Arnold Kling  

Defining Voluntary Exchange

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Some Economics of Sanctions on... Arnold's Hypotheticals...

Bryan writes,


Couldn't you just as easily say that consumers benefit from the peace of mind of Capital One's payment protection products, even though the products make little financial sense?

Now it's my turn to raise some hypotheticals.

(a) If I tell you to give me all the money in your wallet or I will break your thumbs, then couldn't one say that by giving me the money you benefit from the peace of mind that I will not break your thumbs?

(b) Suppose that I say that if you give me all the money in your wallet, you will be blessed by a deity that most of us agree does not exist. That belief that you will be blessed confers peace of mind.

(c) I tell you that a tree is about to fall on you, but if you give me all the money in your wallet, it will not fall on you. In fact, the tree is not about to fall on you, and I know it. But the relief from the fear of the tree (a fear which I put into your head in the first place) gives you peace of mind.

(a) is considered coercion, and I think it is fair to say that it violates our notion of voluntary exchange.

(b) might confer benefits to the consumer, even though the belief is false. When I say that false religious beliefs sometimes confer benefits, I could use examples of people who were able to overcome alcohol addiction or deal with stressful circumstances because of their faith. Rightly or wrongly, we have adopted the social and political convention of cutting slack to many "sellers" of religious beliefs. Generally, we treat this sort of transaction as voluntary.

(c) is what I see as pretty close to what Capital One did. I think it is pretty difficult to defend the view that this transaction was voluntary. You have to say something like, "The consumer should be smart enough to know better than to listen to a customer service representative saying that a tree is about to fall. Given the consumer's stupidity, it was a voluntary transaction." I don't buy that, in part because I think that this is a company that has vast resources to invest into training its staff to convince consumers that a tree that is about to fall.

Many libertarians speak as if it were possible to come up with a clean way to separate voluntary transactions from involuntary transactions. Once you have defined a transactions between parties A and B as voluntary, then you have a presumption that party C should stay out of it. What I am suggesting is that defining voluntary exchange may not be quite so simple.

I would not try to draw a line in the sand in front of something called "voluntary exchange" and fight to defend that line. Instead, I would allow for the possibility that C may be morally justified in interfering between A and B. From a libertarian perspective, I would emphasize the many ways that C can get involved without using coercion or monopoly government. I would emphasize that no single individual or institution has omniscience with respect to these situations, and that this fact is what argues against conceding a large role for government.


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CATEGORIES: Economic Philosophy



COMMENTS (28 to date)

A complicated question: in a competitive environment, doesn't it suit Capital One's competitors to unveil the lie, or to at least alert the consumer to it? This might make the rival company seem more attracted, not just because it doesn't commit that practice, but because the competing firm makes itself look honorable.

Eelco Hoogendoorn writes:

I think you are wrong about a; you can think of it as voluntary exchange, if you accede that the party making the offer indeed has aquired defacto property rights over your thumbs. You probably stand to benefit from the exchange offered; and if not, you can always turn it down. Your beef is really with the fact that someone has taken posession of your thumbs, not that he is offering you a voluntary exchange.

Taking that perspective, the actions of Capital One are more akin to shouting fire in a crowded theater. Its up to you whether to believe it or not, but we can all agree the world would be a better place if we didnt have to ask those kind of questions unless there is a good reason to.

However, 'fire' is a much more objectively measurable thing than 'financial risk'...

Sonic Charmer writes:

(c) strikes me as the essence of marketing. Shall we ban advertising? The implied premise is always 'you need this' and I would say (or at least you would, if you are consistent) that a good 90+ percent of the time, you don't.

Richard writes:

I'm a lawyer, and (c) looks to me to be a textbook example of common law fraud. No one thinks that a transaction made under conditions of fraud is "voluntary." Even libertarians think that the prevention of "force and fraud" are the two legitimate functions of government.

