenon and, at times, have been both heated and extreme. The modern view of advertising, thankfully, has narrowed the range of opinions somewhat and reduced their emotional content. In particular, there is a considerable body of work in economics and marketing science that has outlined the conditions under which advertising is more likely to provide useful information and those conditions where it most likely will not.11 I will discuss the costs of advertising later in my discussion of regulation. At this point, let me elaborate on the beneficial effects of advertising.
One unifying theme that characterizes the advertising literature is the recognition that there are important instances in which advertising can and does provide the kind of information to consumers that considerably improves the functioning of markets. This improvement is manifested in a number of different ways. Advertisements providing truthful information about the price of a product and its attributes reduce the time and effort that consumers need to expend searching for the goods that best satisfy their needs. Advertising can also provide for greater rivalry among firms because the greater flow of information brings more firms into competition with each other. Finally, the ability to advertise new products and services encourages innovative activity by firms.
The impact of advertising on the market depends, of course, on the institutional setting. The United States economy is based largely on the freedom to negotiate and agree to enforceable private contracts. We allow the interplay of consumer demand and producer supply incentives to determine what and how much is produced and who buys it. To a large extent, the market relies on the interest of producers in protecting their reputations to enforce their promises to consumers. If producers do not keep these promises, their customers will search out alternative suppliers, and the original firm eventually will lose both its reputation and its profits. As long as consumers can judge the quality of products, as long as firms require repeat purchases and good reputations with consumers to remain in business (and most legitimate firms do), and as long as rival suppliers exist or can enter the market without undue cost, the forces of the market itself can punish poor quality and deception without any great need for government intervention.
Studies have been done of the impact of state restrictions on advertising that provide persuasive evidence of the importance of informative advertising in improving market performance. These state regulations provide something of a natural experiment regarding the influence of advertising, since researchers can compare the price and quality of a particular product or service in states in which advertising is restricted to those in states where advertising is subject to few, if any, restraints. Most of these studies -- regarding subjects as diverse as legal services, prescription drugs, gasoline price posting, cigarettes and eyeglasses -- find that prices are significantly lower in states that allow advertising.12
The federal courts in the United States increasingly have recognized the importance of advertising as a source of useful information to consumers, especially in regard to professional activities. In Virginia State Bd. of Pharmacy v. Virginia Citizens Consumer Council, Inc., 13 the United States Supreme Court ruled that the First Amendment to the United States Constitution, which guards freedom of speech, protects advertising that conveys truthful, non-deceptive messages to consumers. 14 In language that echoes my earlier discussion about the role of information in free market economies, the Supreme Court noted that "the free flow of commercial information is indispensable to the proper allocation of resources in a free enterprise system because it informs the numerous private decisions that drive the system." Id., at 765. The Court went on to observe that a "particular consumer's interest in the free flow of commercial information . . .may be as keen, if not keener by far, than his interest in the day's most urgent political debate." Id., at 763.15
Another important influence of advertising is its ability to spur innovative activity by providing firms with an effective way of informing consumers about the availability of new products, or new applications of existing products. Clearly, one is more likely to invest in the search for a better product if one has the means of informing consumers about the existence of such a product and its advantages. I will give you an important example. Recent research has indicated that advertising has inspired the development and acceptance of healthier foods. An FTC Bureau of Economics study found that after the introduction of advertising claims discussing the relationship between fiber and cancer, the number and the fiber content of new product introductions in the high fiber cereal market increased.16 The informational content of the fiber-related advertisements led, in turn, to greater consumption of high fiber cereals and to greater consumer awareness of the benefits of fiber in the diet. I will return to the issue of health claims in advertising.
IV. THE REGULATION OF INFORMATION FLOW
Let me turn now to problem advertising: that is, advertising that uses false or deceptive claims. These claims may induce the purchase of goods or services that routinely do not meet consumers' expectations. When this happens, the government may need to step in to restore the integrity of the market. It may take various steps, including case-by-case enforcement of laws and regulations designed to prevent false and deceptive advertising and issuance of regulations to address prevalent practices that similarly mislead consumers about material attributes of the goods and services in the market.
