By Dr. Katherine Curchin, a Research Fellow at the Australian National University.
Manipulation and deception are predictable, yet strangely under acknowledged, features of competitive markets. In their award-winning book Phishing for Phools, economics professors George A. Akerlof and Robert J. Shiller argue that trickery on the part of sellers is not just an occasional nuisance: it's an inherent part of our economic system, a natural consequence of competitive pressure. The upshot is that ' free markets leads us to buy, and to pay too much for, products that we do not need'. This downside of markets is worth pondering as we consider marketizing human services in Australia.
The title of Akerlof and Shiller's book 'Phishing for Phools' refers to the angling by unscrupulous sellers for buyers vulnerable to deals that are not in their best interests. (The term phish spelled with ph comes from the term for internet scamming). According to these behavioural economists, markets don't always provide what people want - it's more accurate to say they provide what people can be momentarily conned into buying. Chapter by chapter Akerlof and Shiller take us through the trickery and deception in the marketing of securities, cars, houses, credit cards, food, pharmaceuticals, tobacco and alcohol.
Though it's heretical to say so, more choices don't always lead to greater wellbeing. The standard economists' assumption that people only make choices that maximise their welfare is at odds with the remarkable frequency with which people choose products that (if they had the full information) they could not possibly prefer. A surprising number of people make purchasing decisions that make them miserable. Instant access to credit has resulted in large numbers of people drowning in debts they'll never pay off. Gambling addicts feed the pokies with money they don't have. Other people drink or eat themselves to death.
Akerlof and Shiller write that economic equilibria ensure there will always be a firm available to exploit consumers' weaknesses and facilitate this kind of misery. If one firm doesn't, another firm will. 'Because of competitive pressures, managers who restrain themselves [from taking advantages of their customers' psychological or informational weaknesses] tend to be replaced by others with fewer moral qualms ... if there is an opportunity to phish, even firms guided by those with real moral integrity will usually have to do so in order to compete and survive' p xii. The ugly truth is that markets are an economic system that encourage producers to prey on human weakness.
If the profit motive is to take the credit for the butcher, the brewer and the baker providing the things we do want, then it's only fair that the profit motive gets the blame for many of the ills of consumer society.
The authors stress that everyone has weaknesses, everyone lets their guard down sometimes. With so many decisions to make - and so much manipulative information to sift through - it's inevitable that from time to time we'll take our eye off the ball. The behavioural sciences are doing a great job of illuminating the many quirks of human decision making. One of the charms of the book is the disarming way the authors - both Nobel Prize winners - recount times they've fallen for salesmen's tricks themselves.
Awash in a sea of intentionally misleading information, consumers must be vigilant. Modern market societies make available a cornucopia of delights. But for many people these same societies are also tough, stressful places to live in, full of tricks and traps for the distracted, impulsive or financially illiterate. As another duo of behavioural economists, Sendhil Mullainathan and Eldar Shafir, explain in their book Scarcity people on low incomes just don't have the slack in their budgets to be able to afford to make bad purchasing decisions. Momentary failures of self-control or attention can have weighty consequences.
Phishing for Phools offers a fresh take on the idea that markets promote innovation. Market-driven innovation is a double-edged sword. Akerlof and Shiller acknowledge the spur competition give to innovation in the development of new products and production processes. But they are also wise to the way markets incentivize innovation of a less honourable kind. Business people can use their ingenuity to find new products that will satisfy consumers' needs, or alternatively to figure out consumers' weaknesses and create innovative ways of selling them things they didn't really want. The profit motive drives firms to invest in advertising and elaborate sales techniques. Salesman prey on the many weaknesses of human decision making such as our tendency to think of the present at the expense of the future (what's known to behavioural scientists as 'present bias') and our fear of missing out. Sellers take advantage of buyers' comparative ignorance of their products' features. They develop complicated and overwhelming product packages whose relative merits customers can't properly process.
Highlighting the trickery and manipulation in our economic system illuminates why so many intelligent people work in jobs they have misgivings about. If private companies really were about satisfying people's needs efficiently, wouldn't it feel more satisfying to work in them? Getting paid to find new ways to con the same old people - or finding new people to con the same old way - isn't nearly as rewarding.
Investment banks refer to their own clients as 'muppets', and foist upon them products they don't want. Gyms sell memberships that go unused. Ink cartridges cost almost as much as the original printer. Tobacco companies use health messages to encourage customers to buy products they know will kill them. Akerlof and Shiller's message is that these are not quirky economic aberrations. They cannot be explained away as the work of a few evil people who don't care about their customers. Rather trickery and deception are key to how markets normally work. Sellers find weaknesses in buyers that they can exploit to make a buck. Markets are full of people trying to find ways of inducing people to make decisions which are not in their best interests.
