Culture and market efficacy are jointly determined
The typical interface between a business and its customers has changed considerably over the last twenty years. Part of this change is a function of the technological developments that have revolutionized the way businesses and their customers communicate. But technological change cannot be the whole story – no features of the modern technological landscape require that businesses abandon good faith practices as they interact with customers.
In The Theory of Moral Sentiments, Adam Smith argues that for a society to enjoy the surplus enabled by decentralized market mechanisms – the invisible hand – the culture must discipline the manner of its constituents’ interactions. When members of society fail to communicate with each other in good faith , the market equilibrium will reflect this breakdown in various ways.
Let me explain what I mean by good faith practices in business. Markets work when they connect buyers and sellers who are informed enough to each bargain in service of their own interests. Part of being informed enough is knowing enough about your potential business partner, their reputation and the conventions prevailing in the market for the particular good you are exchanging. Good faith business practices are those which actively cultivate your business reputation and promote the transparency of conventions in your area.
Today, few businesses advocate public understanding of their processes, and several practice obfuscation as a matter of policy. Many companies engage in reputation management, but not in the spirit of good faith practices. Reputations are managed through public relations campaigns, typically centered on issues unrelated to transparency in the markets they help to shape.
It’s worse. It is difficult to find a major online vendor – an airline, an e-commerce resource, a shipping company, etc. – whose protocols are not engineered to mislead their customers throughout the interaction. A typical online purchase requires several professionally obfuscated permissions be given – most commonly to receive automatically generated advertisements on your phone and email. Installation of a benign- sounding smartphone app typically surrenders access to your camera, contacts, phone calls, emails and even your microphone.
These protocols are almost never illegal (nor should they be), and individually, the rents extracted are minor. However, these practices contribute to an antagonistic and cynical spirit that is already too pervasive in our society.
The strategic behavior of these firms is consistent with collusion, but it is much more likely this behavior has emerged as an equilibrium non-cooperatively. In repeated games, firms experiment with different strategies and observe the distribution of payoffs among competitors. They have learned to trade-off incremental reductions in good faith business practices with new sources of revenue that exploit the fast pace of modern technological development. And, importantly, each firm knows the other firms have reached the same conclusion. Explicit collusion is not required.
Ultimately, the market will produce the solution to this market problem. Either an existing firm or a new entrant will deviate from the prevailing practices and consumers will reap the rewards.
I just hope the firm that deviates makes its move soon.
protean 