Wednesday, October 1, 2008


I've written here about how newspapers used to sell trust, and the always insightful Bruce Cubbison of Syracuse noted how that trust has in many cases been transferred -- you trust, say, Jon Stewart more than you trust the New York Times, because you know -- or at least think you know -- that Jon Stewart shares your underlying attitudes. The problem with journalism's stock in trade, semi-omniscent objectivity, is that almost no one views the world with semi-omniscent objectivity. To see the world and see it whole, as a London Times editor once said of his calling (doing so before the Internet and thus having a not easily findable quote), is just not what the typical reader does, for the obvious reason that the typical reader is self-interested.

My former colleague Andy Cassel once wrote a column (I can't find it, but here's a brief comment showing it existed) on how Independence Blue Cross paid for the fireworks at a Phillies game. If IBX had the money to pay for fireworks, wrote Andy (now writing for the "Dismal Scientist" at Moody and working with another incredibly talented journalist, the reporter and editor Colleen Gallagher), that was money that in a purely competitive economic system would have not been there because insurance prices would have been lowered. IBX's operation in a semi-protected sphere meant it could put aside money for what it saw as "good corporate citizen" activities. I don't remember, but I think Andy's point was that if the Phillies wanted to have fireworks, they could provide them themselves and build the cost into a ticket price. Thus you, Homo economicus, moving in a transparent market of goods and services, would be able to allocate your resources appropriately.

My son is the economist, but I know enough to know that 1) I don't know enough about economics to say anything rebutting Andy Cassel and 2) the Homo economicus model has been under a lot of attack because of its underlying assumption that while individuals may act irrationally, the marketplace as a whole will not act irrationally. It is like the Catholic teaching that while priests and bishops and even popes may err, the church itself cannot err -- a teaching that says that the only errors are those that the church chooses itself to call errors and correct. This asks ordinary mortals to trust the church, which is what institutions do. And we have seen the cost of institutional errors in the Catholic Church. In a pure free market there are no institutions, merely traders in the bazaar, which looks attractive when a surfeit of information makes it appear that we all know as much as everyone else.

The giant department store Rich's Inc. in Atlanta was known for having one of the most liberal returns policies anywhere. As Leon Harris wrote in "Merchant Princes":

"In each generation there were dozens of tales -- the true stories often more remarkable than the apocryphal ones -- of how Rich's resolutely, unremittingly, satisified its customers no matter how unreasonable, outrageous, or provocative. The store refunded the full price of an unused pair of high-buttoned shoes thirty yearsold, of an unworn man's shirt ten years old, of a dead canary. It accepted for credit or exchange merchandise that customers had bought not at Rich's but from its competitors, because when a customer alleged that she had bought it at Rich's, the Riches did not propose to call her a liar."

The Rich family took the omniscent view -- what appears to not be in our self-interest is actually in the interest of the store as an institution, and indeed in the interest of Atlanta. Harris notes that clerks tended to act in self-interest, though:

"Such a liberal program was very difficult to enforce because employees usually felt that they were giving away their money, their profits, that they were being taken advantage of. ... The store's liberal return policy was only one aspect of the family's insistence that the store must be run to suit the needs of its customers."

In other words, hey, Mr. Rich, if you didn't take that shirt back, you'd have more money to pay me. But Rich's was incredibly successful for generations, becoming the largest downtown department store in the South and helping build the reputation of Atlanta as a place to be. Clearly Rich's built the cost of its return policy into its prices.

What probably made the policy less important was that as many goods got cheaper, it seemed less of a hassle to throw things away than return them. In a country with what many analysts (yeah, I know, that's a journalistic thing that means "some analysts whom I happen to agree with but don't want to take the time to cite") say there are too many stores, Homo economicus could buy the same toaster oven at Rich's or Wal-mart or CVS. Rich's could no longer build in its convenience premium. But Rich's then lost the ability to offer the consumer the same level of trust in the Rich's brand. Rich's then lost the ability to be a good corporate citizen as it had been with such programs as the Christmas Tree Bridge and its activities in the Depression:

"In 1930, when the virtually bankrupted city had no money to meet the schoolteachers' payroll, the store's president, Walter Rich .... called the mayor to suggest that the city issue scrip to pay the teachers, which the story would not only accept in payment but also cash at full value with no obligation that a penny be spent at the store. Rich's paid out $645,000 for this scrip and held it until the city could redeem it." (Harris.)

The individual gets the toaster oven for 30 cents, but society suffers unless your model of the world says there is no such thing as society, only self-interested individuals pursing maximum satisfaction. The weaknesses in that model are why institutions and regulations wax and wane. Institutions -- department stores, newspapers, banks, what have you -- tend to build "trust" in as part of their economic model. (IBX says, we'll put on fireworks to show we're good guys and you will trust us for your health coverage. Of course, good customer service is also necessary.) But "trust" is just another expense to throw over the side when the only market value is the highest return for the least effort -- the lowest cost. Homo economicus, being fundamentally irrational, throws trust out the window in pursuit of short-term gain, then rails back, wounded, when institutions are no longer trustworthy, having pursued nothing but short-term programs themselves.

