Are Rossman’s Obfuscation Mechanisms Cynical, or the Best Available Compromise?

A famous example of exchange is found in a passage from Cicero, in On Duties III.15.

Quintus Scaevola, the son of Publius, when he asked to have the price of an estate that he was buying named once for all, and the seller had complied with his request, said that he thought it worth more, and added a hundred thousand sesterces. There is no one who would say that this was not the act of a good man; but men in general would not regard it as the act of a wise man, any more than if he had sold an estate for less than it would bring. This, then, is the mischievous doctrine, — regarding some men as good, others as wise…

In an everyday commercial setting, Scaevola was perfectly justified in paying a price less, even much less, than he valued the estate. That difference in valuation is what makes exchange, and commerce, possible. The story is only remarkable because Scaevola is giving something away, as if the setting were more about charity than commerce.

What Rossman has done is to identify some circumstances and transactions where the identification as an “everyday commercial setting” is problematic. My general response is that there is a misunderstanding here. Not by Rossman, who has written quite a useful essay. Rather, the misunderstanding is on the part of “the public.” Most of the time, general objections to market exchange, for any commodity whatsoever, are misplaced objections to the pre-existing (possibly unjust, and in any case unequal) bargaining power of the participants in the exchange. Markets make this bad situation better, not worse.

 

Voluntary Means Consent

Most theories of markets rest on the claim that voluntary exchanges make both parties better off, because both have an effective right not to exchange. If they are willing, they must prefer the exchange to their current situation. The policy implication is clear: the state should focus on reducing the transaction costs of exchange, and extending the market, making exchange widely available so that the benefits of exchange are distributed as broadly as possible.

Opponents claim real exchanges are often neither fair nor voluntary. If one party is desperate, or in a weak bargaining position, most or even all of the surplus created by an exchange accrues to the stronger party. Consequently, real exchanges often benefit only the powerful, and may even harm the weak or frantic. And that in turn means that the state is not only justified in regulating, but may well be obliged to mitigate the harms of involuntary or coerced exchange. The simplest and most effective way to accomplish this object is to prohibit the exchange outright, as is the case with (in Rossman’s terms) “prostitution, low-wage work, or even baby-selling.”

Rossman makes some interesting observations about ways in which the force of these regulations and prohibitions can be softened or circumvented entirely. There are four key mechanisms: (1) Gift exchange; (2) Bundling; (3) Brokering; and (4) Pawning. The interesting thing about these techniques is that they “obfuscate” (Rossman’s term) what is really going on, while also increasing the transaction costs of the exchange.

Such “second best” alternatives to straightforward exchange, especially when the alternatives have essentially the same destination but must take an inefficiently circuitous route, seem cynical and misguided. George Stigler famously noted that beneficial subsidies given to industries are rarely provided in the form of cash transfers, but instead are (Rossman might say) bundled or brokered. In Stigler’s (1971) words:

[W]hy does an industry solicit the coercive powers of the state rather than its cash? … The most obvious contribution that a group may seek of the government is a direct subsidy of money…. [But] unless the list of beneficiaries can be limited by an acceptable device, whatever amount of subsidies the industry can obtain will be dissipated among a growing number of rivals….[Therefore,] political boons are not obtained by the industry in a pure profit-maximizing form. The political process erects certain limitations upon the exercise of cartel policies by an industry…(pp. 4-6)

Thus government regulatory policy designed to benefit industry will also generally be obfuscatory. This is true in the case of regulating “bad” transactions, as Rossman discusses, and in the case of favorable industry regulation, as Stigler discusses. This may seem to be just simple cynicism, covering one’s tracks while using less efficient means of allowing the powerful to do what they wanted all along.

But there are consequences to fostering higher transactions cost for undesirable activities. Consider the best-known example: The Australian or anonymous ballot. Traditionally in the United States citizens voted at separate booths, or asked for the ballot of the candidate or party of their choice. These ballots were brightly colored in ways that made it easy to distinguish the voter’s choice, even from a distance.

This made vote-buying easy, because it was possible to monitor the compliance of the voter. The “buying” of course might take the form of payment, or extortion based on threats of violence or retaliation by being fired from one’s job. Given the relative uselessness of a single vote to a voter, but the value of many votes to a corrupt politician, it is easy to imagine that the transaction “I’ll pay you $5 and a turkey for your vote!” might have made both parties better off, moral qualms about vote buying set aside.

The Australian ballot process, where all the names are listed on one ballot and the ballot itself is marked and filed in privacy, raises the transaction costs of carrying out promises or making threats. The attempt at “brokering” by partisans or (and?) thugs is thus blocked.

