One of the main functions which the modern state has arrogated to itself in recent times, one which is almost universally viewed as legitimate now that it has become fully ingrained, is the setting of product standards. The FCC, FDA, USDA, CPSC, EPA, and other agencies constantly prevent countless products from ever even entering the market, and so-called “consumer advocates” nevertheless call for more. These obviously cause much loss to consumers with a higher risk preference – especially poor people for whom the extra costs of regulatory compliance may be burdensome. Yet though market theorists may like the idea that these can be totally replaced with private ratings agencies (such as Moody’s and S&P for bonds), such agencies are limited by information problems: people have assumptions about the meanings of words which a huckster may deliberately distort. In such cases, the information disseminated by ratings agencies may not get out or be heeded quickly enough for the market to force him out of business.

The regulatory arm of the state may be entirely replaced, however, with the idea of implicit contracts. In short, these are things which consumers will expect of a service by virtue of the definition of its label. For example:

• Consumers deposit money in a bank with the expectation that it will be available on-demand for withdrawal.
• Consumers eat food with the expectation that it will not make them immediately ill (Salmonella infected meat, for example – due exception for allergy, etc.)
• Consumers have a reasonable expectation of privacy from online applications (email, etc.), except if otherwise specified in the terms of service. For example, I expect Gmail will not reveal my emails to anyone except by subpoena.
• Consumers expect that the things they buy will not cause damage to their property in ways unrelated to their function (for example a toy painted with thermite, or a malicious piece of software).

The idea of implicit contracts may resemble in principle the sorts of things which the regulatory state takes upon itself. However, it differs in several key ways:

• They are settled exclusively by the courts. There may be no independent agency with any authority except perhaps to define such contracts, if allowed by constitutional amendment.
• They are only retroactively, not proactively, enforceable. A government agency has no right to inspect a factory until a complaint comes before the courts.
• They do not apply to durable goods for which (1) one may try before he buys, or (2) a warranty option exists. These automatically disclaim any liability except in case of demonstrable fraud or deliberate malice.
• Implicit contracts are discovered from prevailing cultural norms, not created, as regulations are. Thus, they may only demarcate qualitatively: there may be no quantitative thresholds such as the EPA is fond of.
• They are always overridden by explicit contracts (except in cases where the court might rule that there is an implicit metacontract in which explicit contracts are expected to be reasonably comprehensible).

And though private rating agencies may be insufficient, they are not unnecessary. Several of the aforementioned agencies engage in rating as well (for example, the USDA grades eggs and beef). If people value information like grades of eggs and beef or restaurant sanitation grades, then the market will not fail to provide should the USDA and other rating agencies be privatized.

Yet even so, though the modern regulatory state is far beyond useful scope, consumers should not bear the burden of near-universally held assumptions about the meanings of words with regard to their purchases. Indeed, these contracts ought to be construed narrowly enough that their violation constitutes a kind of fraud. This will go a long way to reduce information-gathering costs, and to engender the sort of consumptive confidence that good institutions are expected to provide for a well-functioning market, while at the same time barring from no consumer or honest producer the pursuit of happiness.