"Arguing in My Spare Time," No. 4.32
by Arnold Kling
November 18, 2001
Many economists now lean toward attributing most kinds of injustice, bureaucracy, and societal inefficiency to asymmetric information flows--where one person or group knows something that others don't. . .lack of complete competition, inability to commit, public goods, and externalities would be relatively easy to fix, via either contracts or politics, if we all had symmetric information.
--David Brin, The Transparent Society, p. 24
In this passage, David Brin went too far, as I shall argue below. However, his book offers a provocative thesis, which is that the best solution for issues of surveillance and asymmetric information is to encourage transparency. In the transparent society, you can be spied on by anyone, but you have symmetric capabilities, including the the knowledge of who is spying on you.
Brin wrote The Transparent Society in 1998. However, many of us only have begun to think about surveillance since the 9-11-01 terrorist attacks. Brin anticipated many of the issues that these attacks would raise. For example, he wrote,
Terrorists operate under cloaks of anonymity and secrecy, their movements, supply routes, and sources of funding carefully hidden. This is especially true of their concealed finances, which are often funneled through those so-called banking havens discussed earlier...the real impulse to force them open may only come after some band of terrorists manages to kill thousands with a gas attack, or blow up a skyscraper...When this happens, many will call for draconian solutions, granting the state new police powers. But there may be an alternative...
The transparency option would demand that the world's cash flow finally become open and accountable, thus denying criminals, terrorists, and conspiratorial elites the power to hide away--and hide behind--mountains of untallied cash. (p. 320)
If a government agency obtains the power to examine bank transaction data, then Brin argues that citizens need to have countervailing power. They need to be able to examine that same bank data, and they also need to be able to examine the government agency and its behavior.
Brin postulates that the cost of surveillance technologies is falling dramatically. He particularly focuses on the cost of small cameras. To carry the point to an extreme, he describes the theoretical possibility of a "gnat camera," which can fly into a room nearly undetected and transmit pictures back to its owner.
Brin predicts that cameras and other surveillance technologies will become like guns. That is, legislation to ban them or to keep them out of the hands of wrongdoers will be ineffective.
Furthermore, he argues that if the general public is denied access to surveillance technologies, then those elites that do have access to surveillance will have excessive power. This scenario would lead to abuse, if not outright totalitarian enslavement.
Brin concludes that it will be impossible to ban surveillance or to contrive a world in which "we" have surveillance capabilities and "they" do not. Accordingly, the least problematic scenario is one in which citizens can spy on one another, government and corporations can spy on citizens, and citizens can spy on government and corporations. Hence, the "transparent society."
Brin argues that "mutually assured surveillance" can act as a deterrent to abuse. For example, a voyeur might be tempted to peek into my bedroom. But in the transparent society, I can see that he is peeking, and this may give me the power to stop him. As an economist, though, I am troubled that Brin has not analyzed this in more depth. Do I have to pay the voyeur not to spy on me? Would shameless voyeurs be in a position to blackmail those of us who do not want to be watched, because the threat of revealing their identities would not matter to them?
As Brin pointed out in the passage above, economists have examined situations in which information is asymmetric--one party lacks access to another party's information. In such situations, the ignorant party may look for "signals" from the informed party, and this can lead to a variety of outcomes.
The concept of "signalling" can be traced all the way back to Marx. That is Groucho, not Karl. Groucho said that "I would never join a club that would have me as a member."
In a world of asymmetric information, Groucho does not know which clubs are truly selective and elite. Admitting Groucho as a member sends a signal that the club is not selective. That provides him with the information he needs to know that he does not want to join.
Below are four examples of topics that economists have examined relative to asymmetric information.
|Asymmetric Information||Economic Impact||Economist|
|The seller of a used car knows more about the condition of the car than the buyer||Buyers assume that used cars are flawed. People with good used cars to sell cannot get a fair price in "The Market for Lemons."||George Akerlof|
|Consumers know more than insurance companies about their individual health risks||Insurance companies try to use different combinations of premiums and deductibles to get consumers to sort themselves. If this sorting is successful, the riskiest people may not be able to afford health insurance.||Joseph Stiglitz|
|Job applicants know more than their employers about their ability to function in a corporate setting. The employer does not know if you are willing to sit through PowerPoint presentations with meaningless jargon and pretend to be impressed.||People go to business school to obtain a "signal" that they have the temperament to be corporate sheep.||Michael Spence|
|A company and its regular customers know the prices that it charges, but potential customers are not as aware of its prices.||The firm may choose to stick to its price when demand falls, because it will not be able to attract enough new business for the price cut to be profitable. This "price stickiness" prolongs the impact of recessions.||Arnold Kling|
As it happens, three of these economists shared the Nobel Prize that was awarded in 2001.
