Economies of Deception

Two books I have recently read, Treasure Islandsand Merchants of Doubt, have each highlighted, in their different ways, how deeply rooted deception is in our current economic order.  Banks hide behind many layers of secrecy, shuttling funds around shady offshore jurisdictions, in order to get by with transactions that would never pass public scrutiny, and to hide profits from taxation.  Manufacturers have turned to the business of manufacturing doubt about the environmental impacts of their activity, systematically engaging in smear campaigns against scientists and whistle-blowers who reveal these impacts and costs, and funding “studies” to convince that everything from CO2 to acid rain to DDT to cigarettes are clean, safe, and sustainable.  

A slew of recent high-profile scandals have illustrated the same tendency.  The world’s largest company by market cap, Apple, Inc., was sued by the US Department of Justice for secretly colluding to fix prices on e-books.  More recently, damning allegations have come to light that the world’s largest company by revenue, Wal-mart, engaged in systematic bribery to gain a major foothold in Mexico, and, most seriously, that the bribery was then carefully covered up by senior Wal-mart executives.  A couple months further back, US meat-lovers were scandalized to learn that supermarkets and fast-food chains had been selling them beef padded with ammonia-sprayed “pink slime,” prompting a massive public backlash and the virtual shutdown of the pink slime industry, may it rest in peace.

 

Despite their differences, all of these episodes reveal a troubling problem in our economic order—the truth doesn’t sell.  The truth about tobacco doesn’t sell cigarettes, the truth about beef doesn’t sell burgers, the truth about e-book prices doesn’t make nearly as much profit as an artificially jacked-up price, the truth about Wal-mart’s corporate practices isn’t gong to endear them to consumers.  

This problem points to a deeply-rooted contradiction in the free market model—its hostility to the free flow of information.  For Adam Smith and other free market theorists, free access to information was a key pillar of a successful free market.  If a given exchange was to be genuinely free, and thus maximize the total benefit for buyer and seller, then buyers and sellers had to have roughly equal knowledge of the relevant information.  If I sell you a rhinestone necklace while deceiving you into thinking that it is in fact diamond, then we wouldn’t call this a properly free exchange, even if you eagerly bought it at the offered price.  The resulting transaction would not have taken place at the true equilibrium price, the point at which markets are maximally efficient.   

But of course, while maximally efficient for the market as a whole, the equilibrium price is not where either buyers or sellers would prefer to transact, since it limits the gain that either can make.  A buyer would prefer to take advantage of a going-out-of-business sale, in which a distressed merchant has to sell goods at well below the normal equilibrium price in order to get rid of them quickly.  A seller would prefer to take advantage of a naive first-time buyer, who has no idea how much something normally costs, so he can charge far more than it’s worth—hence the rip-off merchants that like to cluster around entry points for foreign tourists.  As this latter illustration shows, limited information can provide tremendous opportunities to avoid the equilibrium price and maximize gain.  

Generally, it is the seller who is in much the stronger position to make use of this information gap, since the seller usually knows a great deal more about the actual value of the goods and where they’ve come from than the buyer.  The seller may know that a product has cost him $10 to acquire, and he will have to sell it for $12 in order to turn a profit; but if he can convince the buyer that in fact the market price is $20 (say, by normally selling it at that price, and occasionally having a 50% OFF CLEARANCE SALE!), then so much the better.  This kind of disequilibrium is of course ubiquitous, but normally it doesn’t bother us that much, because it is kept in check by competition.  Assuming plenty of competitors in the marketplace, and assuming they aren’t colluding with one another (which, as the Apple case shows, is not always a safe assumption), we can count on the selling price as a whole to gravitate toward equilibrium, especially if we are willing to be shrewd shoppers and only buy things when they’re on sale, recognizing that the sale price is likely to be closer to the real price.

But rather harder to exorcise is the suppression of unsavory information about a product—if it comes from an unethical source (e.g., blood diamonds or Nikes), or contains harmful ingredients (e.g., Coke, a Big Mac, or tobacco), or else is just useless for its supposed purpose (e.g., a high proportion of patented medications and hygiene products, for which dirt-cheap natural substitutes are often far more effective).  Any of this information might cause the consumer to pay far less for the product, or reject it altogether (which would, of course, force the price down for those still willing to buy).  While we might be able to rely on McDonalds to sooner or later make it clear to us that Burger King is systematically overstating the cost of beef, by underselling them if they price it too high, it is in neither McDonalds’s nor Burger King’s interest to be forthcoming with us about the unsavory backstory of that beef, just as, competitors though they may have been, everyone in the tobacco industry could agree to work together in manufacturing doubt and disinformation about the dangers of smoking.  Collusion in the suppression of information is the order of the day.  

 

What all this suggests, of course, is the dependence of any kind of free market on a robust moral order, the dependence of The Wealth of Nations on The Moral Sentiments.  When the pursuit of profit becomes a self-justifying end, truth becomes a readily dispensable commodity, because truth will not maximize profit.  And as truth is exchanged for profit, a genuinely free market is exchanged for a war of all against all, in which consumers and producers are locked in an endless battle of trying to deceive and outwit the other.  If a free market can work, it can only work within a vigorous shared commitment to truth and honesty that runs deeper than any desire for gain, an integrity that “swears to its own hurt.”  Whether such a shared commitment can be counted on in any society, much less in our current culture that is at war with the very idea of truth, is an open question, and one that needs to be faced more honestly by the proponents of free market orthodoxy.