All of which is a long way of wondering whether newspapers would have adopted the "everything is free" model of Internet service in an era less driven by a laissez-faire model -- or indeed whether they would have been able to (imagine the Internet appearing between 1905 and 1945, the era in which license plates, broadcasting licenses and modern banking regulations were established). Newspapers used to charge in part for "trust." The conundrum, of course, is that if people are told that anything except pure self-interest is "being taken advantage of," no one wants to pay for it. And then they find trust in people who they feel think as they do -- who, in journalism's case, mainly take what newspapers, newsmagazines and network broadcasters do, comment on it, and present it for their circle of fans. (Jon Stewart does his own form of original reporting, of course, which is why he has been honored, seemingly against his will, as a journalist.)

If newspapers were to suddenly say, "Hey, bloggers, you know, if you now want to comment on this information, you will have to pay for it," what would happen? Yes, I know the nature of digital information means that after the first person paid for it, it would be free. But for people to be able to trust anything other than "my friend whom I agree with," a price for trust -- for example, to employ editors whose job is to verify that the information is correct -- has to be paid.

All of which comes to mind in the current apparent failure of a system founded on laissez-faire unregulated self-interest. Will trust will be more important to the younger people now in high school, college and early jobs? And can institutions, such as newspapers, use this to emphasize trust as a value, even though it cannot come free?


AC said...


Just ran across your kind words via an otherwise unproductive Technorati search. The column you referenced is below. FYI, I've added a free blog to the Dismal Scientist site:
Feel free to check it out, link or cross-post anything that catches your eye. All best, Andy

July 22, 2005 Friday CITY-D-EAST EDITION

The Economy / Health firms need competition

BYLINE: By Andrew Cassel; Inquirer Columnist


LENGTH: 655 words

Insight came to me recently in a blinding flash of light. Literally.
I was sitting in the stands at the ballpark. The Phillies had just dropped a heartbreaker to the D.C. Nationals. But we had all stayed put to watch the evening's featured attraction: the Independence Blue Cross fireworks show.
BLAM! BOOM! The sky blazed red, white and blue. Fountains of sparklers rushed and crackled above our heads. Sousa marches played above the noise, followed by Springsteen anthems.
It was splendid, glorious, awesome - and as I watched, exhilarated, the thought suddenly hit me like a hammer:
There's not nearly enough competition in the health-insurance industry.
What did Blue Cross spend that night to blow our socks off and eardrums out? A hundred grand? Two hundred? More?
I don't know what it costs to explode enough fireworks to keep 45,000 people entertained for nearly an hour, but I bet it was more than your employer (or mine) has lying around the petty-cash drawer.
And here's something I'm sure of: When a company has that kind of money to burn, it's a sign it lacks competition.
Call it an economic law of nature: In a competitive market, firms can't afford "image" marketing and other such frills.

The efficiency of competition
Prices can't be higher than what's necessary to cover costs, plus enough profit to keep the shareholders from taking their capital elsewhere.
Any firm that violates the rule will find itself under pressure. Rivals will offer lower prices or a better product, and thereby take away market share. The process is ruthless, but in the end we all benefit from the efficiency and innovation it breeds.
Adam Smith had this all figured out in 1776, when he published The Wealth of Nations. Countries that protect monopolies don't prosper, he argued. Those that encourage free and open commerce do.
It ought to be gospel, but it's still an underappreciated truth, even today. Case in point: the 1990s.
Partisans from both sides of the political fence claim credit for that decade's remarkable growth, but as author Paul London writes in a new book, the real hero was competition.
London's The Competition Solution argues that the 1990s boom stemmed directly from pro-competitive policies begun in the '70s and '80s, under both Democratic and Republican administrations.
In those years, price controls and other monopolistic crutches were removed from a host of industries, including trucking, airlines, stock-brokerage and telecommunications. Steel, auto and other types of manufacturing were opened to competition from abroad.

Deregulation, free trade pay off
The result was a massive industrial restructuring, followed by cost-cutting and waves of innovation. U.S. firms that had grown fat slimmed down or fell by the wayside.
Today, the United States has one of the most competitive and open economies in the world. Among the developed nations, we're also one of the fastest-growing.
But one byproduct of greater competitive efficiency is a decline in displays of corporate munificence. As nonprofit fund-raisers attest, it's much tougher today to tap business for big donations or sponsorships.
Even ExxonMobil recently gave up sponsoring its signature Masterpiece Theater show on PBS. That's sad for the show's fans, but, as a consumer, I'm delighted. Where was Big Oil getting the money for those sponsorships, anyway?
Hint: It's the same place Blue Cross goes to fund fireworks displays.
Indeed, London names health care and education as two of the last industries in America where price-fixing and monopoly are more the rule than the rare exception.
Eventually, he believes, competition will reshape these industries as well. Consumers will be able to compare prices and services, giving providers the incentive to innovate or pare costs for greater efficiency.
It will be great when that happens. Just don't expect Blue Cross to announce it with fireworks.

LOAD-DATE: July 26, 2005

jaspreet said...

This has been very helpful.

waxing ny and waxing nyc,body waxing nyc

jaspreet said...

This has been very helpful.
waxing ny and waxing nyc,body waxing nyc