If what Capital One was doing was common law fraud, then Arnold is surely right -- under any reasonable standard -- that the government should stop it.

andy writes:

What actually did Capital One do?

liberty writes:

"A complicated question: in a competitive environment, doesn't it suit Capital One's competitors to unveil the lie, or to at least alert the consumer to it?" -- J. Catalan

In theory one might argue so - but what if they would earn more engaging in similar practices? Or what of they don't notice the practice, being more concerned about their own marketing and less involved in the details of what their competition is doing (particularly if it is competitive and hence there are many competitors with many different practices).

In reality, whether competition might be imperfect or not, we see plenty of cases when the practice is not exposed.

Thomas DeMeo writes:

It probably would make sense to unpack what Capital One actually was charged with. The following information is posted on the Consumer Financial Protection Bureau website:

http://www.consumerfinance.gov/pressreleases/cfpb-capital-one-probe/

...

  • Misled about the benefits of the products: Consumers were sometimes led to believe that the product would improve their credit scores and help them increase the credit limit on their Capital One credit card.
  • Deceived about the nature of the products: Consumers were not always told that buying the products was optional. In other cases, consumers were wrongly told they were required to purchase the product in order to receive full information about it, but that they could cancel the product if they were not satisfied. Many of these consumers later had difficulty canceling when they called to do so.
  • Misled about eligibility: Although most of the payment protection benefits kicked in when consumers became disabled or lost a job, some call center representatives marketed and sold the product to ineligible unemployed and disabled consumers. Despite paying the full fees, they could not get all the benefits of payment protection; some later filed claims that were denied because their “loss” (e.g. loss of job or onset of disability) occurred prior to enrollment.
  • Misinformed about cost of the products: Consumers were sometimes led to believe that they would be enrolling in a free product rather than making a purchase
  • Enrolled without their consent: Some call center vendors processed the add-on product purchases without the consumer’s consent. Consumers were then automatically billed for the product and often had trouble cancelling the product when they called to do so.
  • [quote reformatted for clarity and accuracy--Econlib Ed.]

    rpl writes:

    Bryan's argument is just a garden-variety slippery slope fallacy. Essentially he's saying that since there are edge cases where the benefits someone gets from a purchase are debatable, we can't prohibit obvious fraud without including the edge cases. It is, to put it bluntly, complete nonsense.

    The argument is made even more nonsensical by the fact that there are several distinctions you could draw between (b) and (c) that make the slope not so slippery:


    1. In (b) you can't actually prove that the deity doesn't exist, while in (c) you usually can prove that the tree was a fabrication.
    2. A person in (b) might still be satisfied with the exchange, even if the deity turns out to be imaginary. (For example, I know several people who don't believe in God, but still attend religious services regularly). Contrariwise, the buyer in (c) almost certainly will not be satisfied if he finds out the truth about the exchange.
    3. The seller in (b) almost always believes what he is selling is genuine; the seller in (c) almost never does.

    stephen writes:

    b and c seem closer together to me. With the exception that c seems to be the most unrealistic of the three.

    But whatever, if someone wants to break a principle it is always possible to find some nth order distinction to act as The Reason Why this case doesn't fit.

    What if the sales/product development folk at CapOne (or the tree guy) actually believed their product worked? Now we are just talking about homeopathic medicine, or good old fashion religion, which are totally cool.

    It seems to me the principle here (if there is one) is that people have to believe that what they are selling is For Real, otherwise it is coercion.

    Of course, I seriously doubt the sales chick at Ralph Lauren thought the suit I bought was really worth what I paid, but I sure did.

    Ken B writes:

    rpl:

    3.The seller in (b) almost always believes what he is selling is genuine

    Not only that but, pursuant to my argument of the other day, trying to prove otherwise is usually impossible (I cite Jimmy Swaggart), and detrimental. Teaching a pig to dance.

    yet another david writes:

    The statists use these sorts of arguments all the time. It's why we have a really big state.

    You get to choose one (and only one):

    a) the non-aggression principle for defining voluntary exchange;

    or,

    b) a really big state.