In the United States, the Federal Trade Commission, or FTC, is the primary federal consumer protection agency. The FTC has responsibility (along with the Department of Justice) for enforcing the nation's competition laws, and it is the only agency that administers the nation's most comprehensive federal statute designed to protect consumers from unfair or deceptive practices, the Federal Trade Commission Act. 17 Under this statute, the chief substantive provision of which is Section 5, the FTC works to ensure that advertisers do not disseminate false, unsubstantiated or otherwise deceptive advertising claims. When such unlawful claims are identified, the FTC, after adjudicating formal allegations of wrongdoing, or obtaining voluntary consent of the alleged wrongdoer, may impose orders, enforceable through the courts, requiring the advertisers to halt their false or deceptive advertising. If such an order is violated, the advertiser risks being required by the courts to pay monetary civil penalties, which can be substantial. In some instances, the FTC's cease and desist orders also may require the respondents to make affirmative disclosures in future advertisements to prevent further harm to consumers, 18 or to make corrective statements about their earlier claims to eliminate lingering false impressions they may have caused. 19
Apart from case-by-case enforcement action against advertisers who disseminate false or deceptive claims about their products or services, the FTC influences the level and content of information reaching consumers in two principal ways: by issuing regulations requiring disclosure of information and by issuing regulations setting standards for certain products or services that cannot easily be evaluated by ordinary consumers. Let me say a few words about each of these activities.
A. Regulations Requiring Disclosure of Information
As a practical matter, markets may not always produce the optimal amount of consumer information to ensure that consumers will be fully informed before making their purchasing choices. For the most part, however, the FTC tries simply to ensure, through its case-by-case enforcement activities, that information provided by sellers to consumers is accurate, not that it is complete. Therefore, as a general rule, the Commission does not require that sellers provide particular information, or that information be provided in a particular way. Nevertheless, with respect to some industries, the Commission has concluded that a general lack of usable information or a general lack of expertise on the part of consumers to assess accurately information that is available warrants issuing rules of general applicability 20 requiring industries to provide particular information in particular ways.
For example, one of the biggest and most costly decisions the average American must make concerns borrowing money to help pay for the purchase of a home. The FTC enforces laws and regulations that require lenders to disclose fully the terms of loans offered for this purpose to ensure that the consumer knows precisely what benefits and obligations he or she is incurring by "purchasing" the loan. In this connection, the Commission has promulgated a regulation defining certain practices in connection with extending credit as "unfair acts or practices" under Section 5 of the FTC Act. 21
The FTC also has used its rulemaking authority to require disclosures of information in other markets in which consumers traditionally received relatively little information, and where the cost of providing the additional information is thought to be offset by the additional benefits flowing from the increased information. These markets include, for example, those for funeral goods and services and for used cars.
With respect to funeral goods and services, the Commission concluded, based on an evidentiary record, that it was an unfair or deceptive act or practice to offer funeral goods and services for sale without furnishing price information that discloses the cost to the purchaser of each of the specific funeral products and services used in connection with burial or cremation. 22 The Commission found that consumers, who often made decisions to purchase such goods and services at their time of need, were frequently unable to obtain full price information on an itemized basis and that this impeded their ability to compare the offerings of different providers and to choose among them on a reasoned basis.
In the used car industry, again, the Commission was concerned that consumers would be unable, without information uniquely within the knowledge of sellers, to assess the relative merits of particular used cars offered for sale. The Commission, therefore, issued a rule requiring sellers of used cars to disclose, among other things, for each vehicle offered for sale whether it is covered by a warranty and, if so, the terms of that warranty. 23 These disclosures were intended to help the consumer to comparison shop and make informed purchase decisions. 24
Warranties, themselves, are another aspect of the market that may be confusing to consumers. In addition to the FTC's rule governing warranty disclosures on used cars, other requirements imposed by United States law require sellers to disclose terms of existing written warranties in a manner that will ensure their availability to consumers before purchase. 25 Significantly, the government does not and, in my view, should not require producers to provide warranties. Instead, warranties should be treated like other product attributes as to which different manufacturers or sellers may compete. The important point about warranties is simply that if they exist, they should be disclosed clearly and fully, so that consumers may evaluate their terms and limitations in deciding whether to buy.
