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Article posted Apr 07 2014, 7:40 AM Category: Economy Source: Robert P. Murphy Print

GM, Product Safety, and Death

by Robert P. Murphy

The reports that GM deliberately avoided a recall for a defective ignition switch–which led to at least 13 fatalities–because of cost considerations has led to predictable denunciations of capitalist greed. Michael Moore epitomizes this reaction:
I am opposed to the death penalty, but to every rule there is usually an exception, and in this case I hope the criminals at General Motors will be arrested and made to pay for their pre-meditated decision to take human lives for a lousy ten bucks. The executives at GM knew for 13 years that their cars had a defective ignition switch that would, well, kill people. But they did a “cost-benefit analysis” and concluded that paying off the deceased’s relatives was going to be cheaper than having to install a $10 part per car. They then covered up their findings and continued to let millions drive around with the defective part in their cars. There would be no recalls. There would only be parents and the decapitated body parts of their dead children.
In this post, I do not want to discuss the particulars of the GM case. Rather, I want to explore the notion of product safety more generally. Even though Moore’s reaction probably captures how most people emotionally respond to such situations, economics offers us a more nuanced understanding.

First things first: No matter WHAT General Motors or other companies do, they will always sell vehicles that could conceivably result in an operator’s death. It’s not as if the only people who died while driving cars in the last two decades did so because of GM’s faulty ignition switch.

There are all sorts of things that car manufacturers could change in their designs, to make their products safer. So why don’t they do so? Because it would make the vehicles more expensive and slower. In the limit, GM could sell vehicles that resembled tanks (without weaponry), which had a maximum speed of 10 miles per hour and cost $100,000. There might be zero deaths for the drivers of such vehicles. Of course, not many people could afford them, and the total number of deaths would probably go up as people biked to work and the economy came to a standstill.

Suppose years ago when they discovered the problem, GM had contacted all of the 2.6 million customers driving the vehicles with a faulty switch and told them, “We think 13 of you will end up dying because of the faulty switch. The problem is, we don’t know which 13–if we did, we’d obviously fix your vehicles. Although the part itself is under $1, there is the labor involved, plus many of you will want a loaner while we fix the vehicle. All told, it would probably cost us about $50 per each of you to replace all 2.6 million switches. So we’ll give you all a choice: We can fix your switch, OR we can mail you a check for $40, and promise that if you die because of the faulty switch, we will pay your estate $1 million.”

I have no idea how many people would take that offer. I’m guessing out of 2.6 million, most would elect to get the switch fixed, but a good many would take the $40 and promise of indemnification. Certainly if we changed the numbers around–so that people got, say, a $400 check–the balance would tilt in favor of the “live with it” outcome.

The reason I have framed this hypothetical is that I’m trying to show that the underlying logic–that in situations where there is a very small chance of death–it really might make economic sense to not do a recall. In my scenario above, if a particular customer had elected to take the $40 rather than get the switch fixed, and then that person happened to die–with his estate then getting $1 million further compensation–people like Michael Moore could hardly complain about the absurdity of neglecting a repair because of cost. In such a hypothetical scenario, the victim himself (or herself) would have chosen to bear the risk in order to save on the repair cost.

Of course, one enormous difference between reality and my hypothetical scenario is that GM didn’t offer consumers this choice. Yet to the extent that the vehicle market is competitive, ultimately costs are borne by the customers. If GM and other car manufacturers have always been following the cold-blooded logic that Moore detests, and now switch to a “always fix a defect, no matter the cost and no matter how few people will likely be affected,” then cars will end up being much more expensive. So there is a sense, even in the real world and not just my hypothetical, in which the car companies are implicitly giving their customers an overall combination of safety-and-money.

As with every tough scenario in which a free-market economist tries to offer analysis, here too we must be very careful. One of the major “inputs” into GM’s cold-blooded cost/benefit analysis was the settlement that it would have to pay the estates of people who died because of its faulty product. In our world, that number is not the outcome of a genuine market process, but is instead largely influenced by government, because of the State’s monopoly of the judicial system.

In conclusion, I am NOT defending the actions of GM. Indeed, had policymakers taken my advice, GM would have gone under; I was totally opposed to the US government’s bailout of the automakers. (The joke at the time was calling it Government Motors.) Rather, I am trying to show that there is nothing evil about a company using cost/benefit analysis to guide its decisions, even when it involves defective products that can kill people. Taking Michael Moore’s logic to the extreme, companies would stop selling food (because it might be poisonous) and no one could ever fly again. The way to reform the system and lead to genuinely sensible decisions is for government to get out of the way, so that true market prices can guide cost/benefit tests. Robert P. Murphy is the author of The Politically Incorrect Guide to Capitalism, and has written for Mises.org, LewRockwell.com, and EconLib. He has taught at Hillsdale College and is currently a Senior Economist for the Institute for Energy Research. He lives in Nashville.





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