    Luther writes:

    Goodbye Mr. Kling,
    Instead of admitting your error you dug in your heels and I don't have time for your bag of errors. The irony is that what I'm doing (leaving your "product") is exactly what consumers do to companies like Capital One when they offer goods that aren't as beneficial as other goods.

    Ken B writes:

    The anti-Kling posters here seem to be ignoring an argument raised by Matt H on the original thread. Our economy thrives in part because financial markets are high trust zones overall. (When's the last time an ATM shorted you? I haven't even bothered to count in 20 years.) Cap-1 and their ilk erode that trust, which is a serious negative externality. It is inadequate to argue, oh markets police themselves better when discussing an example of markets just exactly not doing that.

    rpl writes:

    Ken B:

    Good point. I think it was also you (apologies if it was someone else) that pointed out that as a practical matter, people will fight to keep their right to participate in their religion, while they won't fight for the right to participate in a dodgy financial or insurance scheme. Thus, even if you believed that religion was an out-and-out fraud, you would probably carve out an exception for it just to avoid the violence that would follow from trying to take it away. Still, I think that Bryan's argument fails even without dragging practical considerations into it.

    Scrolling down the comments here, it's really weird to see so many presumptive libertarians defending fraud to avoid admitting that life is more complicated than "Markets good. Government bad." Perhaps the real lesson in all of this is that dogma eats your brain, no matter whose dogma it is.

    Tom West writes:

    Isn't most of this a debate over the semantics of fraud?

    If I sign a piece of paper to renew the newspaper and it turns out I also signed over my house, is that fraud?

    The newspaper never indicated that they wouldn't take my house. They made no false claims whatsoever. I signed without even looking at the price or reading the contract.

    Caveat emptor or fraud?

    Fraud is not a bright line, but a continuum, which is why it's possible for Libertarians to disagree.

    SWH writes:

    thank you Arnold for being, once again, the voice of rational reason.

    yet another david writes:

    @Ken B:

    The anti-Kling posters here seem to be ignoring an argument raised by Matt H on the original thread. Our economy thrives in part because financial markets are high trust zones overall. (When's the last time an ATM shorted you? I haven't even bothered to count in 20 years.) Cap-1 and their ilk erode that trust, which is a serious negative externality. It is inadequate to argue, oh markets police themselves better when discussing an example of markets just exactly not doing that.

    Matt H's point was not about fraud per se but rather behaviour perceived as immoral or offensive or "taking advantage" but which was not illegal.

    The problem, I would suggest, with the Ken/Matt argument is that markets function not only on trust but on individual responsibility and due diligence on the part of the consumer. Trust is not pre-existing - it arises over time from the interaction of market forces and individual responsibility and due diligence. It is this interaction that brings the interests of producers into alignment with those of consumers. Ethical norms emerge (among "olde tyme" bankers, for e.g.) that reinforce or reward the profit-maximizing behaviour and act as signals to consumers that bankers (or whoever) act in a trustworthy fashion not simply because it is profit-maximizing but because it has become part of the bankers' ethical make-up. It is an additional assurance of behaviour that is consistently aligned with the interests of the consumer.

    But the fact of the matter is that the emergence of trust depends not only on the virtue of the bankers but on the virtue of the consumers. Due diligence and individual responsibility are adult virtues. The pervasive regulation that we have now in all industries, finance included, infantilizes and sedates consumers. We have come to assume that the advance protection of the regulator is everywhere, even where it is absent. We have come to expect that everything has been pre-approved or vetted and of course the government in its great and benevolent wisdom would never let anything bad happen to us or let mean people offer one-sided business deals.