10 thoughts on “Economies of Deception

  1. Kent Will

    It's also worth noting that competition only produces endlessly better results if the customers are also making endlessly better decisions. Since, of course, they aren't, at the end of the day competition mainly favors companies with slick marketing and lots of capital, which doesn't always (ever?) correlate with good service or a superior product.

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  2. Kent Will

    I should probably add that my skepticism is only in regard to the supposed virtue of competition, irrespective of other factors, to produce ideal market conditions. In other words, I'm not supporting as an alternative some kind of Keynesian or FDR-type deal.

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  3. Brad Littlejohn

    Of course, Kent. We must always make sure to insist that our criticisms of right-wing ideas should never be construed as endorsements of left-wing ones. :-pSeriously, though—you're right that there's no reason that such skepticism about competition should lead to a New Deal, though I have no problem with selective Keynesianism—that is to say, the conclusion that for certain industries at certain times and places, government-managed enterprises may be more effective than free enterprises. But really, it just comes back to the issues I raised in the second half of my post, "If Corporations are People…" (though the comment discussion focused entirely on the first half): in any competition, we recognize the need for rules and referees. Why should it be any different in the market. If competition left to itself tends to hide and distort key truths, then (unless we can return to a societal commitment to honesty that we have long lost, and which may indeed be too much to ask in a fallen world) there will need to be robust regulation to ensure the freedom and accuracy of relevant information in the market place—e.g., product labeling rules, which are rarely enough given how loosely advertising (which influences us much more than product label) is regulated, but are certainly helpful.

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  4. Bradley

    Compounding the problem Bradford, these days there are lots of foreign businesses with whom we buy/sell/work. Even if America and all its businesses suddenly embraced rigorous honesty and integrity, we would still face immense competition from dishonest businesses abroad….from cultures that have never embraced the gospel historically. Hypothetically, how would a free market work if half the folks were honest Christians and half were dishonest ______s (fill in the blank with your false religion of choice)? I don't know. Like you say, I imagine some type of referee would be very important. And of course, the referee should be Christian. 🙂

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  5. Kent Will

    Heh heh. 🙂 Well, nevertheless, it seems helpful in our goofy bi-polar climate to mention that I'm not supporting communism merely because I'm criticizing capitalism. Without that occasional insistence, all kinds of alarming conclusions get drawn, and you know what happens to the discussion at that point….On another note, aren't all these debates over market regulation assuming a global economy? In the face of the seemingly insurmountable problems that occur in this system (and in its political Siamese twin, imperialism) I wonder if it wouldn't make sense at some point to question whether the system itself is worth the quandaries it brings.

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  6. "When the pursuit of profit becomes a self-justifying end, truth becomes a readily dispensable commodity, because truth will not maximize profit. "Nice line and great post. Thanks.My thoughts turned to journalism and the role of media in exposing corporate profit-making untruths. While it is true that the "slew of recent high-profile scandals" may demonstrate that investigative journalism is not entirely dead, the most high profile scandal of all in the UK over the last twelve months or so has been precisely about the propensity of for-profit media companies to engage in unethical behaviour themselves (deception, hacking, corruption, collusion, systemic cover-up). If journalism is also subject to the same market forces that generate silence from dodgy sellers, then their product is also likely to have relevant information missing on a regular basis since their goal becomes not primarily truth, but shifting papers/clicks/eyeballs. In short, capitalism on any scale beyond the local cannot function without honest media, yet honest media cannot function on purely capitalist lines.

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  7. Brad Littlejohn

    True enough, Byron, and I certainly had that in mind as another of the most prominent recent scandals of this sort. I guess it's worth asking, though, how new this is. Have media ever been more interested in truth than in profit? Is it naive to suppose that they were? And non-capitalist media have generally been state-controlled or church-controlled media, which have suppressed anything that doesn't support the party line. So it's a real conundrum—on what basis could we possibly establish reliably truth-telling media?

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  8. Rick Littlejohn

    Brad,To the best of my knowledge, the term Keynesianism doesn't refer to state ownership or operation of industry, but simply the idea that in times of inadequate aggregate demand in an economy the government should run a deficit in order to create demand for additional goods and services to restore an economy to full employment. Likewise, Keynes counseled the running of surpluses when the economy was at full employment to repay the deficits and to keep the economy from becoming inflationary. Politicians have historically ignored the second part of Keynes' advice and "Keynesianism" gets the blame.

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  9. Brad Littlejohn

    Dad—granted, and thanks for the clarification. But in popular usage, the term seems often to be a catch-all phrase for government-managed industry, and that seemed to be the sense Kent was using it in here (since I don't see how "running a deficit to create demand" would necessarily have much effect on the forces of competition that undermine truth in a free market.

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  10. Horace

    Isn’t that one of the successes of our economy? That even when the owners of the production are few and greedy the truth still comes out? And the market changes? It seems to me that you’ve successfully shown how evil people are able to do evil things for a time – but it never works out in the end. That’s going to be true in any market system because it’s the way God deals with evil everywhere, but I would think a free market system would foster it further – For instance, when we find out how bad McDonalds burgers are for us there is a huge market change called the better burger movement.Similar thing for organic foods, local production, climate-friendly, etc.

    There is no "endless battle of consumers and producers trying to deceive and outwit one another", just an endless tide of evil trying to grasp on to what it can’t hold onto.

    If we leave the government out of it for a moment, a free market makes sense to me because it allows things to work the way they work, needs are met, truth comes out, evil falls by the wayside – Evil can’t prosper, that’s not the issue. Now if we put the government back in with the sword to execute the evildoer we’re golden. Why do we need the government regulating the price of e-books here? The truth comes out.

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