Chapter 5 Ethics of Consumption

Lecture outline
Product safety
Business’s responsibility for understanding and providing for consumer needs is derived from
the fact that citizen-consumers depend on business to satisfy those needs. This dependence is
particularly true in our highly technological society, characterised as it is by a complex
economy, intense specialisation and urban concentration. These conditions contrast with
Australia and New Zealand’s past, when both countries were primarily agrarian and composed
of people who could satisfy most of their own needs. Today, however, we rely on others to
provide the wherewithal for our survival and prosperity. We rarely make our own clothing,
supply our own fuel, manufacture our own tools or construct our own homes, and our food is
more likely to come from thousands of kilometres away than from our own gardens.
Consumer dependence means that society is dependent upon consumer goods to maintain
its urban lifestyle. Moreover, knowledge of products is limited, and goods can be highly
technical and potentially dangerous.

The regulatory framework

 Diverse protection involves different structures in different countries. It is important
because consumer goods are likely to originate abroad.
 Cost effect refers to the potential for regulations and controls to increase consumer prices.
 In terms of effectiveness, regulations have had mixed results in Australia and overseas (e.g.
mad cow disease and importation of tainted goods and toys).
Trade Practices Act 1974
Recently renamed the Competition and Consumer Act 2010, the Act aims to enhance the
welfare of Australians by promoting competition and fair trading and providing for consumer
protection. This legislation is administered by the Australian Competition and Consumer
Commission (ACCC). Also, each state has its own Office of Fair Trading to provide policy and
regulatory services in an effort to advise consumers on their rights.
Economic costs
Although most product safety regulations bring obvious benefits, critics worry about the
economic costs. New safety standards add millions of dollars to the cumulative price tag of
various goods. Often economists can estimate how many lives a regulation saves and then
compare that with the cost of implementing the rule.
Consumer choice
In addition to cost is the issue of consumer choice. Sometimes consumers dislike mandated
safety technology. For example, in 1974, US legislation was proposed that required cars to have
an interlock system that would prevent them from moving until seatbelts were fastened. No
doubt the law would have saved lives, but a public outcry forced lawmakers to rescind it.
Apparently, many drivers saw interlock systems as a nuisance and believed their inconvenience
outweighed any gain in safety.
Legal paternalism
Legal paternalism is the doctrine that the law may justifiably be used to restrict the freedom of
individuals for their own good. No-one doubts that laws justifiably restrict people from harming
other people, but a sizeable number of moral theorists deny that laws should attempt to
prevent people from running risks that affect only themselves.
How effective is regulation?
Consumers usually assume that if a product is on the market, especially if it is something they
eat or drink, then it has been certified as safe. But that assumption can be mistaken. For
example, when mad cow disease emerged in the late 1980s, Australia tested beef for its
presence through the Australia and New Zealand Food Authority. Similarly, Canada, Japan and
the European Union put in place screening tests intended to prevent infected meat from being
sold to the public.
Who bears responsibility for safety?
 Market approach to safety: This approach assumes that the operation of the ‘invisible hand’
in an unregulated market will cause dangerous products and unscrupulous producers to
suffer consumer backlash. However, poor products will result in poor sales and cause the
producer to ultimately lose market sales, thus resolving the problem.
 Contract approach to safety: This approach is based on the premise that the only moral
issues between buyer and seller are the terms of the contract that must be met.
 Due care approach to safety: This approach places the onus of responsibility on the
producer because of the relatively ignorant and vulnerable position of the consumer in the
marketplace.
 Social cost approach to safety: This approach to safety is market-oriented in that the social,
environmental and other costs must be added to the cost of the item consumed so that
costs are covered at time of purchase and sales are limited.

The responsibilities of business

 Businesses should give safety the priority warranted by the product.
 Businesses should abandon the misconception that accidents occur exclusively as a result of
product misuse and that they are thereby absolved of all responsibility.
 Businesses must monitor the manufacturing process itself.
 When a product is ready to be marketed, companies should have their product safety staff
review marketing and advertising strategies for potential safety problems.
 When a product reaches the marketplace, the manufacturer should make written
information about the product’s performance available to consumers.
 Companies should investigate consumer complaints.

Other areas of business responsibility

 Product quality: Business is responsible for ensuring that quality meets consumer
expectations and requirements.
 Prices may not reflect conventional determinants such as overhead and operating expense.
Rather, they are determined in part by psychological factors that influence customers.
– Manipulative pricing: Manufacturers trade on human psychology when they sell
substantially similar products at different prices.
– Price fixing refers to the unseen agreements between producers to limit
competition by agreeing to set prices.
 Labelling and packaging: Consumers rely on packaging information, though some may be
misleading.