    Put simply, regulation introduces moral hazard (or reckless disregard or irresponsibility, to use less gentle synonyms) into consumer decision-making just as surely as bailouts introduce it into big shot bankers' decision-making. And consumers expect to get bailed out of the consequences of their foolish decisions just like the bankers do. And just like other forms of moral hazard, the bad behaviour and consequences that it brings about always generates calls for ... more regulation!

    de Tocqueville said it beautifully:

    Above this race of men stands an immense and tutelary power, which takes upon itself alone to secure their gratifications and watch over their fate. That power is absolute, minute, regular, provident, and mild. It would be like the authority of a parent if, like that authority, its object was to prepare men for manhood; but it seeks, on the contrary, to keep them in perpetual childhood: it is well content that the people should rejoice, provided that they think of nothing but rejoicing. For their happiness such a government willingly labors, but it chooses to be the sole agent and the only arbiter of that happiness; it provides for their security, foresees and supplies their necessities, facilitates their pleasures, manages their principal concerns, directs their industry...what remains, but to spare them all the care of thinking and all the trouble of living?

    P.S. Even though we live in large anonymous communities, due diligence is easier now ever before. Google, Facebook, Twitter, consumer reviews, etc., all provide virtually immediate and convenient means to determine the nature of a company's or product's reputation. No excuse there, I am afraid.

    rpl writes:

    Tom,

    I don't think that is what Bryan is trying to argue. As I read his argument, he isn't leaving any room for a kind of fraud that doesn't lead down a slippery slope toward things we know we don't want to do, like banning religion. Perhaps I'm misreading him, but given the form of his argument, I think it's natural to ask, "What would in your view constitute fraud, and how does the slippery slope argument not apply to it as well." So far as I've seen, Bryan has not answered, nor even acknowledged, that question.

    Julien Couvreur writes:

    "(b) might confer benefits to the consumer"

    Since value is subjective, how can one rigorously claim to know what be benefits are to another?
    Yes, intuition is strong that we know others feel. That is the same intuition that leads to interpersonal utility comparisons.

    Therefore I don't think the definition of voluntary exchange should depend on whether it benefits the recipient.

    The Snob writes:

    Isn't Bryan a fan of intuitive morality? I'm pretty sure upwards of 70% of people would consider Capitol One's practices here to be borderline criminal. William F Buckley used to say that conservatives' job was to defend capitalism from capitalists.

    Tom West writes:

    rpl, good point. It's hard to imagine Bryan calling fraud on anything short of making statements that are untrue in every possible context as fraud.

    I suspect most Ponzi schemes would get a bye unless the perpetrators were inordinately foolish.

    rpl writes:

    Julien,

    In many cases interpersonal utility comparisons aren't necessary because the fraud-induced choice is strongly dominated by other choices available to the fraud victim. For cases where that isn't so, the putative victim's self-reported satisfaction after he has learnt the full ramifications of the deal are a pretty good guide. Note that I'm not trying to argue that every case of buyer's remorse is fraud. Quite the opposite, I'm arguing that if the buyer reports satisfaction even after learning the truth about the deal, then that's a pretty good indication that there was no fraud. This would be a distinguishing factor between Arnold's examples (b) and (c).

    Yet Another David:

    There are some serious problems with your caveat-emptor everywhere, all the time approach. Ponder the following:

    1. Isn't your scheme welfare-reducing for just about everyone, relative to the current definition of fraud and proscription thereof? Each individual will have to spend a great deal more time and effort on due diligence just to get the same level of certainty he enjoys under the current system. Moreover, if we allow (what we now call) fraud on a "buyer beware" basis, we can expect the number of fraudulent deals the typical person is presented with and the degree of fraud in those deals to expand greatly, further increasing the amount of time spent vetting bad deals and increasing the losses from mistakes in vetting.
    2. Can't your reasoning be used equally to justify taking someone else's property by force? After all, if it's each person's responsibility to exercise due diligence to avoid being taken in by fraud, then it's not such a stretch to say that each person is equally responsible to provide adequate self-defense to avoid falling victim to force. Put another way, the standard libertarian line has always been that a transaction is "voluntary" if it is free from force or fraud. Now you're saying that fraud is ok, and only force is forbidden, so what's to prevent the next person from coming along and claiming that, actually, force is ok too (other than that this too would be welfare-reducing)?
    Ken B writes:

    @YAD: Of course a certain diligence is required. Prudence is a virtue. One we also should exercise though in setting up the default rules of the marketplace. There are many more sellers than buyers. It's efficient and prudent to demand a little caveat venditor as well.

