Wednesday, September 30, 2015

Kosher Hot Dogs

If ever there were an industry that no one in their right mind would trust, it's hot dogs. First rule of hot dogs: you do not want to know what's in it. But in this unsavory industry, Hebrew National stands out. The slogan on the company's site summarizes their advantage well:
"When your hot dog's kosher, that's a hot dog you can trust."
And indeed, people do trust Hebrew National's hot dogs.

This is more remarkable than it might seem at first glance. Consider the problem from the perspective of a hot dog company. This company wants to carve out a niche: they will produce high-quality hot dogs, and sell them at a correspondingly higher price. Many people will happily pay extra to know that their hot dogs do not contain ground-up lucky charms, bits of fur, or the occasional lost dog. But how can the company communicate their quality to prospective consumers? How can they convince the public of the superior quality of their hot dogs? What claim could they make which an unscrupulous competitor could not copy?

This is the problem known in game theory as signalling: one party wants to communicate their superior quality to another party, but in order to do so they must send a signal which their unscrupulous competitors cannot easily copy. A certification body can solve this problem. Consumer Reports, for example, provides unbiased analysis of a wide range of products. Unfortunately, this solution is subject to attack in the real world by exploiting the limited information capacity of consumers. Any company can (and does) invent arbitrary metrics by which their product performs best. A less cynical interpretation is that each company stakes out a niche, claiming that their product is the best for X. If you want X, you buy that company's product. Just within hot dogs, we have Ballpark's "Angus", Applegate's "Organic", Nathan's "Bigger than the Bun", Oscar Meyer's "Selects", and several brands of "Premium Jumbo". Many of these brands have multiple lines of hot dog servicing different niches. Consumers with limited attention to devote will ignore most of these, and most are useless anyway. Thus the true signals of quality are drowned out by the noise of their competitors.

If a company is to charge extra for a truly superior product, then they need a more dramatic way to signal quality. Hebrew National does this by invoking kosher rules. Implicitly, the entire weight of the Jewish religion backs the quality of their product. The kosher rules force the company to produce high-quality hot dogs, and lets them communicate their high quality even in the noisy environment of the modern supermarket.

But what does that even mean? I don't actually know the kosher rules. I remember a few bits and pieces... no hooved animals, separate meat and dairy, something about which cuts of meat are acceptable... but I don't know most of it. Yet I'm willing to accept kosher standards as an assertion of quality, at least in the unpalatable hot dog industry.

I do know that kosher rules are generally intended to ensure food quality. They are a 3000 year old FDA regulatory equivalent. They are interpreted by an active rabbinical community, which makes sure that the word and spirit of the rules are properly applied to new foods and new food processing technology. The result is a regulatory framework which is roughly understood and highly trusted by laypeople, even though most of us do not have a detailed knowledge of the rules!  Just as important, I know that the whole community of people who observe, certify and maintain kosher rules is highly trustworthy. They consider themselves in service to God. Abusing the kosher rules or certification would be not just unethical, but a direct transgression against God. I can trust that the rules are applied consistently with the principles.

We have two key elements here. First, a regulatory framework based on simple principles (food that wouldn't be bad 3000 years ago, plus some purely ritual aspects). Second, a highly trustworthy community to work out the details of the rules in keeping with the principles. The result is a certification which laypeople interpret as high quality, even in a market cluttered with questionable claims of quality.

The utility of kosher rules as a regulatory body suggests that these properties could be useful for regulation more generally. As Hebrew National demonstrates, the regulation need not be state-mandated, though the kosher rules may offer some insight there too.

One obvious analog is Islamic banking. The most notable rules of Islamic banks are that they cannot charge interest and they cannot gamble. In practice, contracts are structured to achieve a similar effect to interest, but the consumer sees a number of benefits. Foreclosure is rare, and risk in general is kept low. Many risky investments are considered gambling, and are forbidden. An Islamic mutual fund could see enormous success in the Western world, offering a bank-like investment with positive return and a religious guarantee of low risk. Such a fund would certainly not have invested at all in subprime loans.

What about beyond religion? On paper, much US law follows similar principles. Legislative bodies lay out the original laws, judges make sure the details are in keeping with the original word and spirit. In practice, most US law follows other patterns. Tort law is mostly common law, with judges building on the work of previous judges without any original legislation and few central principles. Regulatory law is usually handled by bureaucrats rather than judges, again with few if any central principles and with less respect for precedence. Criminal law does follow the pattern reasonably well, with simple core ideas (don't kill, don't steal, don't assault, etc...) and details handled by judges.

The main shortcoming of US law, as compared to kosher rules, is the lack of organizing principles understandable by laypeople. In tort law, this means that people cannot reliably anticipate what might be subject to lawsuit without expertise in the subject, and so businesses are forced to take costly legal defensive measures. In regulatory law, people cannot reliably guess what regulations apply to their ideas without considerable research, creating major barriers to new businesses and innovations.

How can this situation be improved? Stay tuned...

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