Deception and unfairness in advertising

Deceptive techniques
 These techniques include misleading consumers, obfuscation and untrue claims.
 Ambiguity involves advertising that deceives the consumer as to the true nature of a
product and its attributes.
 Concealment of facts means that information that is important to the consumer is
hidden or withheld.
 Exaggeration involves making claims that are unsupported but may be technically legal
to make.
 Psychological appeals seek to key into natural desires or drives such as sex, status,
desirability or social acceptance by attaching that attribute to the product.
Advertising directed at children
These ads target the most vulnerable segment of society, as children have limited
understanding of issues such as cost, quality and safety. Producers rely on children pressuring
their parents for results. Some writers contend that unethical advertising could be a
contributing factor to the childhood obesity epidemic.

The debate over advertising

 Consumer needs: Consumers need information about available products.
 Market economics: Defenders of advertising see advertising as an aspect of free
competition in a competitive market, which ultimately works to the benefit of all.
Free speech and the media
Defenders of advertising in the USA claim that, despite these criticisms, advertising enjoys
protection under the First Amendment as a form of free speech. Legally this claim probably
requires qualification, especially in regard to radio and television, for which one must have a
licence to broadcast. Banning cigarette advertisements from television, for instance, did not run
contrary to the US Constitution. More importantly, even if we concede advertisers have the
legal right to free speech, not every exercise of that legal right is morally justifiable. If
advertisements in general or for certain products were shown to have undesirable social
consequences, or if certain sorts of ads relied on objectionable or non-rational persuasive
techniques, then there would be a strong moral argument against such advertisements
regardless of their legal status.

Strict liability
The doctrine of strict product liability holds that the manufacturer of a product has legal
responsibilities to compensate that product’s users for injuries suffered because the product’s
defective condition made it unreasonably dangerous, even though the manufacturer has not
been negligent in permitting that defect to occur. Under this doctrine, a judgement for the
recovery of damages could conceivably be won even if the manufacturer adhered to strict
quality-control procedures. Strict liability, however, is not absolute liability. The product must
be defective, and the consumer always has the responsibility to exercise care.
Critics of strict product liability contend that the doctrine is unfair. They insist that a firm
that has exercised due care and taken reasonable precautions to avoid or eliminate foreseeable
dangerous defects should not be held liable for defects that are not its fault – that is, for
defects that happen despite its best efforts to guard against them. To hold such a firm liable
seems unjust.
Which do you think is more appropriate – a doctrine of strict product liability, caveat
emptor (let the buyer beware) or something in between? Do you think the utilitarian
justification for our current system’s doctrine of strict liability is sufficient? Use product
examples from the product liability court case history given in the text to justify your response.

Legal paternalism
Anti-paternalism gains plausibility from the view that individuals know their own interests
better than anyone else and that they are fully informed and able to advance those interests.
But in the increasingly complex consumer world, that assumption is often doubtful. Whenever
citizens lack knowledge and are unable to make intelligent comparisons and safety judgements,
they may find it in their collective self-interest to set minimal safety standards. Such standards
are particularly justifiable when few, if any, reasonable persons would want a product that did
not satisfy those standards. But do you agree? Which do you think is more appropriate, anti-
paternalistic justifications or paternalistic ones? Is it better to maximise individual autonomy by
giving people the freedom to choose or to have at least some paternalistic laws such as seatbelt
laws?
Self-regulation
Self-regulation can easily become an instrument for subordinating consumer interests to profit-
making when the two goals clash. Under the guise of self-regulation, businesses can end up
ignoring or minimising their responsibilities to consumers. For example, nothing enrages
aeroplane passengers more than being stuck on a runway because of bad weather and
congested terminals, waiting for hours to take off, with little to eat or drink, overflowing toilets
and poor ventilation. (One passenger, made desperate after several hours trapped in a parked
plane, made national news in the USA when he used his mobile phone to call 911 to report that
he and his fellow travellers were being held against their will. That call got authorities to empty
the plane, but it also brought him a jail sentence.) The airlines, however, have avoided
threatened regulation by successfully lobbying Congress to be allowed to solve the problem
themselves. The result? Although a few airlines have committed themselves to releasing
passengers after two or three hours, most have no rules at all. Do you think we should rely on
companies to self-regulate or should we regulate industry? Or should it be on a case-by-case
basis? Discuss the airline example in your response.

Manipulative pricing
Many practical consumers think of the pricing practices and gimmicks mentioned in the text as
a nuisance or irritant that they must live with, not as something morally objectionable. But
tricky or manipulative pricing does raise moral questions that businesspeople and ethical
theorists are now beginning to take seriously.

Free speech or false advertising?