    Ken B writes:

    @rpl: yes that was my argument. I think Arnold implicitly endorsed it with his 'cutting some slack' remark.

    Don't apologize for attributing to me such good arguments! I must say it's a refreshing change; the arguments attributed to me are usually dreadful. That seems to suit many of my interlocutors so much better than the ones I actually make ...

    Costard writes:

    rpl: fraud is a crime. Why should the burden of proof rest with the accused to prove their innocence? Anyway there is an even better test of whether the customer viewed the transaction as fraudulent or not: whether they sued the company for fraud.

    #1: you might defend guilds this way, or monopolies, or any regulatory intervention under the sun. But you would have to argue that guilds, monopolists and politicians are less likely to screw a person over. If, on the other hand, the trustworthiness of another person is something we can only determine in the context of a personal relationship - an intuitive assumption, don't you think? - then it makes sense to keep the due diligence on as close and personal a basis as possible. And this raises question about the last 80 years of financial regulation, and the regulatory preference for increasingly large (and "safe" and "trustworthy") banks.

    #2: this is ridiculous. Fraud is a crime; violent attacks are a crime; neither one is "behaviour perceived as immoral or offensive or "taking advantage" but ... not illegal."

    rpl writes:

    Costard, I'm having a hard time seeing how most of what you wrote is relevant to anything I said, but I'll do my best to respond.

    fraud is a crime. Why should the burden of proof rest with the accused to prove their innocence?
    I don't recall ever saying that it should. Certainly I never intended to say that. Anyone accused under any anti-fraud law should get the full protection of due process.
    you might defend guilds this way, or monopolies, or any regulatory intervention under the sun. But you would have to argue that guilds, monopolists and politicians are less likely to screw a person over.
    The second sentence in this response contradicts the first. You cannot defend any of those things "this way" (i.e., using only the argument that I made) if you must also make some additional argument to show that the argument that I made applies. In other words, your attempt at reductio ad absurdum fails because the obviously undesirable conclusions are not actually implied by the argument I made.

    I've skipped the rest of your response to #1 because it doesn't seem to relate to anything I said.

    this is ridiculous.
    What is ridiculous about it? The other poster argued that we shouldn't prohibit something like Arnold's scenario (c) and that individuals should instead rely on their own due diligence to avoid falling victim to it. But if you're going to argue that we shouldn't authorize the state to protect individuals from fraud (i.e., we should require individuals to rely on their own due diligence), then why can't you argue similarly that we shouldn't authorize the state to protect individuals from force? If force and fraud are both illegitimate ways of acquiring property, then the state should be authorized to sanction anyone who uses either of them (subject to due process, of course).
    Bryan Willman writes:

    This all seems to miss a KEY problem for any theory of economics and for libertarianism in particular.

    People are finite.

    So given that consumers deal with banks relatively infrequently, and have finite time to evaluate their claims, and that society cannot function if people spend all of their time worrying about what thuggish thing a bank will do next, THEN, it makes sense to require that banks be truthful and transparent.

    Being charged with "misled consumers about..." sounds very much like "lying" which would be fraud, no?

    Greg H writes:

    Force and fraud have nothing to do with benefits. That is, whether one benefits from a transaction or not has nothing to do with whether the transaction involves force or fraud. These are two separate determinations.

    With that in mind, it becomes easier to see that (a), (b), and (c) all involve force/fraud. Any benefits involved are irrelevant to the force/fraud.

    Drawing a line in the sand becomes much easier if one stays focused on what the line is dividing. In this case we need two separate lines, one for force/fraud or not, and another for benefits or none.

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