Externalities Are the Reason for Obfuscation

In my previous, somewhat whimsical post I asked if perhaps obfuscation is the lubricant for social intercourse.

That question is itself question-begging (and Prof. Rossman already raised this concern): It assumes that the transaction in question actually produces an economic surplus, but is blocked by moral considerations. Can we be sure that’s true? For whom? It seems I want to treat obfuscation as friction, as a tax, something that reduces the size of the surplus of the disreputable exchange. Professor Rossman rightly notes this may not be true.

One obvious problem would be the situation where the disreputable exchange does not create a (net) surplus. I’m thinking of externalities: The standard economic story is that “we” (whatever that means) should “account for” (whatever that means) the “social costs” (whatever that means) of an action, not just the private cost.

A common example is noise or pollution: If Art sells something to Betty, and Betty uses the item, is Carl somehow harmed? (Perhaps: once you’ve heard Betty, you’ll know what I’m talking about…. ) The reason I added all the scare quotes is that it is not clear how we can take account of social costs. We don’t know their value, in an exchange. The Coase Theorem is based on the important insight that the very idea of an “externality” is contingent, and perhaps not well defined. It may be a product of the (mis)specification of property rights.

When we consider disreputable exchanges, the kind where obfuscation matters, as “externalities” we enter some very deep waters. Suppose that it’s really true that the idea of two people of the same sex getting married offends me. Or, suppose that the idea of a woman taking money for a demeaning (in my mind) sex act offends me. I don’t mean a little; I mean it offends me to the point that I can’t sleep, and I want to go break something. Openly allowing these things, like gay marriage for the right or like prostitution for many leftist feminists, would cause an “externality” (sorry, I can’t help it about the quotes!).

The problem of judging which externalities to account for is a lot like the legal doctrine of standing, or the notion that I have to have been affected in a particular, legally recognized way to be able to “stand” in court and sue for injunction or damages. In politics, though, “standing” only requires that I’m registered to vote. The harm I perceive is made real simply by my perception of it.

And that means that people who are offended by prostitution or gay marriage can vote against it. They aren’t directly affected, but they feel a harm, an externality caused by having these contracts validated by the state officially. You often hear a (presumably intentional) misunderstanding of this problem: “Don’t approve of abortion? Don’t have one!” That’s not an answer, if there is a powerful negative externality for me from having Betty be able to pay Art to perform an abortion. It’s not an answer for prostitution, either: If I am very upset by the idea that Art can pay Betty for sex, there is an externality.

Now, in some cases (abortion and same sex marriage, for example) the courts can simply deny political standing for externalities: you don’t get to vote for what you want, even if you feel it very strongly. The result of this may be violence, because the open state endorsement of abortion rights and gay marriage rights imposes an externality on people who think these things are immoral.

But in other cases, as in prostitution and kidney exchange, we outlaw the state enforcement of voluntary bilateral contracts, for reasons of felt negative externalities by people not party to the proposed exchange.

So obfuscation is sometimes made necessary by the combination of externalities and democracy. The contracts can be consummated, and in some ways even enforced, as long as we don’t admit what’s going on. Thus there ere are escort services and “civil unions,” which both obfuscate the externality-causing contracts.

I wonder if all four of Rossman’s obfuscation mechanisms (gift exchange, bundling, brokerage, and pawning) can be thought of as ways of allowing people who strongly feel a negative externality from the open endorsement and enforcement of disreputable exchanges a way to pretend that it’s not happening.

If so, then obfuscation is not a tax or dissipation of the surplus at all. It is a way of increasing the size of the surplus by repackaging the framing of the exchange.

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

  • Are Rossman’s Obfuscation Mechanisms Cynical, or the Best Available Compromise? by Michael C. Munger

    Michael C. Munger notes that objections to exchange typically arise from the perception of unequal bargaining power; these perceptions commonly are the source of the need to obfuscate. And yet obfuscation increases transaction costs. Even in the case of government subsidies to industry, obfuscation plays exactly this role, for we would perhaps find direct cash transfers even more objectionable than indirect, regulatory subsidies, which are not so easily talked about as just a sop to a favored few. But this is hardly the only time when obfuscation happens, and Munger concludes by promising to examine in a later essay when hidden exchanges should and should not be recommended.

  • 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