The heroes in this book are the regulators. When consumers succeed in getting the product they actually wanted, some of the credit has to go to the regulatory system - and its standardization, grading and certification - that makes this possible. When sellers do serve the best interests of their customers this is usually because they are working within limits carefully defined for them by effective government and civil society. Civil society can encourage business people to understand themselves as members of a community, rather than as amoral profit-seekers. Akerlof and Shiller are by no means anti-market: they believe the best arrangement is when the power of markets, government and civil society balance each other. What we must avoid is the disaster of unadulterated markets: a market so poorly regulated that no one can trust anyone grinds to a halt.
Akerlof and Shiller argue that modern economics has failed to take seriously the role of deception and trickery. It was because economists ignored the trickery and deception involved in mortgage-backed securities that they failed to foresee the 2008 world financial crisis. In the lead up to the crisis some economists even naively believed that markets policed themselves. The free market ideology that claims 'government is the problem' emerges in this book as itself an example of trickery - a con that has taken a lot of people in, and wreaked economic havoc in the process.
The take home message of this book is that when we look at markets we should be on the lookout for the tricks that some innovative firm is bound to have discovered. We should acknowledge the imperative of publicly resourcing regulators capable of putting the brakes on trickery and deception, as well as the importance of protecting the altruistic motivations of civil society from being crowded out by market values. And if we create new markets in new fields we should anticipate that we are opening up new opportunities for exploiting vulnerable people.
There are signs that economists in Australia are not heeding this message. Yet we saw the way the profit motive drove exploitation of the vulnerable here in Australia when a new market was opened up in vocational training funded by the government’s VET FEE-HELP loan scheme. Unscrupulous operators used dubious sales techniques to dupe vulnerable people into enrolling in online courses they had no hope of completing.
The profit motive also produced unpleasant surprises when a market for privately provided employments services was created in Australia. The contracting out of employment services was supposed to enable jobseekers to receive services tailored to their unique situation, but research shows the profit motive has actually driven standardisation of services. Smaller community organisations with the specialist expertise to help particular groups of disadvantaged jobseekers have proven too small to compete against the big firms. Successful providers of employment services have discovered the most profitable way to run their businesses is by ‘creaming’, in other words concentrating on the more readily employable people in their case load and ‘parking’ – effectively giving up on - their more disadvantaged clients. UK research shows parking and creaming are also a big problem in the employment services industry there despite the government’s best efforts. The profit motive leads people to look for loopholes.
The exploitation of the vulnerable by providers of employment services and vocational education should not be considered minor difficulties, but indicators of an inherent downside in pursuing productivity through marketization. It is concerning that the Productivity Commission appears to be starting with the presumption that the marketization of the human services should be encouraged, thereby placing the burden of argument on defenders of non-market values. The delicate balance between markets, government and civil society is everywhere under threat.
The political philosopher Michael Sandel in his book What Money Can't Buy argues we need more public debate about the incursion of market norms into all spheres of life. The trouble as he sees it is that market motivations can crowd out nonmarket motivations. Behavioural economics has shown that putting a price on a service can make people less willing to do it for free. While conventional economics assumes that financial motivations can be simply added on top of other intrinsic motivations, such as public spiritedness, it turns out that in reality financial incentives sometimes cancel out pre-existing motivations. People are more likely to do honourable things like pro bono legal work or collecting for charity if you don’t offer them a financial incentive. Paying people to do these activities changes their character – it commercializes them - which makes people more reluctant to do them. As Sandel points out, the commercialization effect has big implications for policy areas where intrinsic motivations matter such as education, health care or disability care.
This doesn’t mean that people should never be paid for the good work they do, such as caring for the sick or the elderly. But it does mean that creating markets in social services comes with risks. Elizabeth Anderson, another philosopher who has explored the ethical limits of markets, argues that commodification need not be all or nothing; it admits of degrees. It matters a great deal whether exclusively market norms govern the design and delivery of a service or whether other criteria such as compassion and justice come into play.
While full commodification of human services can be degrading, and encourage exploitation of vulnerable people, partial commodification can be a useful way of encouraging investment in socially valuable activities. The realms of childcare and employment services provide examples. We resist the full commodification of childcare when we insist that the best childcare centre is the one where the children are thriving regardless of whether it is the one that makes the greatest profits. We resist the full commodification of employment services when we insist that more disadvantaged jobseekers deserve to be treated with respect, rather than parked by service providers intent on chasing profits.
If we are to avoid the full commodification of all aspects of human life, governments must recognise ethical limits to the operation of markets. Other considerations important to our society – human dignity, democracy and justice for example - must be allowed to trump profitability. Ascertaining the correct limits to commodification is not a task economists are well placed to perform alone. To understand the moral costs of further marketization, the Productivity Commission would require the assistance of sociologists, anthropologists, political scientists and moral psychologists. But more than this, assessing the costs and benefits to Australia of marketizing the human services necessitates deliberation by the general public. We need a public conversation about what values we as a society care about, and what nonmarket norms are worth preserving.
This piece has been written as a part of the Power to Persuade dialogue on the Productivity Commission's inquiry into social services.