At times, private markets may not provide enough useful information on product performance. Consumers may need some common standard or benchmark for comparing the claims of sellers, particularly if the claims involve technical or highly complex subjects or products and if those products tend to be costly. For example, in the home insulation market, the Commission found that consumers often were unable to determine what kind of insulation to use because they lacked the requisite expertise to enable them to make such judgments. After development of an evidentiary record, the Commission concluded that it was an unfair or deceptive act or practice for a manufacturer or merchant to offer home insulation for sale without complying with certain standards in making labeling and advertising claims about the efficacy of the insulation. Because this market involved a product the efficacy of which consumers could not necessarily evaluate without particular expertise, the Commission imposed standards for the product, referred to as "R-values," and required that all manufacturers use the same measurements and terminology in their advertising and labeling to assist consumers in making choices among competing products. 26
Another example may be useful as well: Energy conservation is important to American consumers, as I as sure it is to many of you. Available research shows that consumers want to buy refrigerators, air conditioners and other electrical appliances that consume as little electricity as possible. To help consumers in making complex choices regarding energy conservation, Congress enacted, and the Commission now enforces a national appliance energy labeling law that specifies test conditions and a common method of disclosing electrical power use for all major appliances.27 Consumers can tell from the labels on these appliances both how much the unit costs to operate per year and where that unit ranks in relation to all competing models. Such standardized information not only allows consumers to choose more intelligently among available appliances, it also stimulates competition in the long run. Manufacturers now have strong incentives to develop more efficient appliances because the rating system will allow the new models to stand out in comparison with the competition.
In some instances, Congress has become sufficiently concerned about apparent market failures caused by the lack of useful information that it has enacted special statutes directing the Commission to issue rules requiring disclosures of particular information in specific ways. Examples of such statutes and their implementing rules include, in addition to the energy conservation legislation I mentioned earlier, those concerning the use of smokeless tobacco; those concerning the labeling of wool, fur and textile products; and, more recently, those governing the growing 900-number telephone information service industry under the Telephone Disclosure and Dispute Resolution Act. 28
V. MARKET FAILURE AND ADVERTISING REGULATION
Advertising claims offer to provide to the consumer a product that will perform as advertised. The FTC Act requires not only that advertising claims be truthful, but also, that they not mislead reasonable consumers about material and objective aspects of the product or service to which they relate. As the Commission's Policy Statement on Deception states: "[T]he Commission will find deception if there is a representation, omission or practice that is likely to mislead the consumer acting reasonably in the circumstances, to the consumer's detriment." 29
Although, in principle, the FTC may challenge any deceptive advertising claim, it is the Commission's long established practice not to challenge claims that are purely subjective (e.g., "best", "brightest", "great taste", "feels and looks great"). This type of claim generally is considered "puffery." Instead, the FTC concentrates on challenging false or misleading claims about objective facts (e.g., "fat-free," "proven effective by scientific tests"), especially if in particular instances, those claims are expensive for consumers to verify, or are beyond the competence or expertise of ordinary consumers to verify. For most inexpensive products that consumers can evaluate themselves without unusual expertise, market forces will correct for consumer dissatisfaction because once dissatisfied with such a product, the consumer need only choose not to buy it again and will suffer only the relatively insignificant cost of a single purchase. Because sellers of such products usually depend heavily on repeat purchase of their goods, serious misrepresentations about the attributes of those goods are unlikely to occur, and if they do occur, they likely will be short lived.
Other goods and services may be more difficult for consumers to evaluate. These are known as "credence" goods and services. Because of their lack of susceptibility to consumer assessment, they are subject to more intense scrutiny by the FTC. Examples of such products include such varied goods as fire safety warning systems and over-the-counter (nonprescription) drugs and medical devices. Ordinary consumers are unable to evaluate efficacy claims for such products, and the FTC has adopted a policy that efficacy claims must be supported by a "reasonable basis."
Briefly, if a seller claims that 50% of doctors surveyed agree that a proffered drug product will eliminate the pain of arthritis for 12 hours, or that in 90% of all fires, a proffered fire detection and warning system will provide at least 15 minutes for occupants of a building to escape safely, the seller must be able to produce survey or test data showing that level of support. If, on the other hand, an advertisement specifies no precise level of substantiation, for example, "Fat Master -- eliminates unsightly fat from the body without exercise or starvation diets," the Commission will assume that the claim promises what experts in the particular field would consider appropriate. In such an instance, therefore, the seller must produce medical or scientific research of a caliber recognized as authoritative by the relevant scientific or medical community demonstrating that the product works as promised.
Earlier, I quoted a standard for identifying deception that relies on the perceptions of reasonable consumers "in the circumstances." In cases where advertising is targeted to specific groups, the FTC considers characteristics of the target audience that make it more or less likely to be deceived by advertisements. On the one hand, for example, the FTC is likely to examine with special care advertising that appears to have particular appeal to children because children might be more susceptible than adults to being deceived by certain kinds of claims. Similarly, as in the Funeral Rule example I mentioned earlier, the FTC would look particularly closely at advertising for funeral goods and services because those who have recently lost a loved one may be more vulnerable to misleading claims when they make such purchases than are consumers making regular purchases on a daily basis. Conversely, the FTC would be less likely to scrutinize drug advertising aimed at doctors and published in medical journals, than advertising aimed at children or sick or elderly individuals, because the physicians are presumed to have the knowledge and ability necessary to evaluate such claims.
