Over in China, we're seeing a textbook demonstration of the importance of the rule of law and the need for government to guide the market's invisible hand. We're also seeing why government can't be trusted to supply that guidance on its own.
Milk producers -- either individual dairies or processing plants or both, it's not yet clear -- diluted milk with water, then added melamine to make the protein content look better than it was. Rather than being confined to a few rogue producers, this practice apparently took place on a massive scale and over an extended period of time.
Meanwhile, the government regulatory apparatus was either absent or corrupt, or both. Some of the largest offenders were exempt from government inspections under a self-regulation program. When children started getting sick, some of the suspicious products were recalled by individual companies, though without any explanation of the underlying problem or any coordinated effort to inform the public. Inquiries were suppressed in the runup to the Beijing Olympics. The whole mess came to light only when a foreign investor started to worry about its own liability -- after deferring to its Chinese partner for weeks -- and informed New Zealand's government.
There are episodes like this in America's past, too. They are why the FDA and the USDA exist. It's unfair to suggest, as some commentators have, that the Chinese people are any less ethical than anyone else. The problem is that there is no way for the ethical Average Wen to hold the unethical minority accountable. No whistleblower protections, no aggressive personal injury lawyers, no elected officials accountable to the people. When a major embarrassment like this happens, accountability is imposed from the top down -- I'm sure a good number of midlevel bureaucrats will lose their jobs or their lives over this -- but the emphasis is on containing the embarrassment, not fixing the underlying problem. Bottom up accountability would go a long way to reducing the frequency and severity of such incidents.