A "transparent society" will be better in some of these cases. The "lemons market" would be more efficient if everyone knew the condition of the car. People would not have to go to business school if employers could observe their temperaments directly. Recessions would be shorter if prices were known more widely.
However, health insurance represents a counterexample. The market might work best if health insurance companies did not know the health risks of individuals. Not knowing the risks would force the insurance companies to pool risks, which would enable everyone to buy health insurance.
In the health insurance case, the ideal case might be where the insurance companies know the behaviors of people that can affect their health. This would enable them to reward people who exercise regularly, refrain from smoking, and so forth. This would reduce the problem known as "moral hazard," where people who are insured are tempted to throw caution to the winds.
On the other hand, someone with a genetic predisposition to a certain disease may not be in a position to do anything about it. In that case, the insurance company cannot use the information in a way that helps society.
More generally, I doubt that economists would argue that all asymmetric information is bad. To suggest that information always should be public is to imply that there is no valid reason for intellectual property or for a trade secret.
Suppose that in a "transparent society" new discoveries immediately became available to everyone. Then what incentive would a pharmaceutical company have to invest in research?
Brin argues that research can be protected by patent law as originally intended. His view is that patents were not designed to foster a monopoly on manufacture. Instead, in Brin's view patents were meant to create value through licensing. However, this begs the question of whether the licensing market will provide adequate compensation for inventors. It also places a huge burden on a patent application system that already is strained, if not completely broken.
Related to this are the issues of copyright and compensation for authors, musicians, software developers, and others whose output can be distributed as bits. These are the difficult issues discussed in Information Rules as well as several of my previous essays. Brin offers a rather lame hope that a transparent society will foster "a culture where people pay royalties to creators because it seems the right thing to do." (p. 107)
In any society, transparent or not, providing the correct incentives for research and development is difficult. In a world of patents and trade secrets, the incentives to engage in research and development are indirect. If you discover a drug that can cure Alzheimer's, you may be able to benefit from sales of the drug.
An alternative approach is to provide direct incentives. Alzheimers' researchers could be supported by patrons. In addition to this patronage, researchers could be offered prizes for major discoveries. Patrons might be individuals whose lives have been affected by family members with Alzheimer's.
Of course, this begs the question of how to reward patrons. In theory, people with Alzheimer's and their families will benefit from a cure regardless of whether or not their families are patrons. This suggests that at least some of the funding for patronage and prizes should come from the government, as indeed is the case.
Reading Brin, one can be relatively sanguine about the prospects for fighting terrorism. If he is correct, then we can support highly intrusive government surveillance, because of the countervailing power of individual surveillance.
However, it is costly for individuals and organizations to monitor the government to make sure that it is using its surveillance powers properly. As an economist, I would expect a large under-investment in this type of auditing.
I do not believe that the private sector alone can provide sufficient resources to ensure that government surveillance is not abused. I suspect instead that the surveillance undertaken by any one government agency has to be audited by other, separate, government-funded entities. Such checks and balances need to be built in to whatever surveillance structure is developed, just as checks and balances had to be built into our original Constitution.
The Transparent Society is a valuable contribution to how we might live with the inevitable drop in the costs of surveillance technologies. It is particularly worth reading in light of the September 11th terrorist attacks.
However, David Brin has a tendency to duck the knotty issues of incentives by retreating into wishful thinking. It is wishful thinking to assume that:
Contrary to the passage quoted at the beginning of this essay, it is not the case that all of the difficult economic problems would be "relatively easy to fix" in a world of transparency. Difficult problems of aligning incentives and creating checks and balances would remain. These problems cannot be wished away.