The ultimate in market failure attributable to imperfect information flow is that resulting from fraud. Fraud by the producer or seller violates his implicit or explicit offer to provide for a price, goods or services with particular attributes that have been advertised to attract consumer interest. When a seller induces the purchase of products or services that, notwithstanding his or her claims to the contrary, he or she knows, or should know, are unlikely to perform as claimed or to meet the consumer's needs as promised, the seller perverts the system and causes consumer injury.
The FTC tries to rectify fraud by moving quickly to seek court injunctions against the fraudulent operator and by seeking to recover the seller's ill gotten gains for return to consumers as redress or to the United States Treasury as disgorgement. Most frauds are conducted by firms that have little or no reputation to protect and few fixed assets that are at risk should they be caught. Unfortunately, and of particular interest to many of you, their operations are increasingly international.
Returning to our theme of the usefulness of information, one effective way to combat fraud is to inform consumers about the ways in which fraud can be practiced and of particular fraudulent schemes that have been identified so the consumers can protect themselves. Truthful and nondeceptive information is the lifeblood of a healthy free market economy.
V. ADVERTISING REGULATION: THE CASE OF HEALTH CLAIMS
I would now like to discuss in a little more detail one important area of advertising in the United States that I mentioned earlier in passing -- deceptive health claims -- and to describe how the FTC approaches the task of monitoring such claims to ensure that they are truthful and not misleading. A key characteristic of advertisements for health-related products and services is that they may contain either informative or deceptive elements and, in some cases, both. The regulatory challenge is to develop policies that discourage the deceptive claims without restricting the truthful ones.
The FTC's "reasonable basis" standard or "advertising substantiation" doctrine, which the Commission announced in its 1972 decision in Pfizer, Inc., 30 comes close to achieving both these goals. Under this doctrine, advertisers need not have absolute proof that their objective claims are true before making those claims, but they must have a "reasonable basis" for believing the claims are true. Objective claims for which the advertiser can provide no reasonable basis are considered deceptive and are unlawful under Section 5 of the FTC Act.
Using the advertising substantiation doctrine, the Commission considers six factors before deciding whether an advertiser possesses a reasonable basis for an objective claim. The first factor is the type of product being advertised. If the product is a familiar item the use of which presents little risk of harm to consumers, a lower level of substantiation is required. The second factor is the type of claim. Claims that refer to specific facts or figures require a higher level of substantiation than claims that contain more generalized descriptions of performance or effectiveness. Claims that are difficult or impossible for consumers to evaluate by themselves -- such as a claim that eating a certain food will lower your risk of cancer or heart disease -- are also held to a higher standard.
The third factor to consider is how much consumers will benefit if the claim proves to be true. The likelihood that this factor would ever be important may seem counter-intuitive to people who consider advertising to be generally distasteful and of no redeeming social value. A study by the Commission's Bureau of Economics of cereal advertising, however, demonstrates that advertising can indeed contain information of real value to consumers. 31 The fourth factor is the seriousness of the harm that will result if the claim proves to be false. The economic consequences of a false claim are more serious for expensive products than for products for which the cost is cheap. In addition, health consequences of a false claim are more grave if the advertisement represents that a product will prevent or cure a serious disease, particularly if the advertised product is chosen instead of an alternative product or treatment that is, in fact, effective.
The fifth factor is the cost of developing substantiation for the claim. All else being equal, we require a higher level of substantiation for claims that are less expensive to evaluate, particularly if the potential profits from sale of the product are relatively large. The sixth and final factor is how much substantiation is considered reasonable by experts in the field. Although the FTC consults outside experts, it does not delegate its responsibility to decide the appropriate level of substantiation.
The crucial factors in evaluating health claims are often numbers three and four on this list: that is, the potential benefit if the claim is true and the potential harm is a claim is false. It is important to give full consideration to both of these factors.