With annual sales of over US$16.3 billion and annual profits of around $1.5 billion, Nike
is one of the giants in the sports apparel business, and its trademark ‘swoosh’ logo is
recognised around the world. However, for a company its size, Nike directly employs
surprisingly few workers – only about 22 000. That is because overseas contractors
manufacture all Nike’s products. These independent contractors employ approximately
600 000 workers at 910 factories, mostly in China, Indonesia, Vietnam and Thailand.
Like many other firms, Nike outsources its manufacturing to take advantage of
cheap overseas labour. But the price of doing so began getting higher for Nike in the
late 1990s, when anti-sweatshop activists started campaigning against the company,
charging that the workers making its products were exploited and abused. Activists on
many university campuses, for instance, encouraged their peers to boycott Nike shoes
and clothing, and tried to pressure their universities’ athletic departments not to sign
deals with Nike for team sports apparel.
Instead of ducking the issue, as other companies might have, Nike responded
vigorously to the criticisms. At the University of North Carolina, for example, Nike ran
full-page ads in the student newspaper, asserting that it was a good corporate citizen
and upheld humane labour standards. It sent representatives to meet with student
activists, and company CEO Philip Knight took the unusual step of showing up at an
undergraduate seminar on corporate globalisation to defend his company. Nike issued
press releases and sent letters to many university presidents and athletic departments,
asserting, among other things, that Nike paid ‘on average, double the minimum wage as
defined in countries where its products are produced’ and that its workers ‘are protected
from physical and sexual abuse’.
Enter Marc Kasky, a 59-year-old San Francisco activist. He thought Nike’s
campaign was misleading the public about working conditions inside its factories, so he
sued the company for false advertising under California’s consumer protection law. In
Kasky’s view, the case was simply a matter of protecting consumers from corporate
deceit. In response, Nike argued that the statements in question were protected by the
First Amendment because they were made in news releases, letters to the editor and
op-ed essays, and because they related to the company’s labour practices – which are
a matter of public concern – and not the products it sold. Two lower courts agreed with
Nike, but then the California Supreme Court overturned their verdict, ruling in a 4–3
decision that the company’s campaign was essentially commercial speech (which
generally receives less First Amendment protection than political or personal speech),
even though Nike was not specifically talking about shoes. In the court’s view, Nike’s
speech was directed at customers and dealt with its business operations; the form in
which the information was released was irrelevant. The judges, however, didn’t
determine whether Nike really did abuse workers or mislead consumers; it left those
factual questions for a trial court to decide.
Nike then appealed the case to the US Supreme Court. California Attorney
General Bill Lockyer filed a brief in support of Kasky, which 17 other states joined. The
brief contended that the case was not about free speech but rather about ‘Nike’s ability
to exploit false facts to promote commercial ends’. Harvard law professor Laurence
Tribe, however, defended the company, arguing that treating Nike’s letters and press
releases as equivalent to advertising would undercut the ability of companies to speak
out on political issues. He urged that the California decision would have a ‘chilling effect
on freedom of speech’. To this, however, the chief author of the California brief, deputy
attorney general Roland Reiter, responded: ‘I believe the concerns expressed are really
overblown. We have a company talking about itself. It’s difficult to see why holding them
to the truth would cause any kind of calamity.’ USC law professor Erwin Chemerinsky
agreed. He argued that it didn’t matter whether Nike issued the information in the form
of a press release: ‘If a company makes false statements about its product or practices
with the intent of increasing profits, that’s commercial speech.’
After having heard the case, however, the Supreme Court declined to decide the
substantive legal issues at stake. Instead, it dismissed the case on a technicality and
sent it back to California for trial. Before the trial began, however, Nike settled out of
court with Kasky. As part of the deal, Nike agreed to donate $1.5 million to the Fair
Labor Association, a sweatshop monitoring group, and in a joint statement, Kasky and
Nike ‘mutually agreed that investments designed to strengthen workplace monitoring
and factory worker programs are more desirable than prolonged litigation’.
A happy ending? Not in everyone’s eyes. Friends of Nike argued that because
the Supreme Court did not act forthrightly to protect corporate speech, companies will
be reluctant to discuss public issues involving their products. Those on the other side,
however, responded that when disclosing information about wages and working
conditions, companies should be held to the same standards of truth and accuracy as
when they disclose financial data.
For more on this case, see ‘Just How Far Does First Amendment Protection Go?’, Wall Street
Journal, 10 January 2003, B1; ‘Suit against Nike Raises Free Speech Questions’, San Jose
Mercury News, 21 April 2003, 1A; ‘Free Speech or False Advertising?’, Business Week, 28 April
2003, 69; Robert J. Samuelson, ‘The Tax on Free Speech’, Newsweek, 24 July 2003,