My good friend and coauthor John E. (Jack) Calfee died suddenly of a heart attack last month. He was bon in 1941 and was 69 years old.
Jack came late to economics. After graduating from Rice with a major in mathematics, he studied international relations at the University of Chicago and then worked for AT&T in California. It was only in 1980 that he received his Ph.D. in Economics from Berkeley. He then went to work at the FTC (where I met him), mostly as Special Adviser to Wendy Gramm when she was Head of the Bureau of Economics. The issues he studied there – advertising, markets for health, including pharmaceuticals, tort law – were the basis for the rest of his career. From the FTC, Jack went to the University of Maryland (my daughter was his student) and then to Boston University, where he taught marketing. He returned to Washington in 1993 and worked for a year at the Brookings Institution, and then at the American Enterprise Institute, where he remained until his death.
Jack’s work had both scholarly and policy impacts. Google Scholar lists about 150 papers with about 2000 citations, a very respectable number for anyone, and especially for someone who was not primarily an academic. But Jack’s work had important policy implications. In addition to his scholarly work Jack wrote innumerable policy papers and articles, and testified both before Congress and before regulatory agencies. Many of his policy articles appeared in AEI publications, but there were also op-eds in the many newspapers and magazines. Indeed, Jack’s final publication, an analysis of the costs of the Massachusetts health plan appeared posthumously in the Wall Street Journal, one of many publications in that newspaper.
Jack contributed to our understanding of several areas of knowledge. His 1997 book, Fear of Persuasion is the best exposition of the way advertising works of which I am aware. In this book and numerous articles, Jack illustrated the benefits to consumers of advertising and showed the dangers of regulation. For a well known example, in a paper in Regulation magazine he showed that the cigarette companies advertised tar and nicotine levels and reduced these levels voluntarily until the FTC made them stop. In this as in other areas his knowledge and understanding of advertising blended with his understanding of health care and pharmaceutical markets to show how advertisers are forced by market forces to provide benefits, and he also showed that regulators generally do not understand these benefits and so often harm consumers by reducing the amount of information advertisers are allowed to provide. His research also provided insights about tort law, about patents, and about the sources of new medicines. The overarching theme of his research is that Adam Smith’s “invisible hand” works not only through prices, but also through information and through other subtle and non-obvious benefits of free markets.
More recently, Jack’s work was increasing in importance. He has been one of the leading voices pointing out the costs and harms of Obamacare. Moreover, as a pro-regulatory administration has put in more active regulators at agencies like the FDA and the FTC, Jack’s deep expertise in understanding the costs of these regulations and the indirect effects of interfering with both product and information markets has been extremely valuable.
Those of us who knew him personally mourn his untimely death. I would see Jack and his lovely wife Brenda for dinner when I was in Washington and will sadly miss these meetings. But everyone in America will be harmed because we have lost a wise and knowledgeable defender of the benefits of markets when they are under sustained attack.
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The point is that advertising anything about health reminded consumers that cigarettes are unhealthy and thus had a tendency to reduce smoking. That is why the larger companies (Reynolds, American Tobacco) tried not to do this advertising. It was smaller companies that did. In fact, the article shows that at the height of this period of advertising (1953-54) smoking actually declined by 9%. It was also during this period that filter cigarettes became a major p;art of the market. Even with compensation, I doubt that you would favor returning to the days of unfiltered Camels and Lucky Strikes.
With all due respect, the advertising of tar and nicotine levels was not “information.” It was irrelevant data that tended to make smokers believe that lower tar and nicotine was related to cigarette safety and to encourage smokers who wanted to quit that it would be safe to continue doing so. The tobacco companies internal documents disclosed in the case brought by the states and maintained in a database at USF pursuant to the Master Settlement Agreement, in addition to the discovery provided in the United States v. Philip Morris, makes abundantly clear that the companies knew there was no benefit to smoking lower tar cigarettes because of the compensation effect (i.e., smoking more, drawing on cigarette more deeply, smoking more of the cigarette, etc.) and also that smokers (virtually all of whom were addicted but wished to quit) would grasp at any straw, no matter how slender, to justify the continuation of smoking. “Low tar” and “light” claims (as well as claimed levels) were intended to serve as this straw. it was irrelevant “information” offered to drive decision-making in the direction favorable to the companies. For a very straightforward example of this same principle see Dan Ariely’s example of the Economist’s subscription proposal with 3 options- print only, on-line only and print +on-line where the print plus on-line was the same price as the print only. Confronted with only 2 choices print & on line for $125 and online only for a lower price most people chose online only. But when the 3 irrelevant choice (print only) was added more people chose the more expensive option of print + online. Ariely theorizes that this is because the irrelevant “information” frames the choice so that it appears that the print + on-line is a better deal. And perhaps it was and perhaps that framing alerts consumers that they really do want to spend more money than they thought they would if the offer was presented a different way. But where framing and irrelevant information drives decision-making (in the aggregate) in a manner that seems to take advantage of consumer ignorance and is contrary to interests in public health, it seems very difficult to describe this as a “benefit.”