Insignificant, contradictory or poorly designed studies would not satisfy the "reasonable basis" standard, especially as applied to a health-related product, where the standard is applied with particular rigor. One has only to look, for example, at the order in Thompson Medical,32 in which the Commission prohibits, among other things, use of the product name "Aspercreme" without an accompanying clear and prominent disclosure that the product does not contain aspirin. The Commission also required substantiation for pain-relief claims in the form of "at least two adequate and well-controlled, double- blinded clinical studies which conform to acceptable designs and protocols and are conducted by different persons." The "reasonable basis" standard may even require an absolute consensus in some instances. 33
In his famous dissent in the case of Abrams v. United States, 34 noted Supreme Court Justice Oliver Wendell Holmes observed that "[e]very year if not every day we have to wager our salvation upon some prophecy based upon imperfect knowledge." Many of the decisions government agencies are asked to make in the health claims area are "prophecies based upon imperfect knowledge." Scientists rarely know for certain that a particular nutrient or food component exerts a particular effect on a particular disease. More commonly, the Commission is faced with a body of studies, each with its own limitations, that suggest certain relationships but do not prove causal links between diet and health. I would like to think that all the Commission's future decisions on health claims will be the right ones, but it would be foolish to choose a policy that works only when we are able to predict the future with complete certainty. Some of our "prophecies" will not doubt turn out to be mistaken.
I have tried today to highlight the benefits of taking the positive approach toward advertising that I mentioned at the beginning of my remarks. Once we acknowledge the potential for advertising to provide useful information to consumers that they otherwise would not have, then it is incumbent on regulators to seek solutions that preserve the valuable information content of advertisements yet limit misleading impressions from being conveyed. To do this we need always to keep in mind the incentives that drive firms to advertise in the first place.
That concludes my prepared remarks. Yo he disfrutado mi estadia en su pais. Muchas gracias por su hospitalidad y su atencion.
1 The free market and socialist models to which I refer are, of course, polar cases between which are many variations: market systems with varying degrees of government ownership and control, and socialist systems in which market elements are present. Nevertheless, the key differences relating to ownership rights and decisionmaking serve to distinguish the two systems appropriately for my purposes.
2 See "In Praise of Hayek," The Economist 75 (March 28, 1992).
3 P. Samuelson and W. Nordhaus, Economics, 14th ed., New York: 1992, p. 36.
4 The Socialist System, Princeton: 1992, p. 127. For a general discussion of the economic problems arising under socialism, see Kornai, op. cit.
5 Although the FTC issued guidelines articulating how it would identify environmental marketing claims that are likely to be deceptive, these guidelines are not themselves enforceable as law. 16 C.F.R. Part 260.
6 The environmental policies followed in the Soviet Union and their effects are documented in E. Neuberger, Ecocide in the USSR: Health and Nature Under Siege, New York: 1994.
7 See, e.g., J. Kornai, op. cit.; P. Murrell and M. Olson, "The devolution of centrally planned economies," Journal of Comparative Economics, June 1991.
8 F.A. Hayek, "Socialist Calculation: The Competitive 'Solution,'" Economica, May 1940. Hayek's analysis was done in response to arguments by Oscar Lange and others that "market socialism" could attain the same efficiency as a free enterprise system. For a description of the ensuing debate, see K.I. Vaughn, "Economic Calculation Under Socialism: The Austrian Contribution," Economic Inquiry, vol. 18, October 1980, pp. 535- 2 Looking back after fifty years, Kornai (op. cit. p. 476) concludes that "Hayek was right on every point in the debate. Reformers who begin groping toward market socialism along Lange's lines regularly learn by bitter experience in their own countries that the hope Lange held out was illusory."
9 P. Murrell and M. Olson, op. cit.
10 Although advertising was not a key issue in the classic debates over market socialism in the 1930's and 1940's, its value was discussed by a number of the participants in other venues. The Austrian critics of socialism tended to view advertising as a distasteful but necessary way for firms to transmit information to consumers. Holding his nose, Von Mises, observed that advertising "must be obtrusive and blatant. It is its aim to attract the attention of slow people; to rouse latent wishes, to entice men to substitute innovation for inert clinging to traditional routine." (J. Driver and R. Foxall, Advertising, Policy and Practice, New York: 1984, p. 62.) At the other end of the spectrum, commentators sympathetic to the socialist model were more skeptical of advertising's advantages. Economists such as Nicholas Kaldor and James Mead, for example, recommended that advertising by firms be discouraged and that a centralized provision of information by the state be used in its place. (Driver and Foxall, op. cit., p. 37.)
11 The research is summarized in D. Carlton and J. Perloff, Modern Industrial Organization, New York: 1989, pp. 593-616. See also the discussion in J. Calfee and J. Pappalardo, How Should Health Claims for Foods be Regulated? FTC Report, September 1989.
