September 2, 2020 Reading Time: 3 minutes

Last week, a California court ruled that a vegan butter producer could use the word “butter” to describe his product. Agricultural regulators had, back in December 2019, claimed that this producer (Miyoko’s Creamery) was attempting to fool consumers by implying that he was producing a dairy food item. In recent years, a wide variety of new food items that do not fit into previously regulated categories have emerged. Because these new items are often substitute goods to existing products, numerous incumbent producers have tried to use regulatory statutes to restrict competition.  

It is hard to imagine a more potent illustration of “regulatory capture,” which is the theory that regulating government agencies are in such a close relationship with the industries they regulate that they end up acting in ways that benefit those industries. What is more interesting is that the dairy industry’s history is filled with such illustrations. In fact, the dairy industry stands out from all other industries that could make it into economic textbooks to illustrate how regulatory bodies can become subservient to the industries they regulate. 

In the 1860s, a French chemist invented margarine as a cheap substitute to butter. The product grew rapidly popular as it was less than half the price of butter during the 1870s. It was particularly cheap because it was a byproduct of cattle slaughtering which the incredibly efficient meatpackers were able to turn into a profitable consumer product. 

The reaction of the dairy industry was virulent. Economic historian Ruth Dupré, in an article in the Journal of Economic History, noted that margarine was the first food product to be regulated by the federal government in the United States. The yellow coloring dye was subjected to discriminatory taxation in the United States until the 1950s. In some states, margarine was entirely prohibited. In Canada, margarine was entirely prohibited from 1886 until 1949. Bans continued in some Canadian provinces as late as the 1990s. 

Dupré notes that margarine producers frequently mislabelled their products in order to compete with butter. Yet, dairy producers – unsatisfied with asking for proper labelling of the substitute goods – lobbied heavily for stronger measures to deter margarine consumption. They invented stories about the harm that margarine could do to consumers. It was “unfit” for human consumption. These justifications were used to push for prohibition, discriminatory taxation, bans on coloring etc. 

The results were immediate as early state-level regulations, such as those in New York, led to massive reductions in the production of margarine. Those regulations essentially raised the price of margarine so that the price difference was less than 2 cents per pound. The poorest consumers of the 19th century, for whom dairy products represented between 7% and 13% of household expenditures, were stuck with higher prices. 

Why did politicians cede to these demands of the dairy industry? Dairy farmers were a concentrated interest group and as such had strong incentives to mobilize for regulations. With costs dispersed over large populations that were unwilling to expend resources to fight against dairy farmers, politicians were tempted to give in to the strongest group. In states where they were exceptionally powerful relative to other farming interests, as Dupré points out, dairy farmers were particularly efficient in obtaining these regulations.

From these initial regulations against margarine grew a large bureaucratic apparatus meant to govern the food industry. Each regulation brought regulators in closer relation with dairy producers. This strengthening connection between both made it more likely for additional regulations to be adopted (to the benefit of industry members). 

This meant that regulators were instrumentalized to restrict entry into the “dairy” industry or stimulate demand for dairy products. For example, when the Canadian food guide was first introduced in the 1940s, the dairy industry heavily lobbied the department of agriculture to include large portions of dairy items. To this day, the dairy industry is considered a major stakeholder in revisions of the food guide and so it is frequently consulted. By way of another example, in both the United States and Canada, industry members combatted raw milk producers and distributors even though it filled only a niche market. The example of vegan butter is only the most recent expression of this instrumentalization. 

At any point in time, say at present, the cost of this instrumentalization of regulatory agencies for private purposes appears minimal. After all, only an infinitesimal fraction of the economy is affected. Yet, try picturing a counterfactual America where the regulatory waltz that began in the late 19th century never actually started. How much richer would Americans be today? How different would their consumption patterns be? How different would the agricultural sector be? In the long run, this regulatory capture is very costly. We should bear this in mind the next time stories such as that of vegan butter flare up in the media.

Vincent Geloso

Vincent Geloso

Vincent Geloso, senior fellow at AIER, is an assistant professor of economics at George Mason University. He obtained a PhD in Economic History from the London School of Economics.

Follow him on Twitter @VincentGeloso

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