 

A Problem, Unresolved

There is a difficulty with the regulation of mutually beneficial transactions. The refusal of the state to enforce “unconscionable” contracts may make worse off the very people we pretend to care about. As I noted above, the problem with unfair exchanges is that one person is desperate. It is tempting to say that we can help by relieving the person of the burden of exchanging in such dire circumstances. But restricting access to a transaction that was the person’s only hope to get out of the desperate situation seems an odd “solution,” except to the extent that it eases the conscience of the (now) morally superior onlooker.

This is exactly the form of the objection to “voluntary” exchange made by Michael Sandel (2003).

The… objection [to the claim that an exchange is voluntary] is an argument from coercion. It points to the injustice that can arise when people buy and sell things under conditions of severe inequality or dire economic necessity. According to this objection, market exchanges are not necessarily as voluntary as market enthusiasts suggest. A peasant may agree to sell his kidney or cornea in order to feed his starving family, but his agreement is not truly voluntary. He is coerced, in effect, by the necessities of his situation.

Does this objection, if we grant its validity, imply that the state should disallow the contract? Imagine that we find out that the “peasant” intends to sell his cornea tomorrow, to save his family. We roll up (no doubt in an air-conditioned SUV), roll down the window, and inform the peasant that this will not be allowed. Then we sit back and wait for the waves of his gratitude to wash over his.

But he is not grateful, not at all. We have taken the one means he had of improving his situation, and outlawed it, in effect marooning him at a situation that by our own premise was unacceptable. The problem is not, and was not, voluntary exchange. The problem is the desperate need of the peasant for the resources to feed his family. Access to market exchange, far from being a problem, is his only possible salvation.

Of course, we might well say, and be right: “The peasant should not have to sell his cornea to feed his family.” Fair enough. But from that true statement it does not follow that “Therefore, the peasant should not be allowed to sell his kidney.” To the contrary, unless we are going to help in some other way we are harming the very person we claim needs our help most desperately.

To close the circle, then, allowing transactions of a “second best” sort, through gifts, bundling, brokering, or pawning, may be the best we can realistically hope for. The benefits of the exchange can still be obtained, but the moral sensibilities and legal conventions of the society can be preserved. It is a separate question, one I will address in the conversation phase, whether these sensibilities or conventions are worth preserving.

 

Works Referenced

Cicero, Marcus Tullius. (1913). De Officiis (Of Duties).  Constitution Society. http://www.constitution.org/rom/de_officiis.htm

Sandel, Michael (1998). “What Money Can’t Buy: The Moral Limits of Markets,” The Tanner Lectures on Human Values, University of Utah. http://tannerlectures.utah.edu/_documents/a-to-z/s/sandel00.pdf

Stigler, George J. (1971). “The Theory of Economic Regulation.” Bell Journal of Economics and Management Science. 2(1):3-21.  http://www.rasmusen.org/zg604/readings/Stigler.1971.pdf

 

Also from This Issue

Lead Essay

  • When the Invisible Hand Needs to Stay That Way by Gabriel Rossman

    In nearly all cases, markets are how most of us obtain and provide goods and services. But in some situations, recourse to markets is disfavored - whether rightly or wrongly - and in those cases, participants sometimes resort to what is known as an obfuscated exchange: Transactions may occur in which the good or service is provided, and in which the provider is compensated, but the whole thing still looks much less like a market transaction than it otherwise might. Examples are many, including everything from radio payola to Islamic finance. Professor Gabriel Rossman offers an introduction to this fascinating world and speculates on how cultures overcome their scruples about using markets.

Response Essays

  • Sleight of Hand-Out by Alan Page Fiske

    The examples that Gabriel Rossman analyzes are special cases of a general pattern, says Alan Page Fiske: What people say about social relationships commonly diverges from the actual nature of the relationship. This is not limited to obfuscation of market behavior; other things sometimes masquerade as commercial transactions instead, and various types of non-commercial interactions masquerade as one another. Further, individuals commonly act to preserve a beneficial ambiguity in their social relations, seeking to retain a pattern of options that would be foreclosed by a strict definition of the nature of their relationships. And at times, we may even be personally unaware of what our social minds are doing - and mischaracterize a relationship without realizing it.

  • How to Hide Trade from a Lizard by Alex Tabarrok

    Alex Tabarrok notes that for evolutionary reasons, humans tend to think in wealth-destroying ways about certain types of exchange. Obfuscation can help us work around the constraints of our lizard brains, saving lives in the process. Such happens in the obfuscated markets for organs in Iran and Israel. But obfuscation can do more than that: It can also allow participants to preserve certain kinds of social status that they might not want to forego. Obfuscation, then, is not mere dishonesty. It’s a way of negotiating social hierarchies while also participating in a market.

The Conversation