It's an idea I really wish could work, but it commits the #1 libertarian fallacy of assuming that markets are free enough to be called capitalist.
I would argue that government regulation lowers quality in general because it creates an overhead for any competing entity. Consider if the government created a "free milk" program and payed for it with taxes. Instead of suppliers competing for the many quality levels that consumers are interested in the vast majority now only cater to one quality level: that set by regulation. What is easier to game? one customer (the regulator) or millions of competing customers?
And now that there is in fact a government regulation, one cannot.
http://www.ams.usda.gov/AMSv1.0/nop
> What is easier to game? one customer (the regulator) or millions of competing customers?
I'm not sure what you're asking here. It's quite clear to me that one regulatory body, which can hire inspectors and food-testers and use economies of scale to regulate an entire industry, is much less easy to fool than individuals purchasing milk, who cannot cost-effectively hire inspectors and food-testers and thus cannot evaluate the quality of the product AT ALL.
Your "free milk program" example is far more than government regulation, so I'm not really sure why it belongs in this discussion. It seems to be a badly-executed straw-man argument.
You say this idea assumes markets are free enough to be called capitalist? How does it do that exactly?
If people voluntarily join organizations such as a community that has rules but that cannot be arbitrarily changed without consent and where individuals can leave, even taking their real estate out of the agreement, such an arrangement could still adopt all kinds of standards. This would not a coercive arrangement, but one that people voluntarily join to get the benefits of belonging.
One rule such a community might have could be that all members agree to only buy and sell food that meets certain standards. You would likely have many communities adopting different standards, many of which would likely be BETTER than one ALREADY watered down to satisfy industry.
With such arrangements, it would be possible for people to promote and enjoy standards of their choosing, without having the never-ending struggle over what those standards should be.
Why is it that we all must live be the same rules when many can live side by side? We seem to be ok with other nations choosing their own standards, but not our own countrymen. No, they must live lives designed by committee.
A voluntary rules making community could actually go much further than government can in making rules. This is not a problem when people can vote with their feet and simply end their membership when the rules get to be too much. Try doing that with government.