12Carlton and Perloff, op. cit. pp. 602-603.
13 425 U. S. 748 (1976).
14 In contrast, the Court has ruled that the First Amendment does not protect deceptive or misleading commercial speech -- speech that only proposes a business transaction. See, e.g., Rubin v. Coors Brewing Co., 63 U.S.L.W. 4319 (April 19, 1995); Bolger v. Youngs Drug Products Corp., 463 U.S. 60 (1983); Virginia State Bd. of Pharmacy v. Virginia Citizens Consumer Council, Inc., supra.
15Rubin v. Coors, supra.
16P. Ippolito & A. Mathios, Health Claims in Advertising and Labeling: A Study of the Cereal Market (1989) (FTC Bureau of Economics Staff Report).
17 15 U.S.C. 45. In addition to the FTC Act and other federal laws governing a range of consumer-related areas including the efficacy of prescription drugs, the safety of children's toys and the protection of the environment, all, or nearly all, the states have enacted what are commonly known as "little FTC Acts." These state-enacted consumer protection statutes often are modeled on the federal law, and they are enforced by state courts, which often give great weight to the decisions and policies of the FTC. Consumers in the United States, therefore, are protected by a web of laws and regulations that seek to maintain and preserve the functioning of the free market for the benefit of consumers and business.
18 See, e.g., Campbell Soup Co., F.T.C. Dkt. No. 9223 (Aug. 18, 1992)(consent order).
19 See, e.g., Warner-Lambert Co., 86 F.T.C. 1398, 1503, aff'd as modified, 562 F.2d 749, 762 (D.C. Cir. 1977), cert. denied, 435 U.S. 950 (1978).
20 Section 18 of the FTC Act, 15 U.S.C. 57a, empowers the Commission to promulgate trade regulation rules with the force and effect of law that "define with specificity" acts or practices that the Commission finds, based on substantial evidence in the rulemaking record, are prevalent and are unfair or deceptive.
21 Trade Regulation Rule on Credit Practices, 16 C.F.R. Part 444.
22Trade Regulation Rule on Funeral Industry Practices, 16 C.F.R. Part 453.
23 Trade Regulation Rule on Used Motor Vehicles, 16 C.F.R. Part 455.
24 Other major trade regulation rules focusing on prepurchase disclosures to consumers include those concerning mail- and telephone-order purchases, 16 C.F.R. Part 435; and franchise sales, 16 C.F.R. Part 436.
25 Magnuson-Moss Warranty Act, 15 U.S.C. 2301.
26Trade Regulation Rule on Labeling and Advertising of Home Insulation, 16 C.F.R. Part 460.
27 The Energy Policy and Conservation Act, 42 U.S.C. 6291.
28 Comprehensive Smokeless Tobacco and Health Education Act, 15 U.S.C. 4401, 16 C.F.R. Part 307; Wool Products Labeling Act, 15 U.S.C. 68, 16 C.F.R. Part 300; Fur Products Labeling Act, 15 U.S.C. 69, 16 C.F.R. Part 301; Textile Fiber Products Identification Act, 15 U.S.C. 70, 16 C.F.R. Part 303; and Telephone Disclosure and Dispute Resolution Act, 15 U.S.C. 5711-14, 5721-24, 16 C.F.R. Part 308.
29 Policy Statement on Deception, appended to Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984).
30 81 F.T.C. 23 (1972).
31 P. Ippolito & A. Mathios, supra.
32 104 F.T.C. 648, 844 (1984).
33 Congress incorporated a "consensus" standard in the Nutrition Labeling and Education Act of 1990, Pub. L. No. 101- 535, 104 Stat. 2353 (codified in part at 21 U.S.C. 343(i), (q) and (r)), but left its interpretation and application to the Food and Drug Administration. The FTC has a parallel responsibility, under the FTC Act, for preventing and eliminating deceptive advertising for food and nutrition products, the labeling of which is governed by the NLEA. As the Commission has explained, its "reasonable basis" substantiation measure "shares many elements with" the NLEA consensus standard. FTC Enforcement Policy Statement on Food Advertising, 18-28, May 13, 1994. Both demand significant support for objective claims about food and nutrition products, and neither would tolerate proffered substantiation for health claims about such products consisting merely of anecdotal accounts, or otherwise unreliable evidence, that would not produce reliable data from which generalized conclusions could be drawn to support the claims.
34 250 U.S. 616, 624 (1919).