Over the last decade, waves of studies have claimed that individuals aren’t rational — that they often reject options that are in their best interest. That literature is being used to justify government “marketing” efforts to persuade people to accept government “advice” on everything from light bulbs to school lunches to home purchases. Cass Sunstein’s famous “nudge” approach — extolling the moral case for public interest propaganda is indicative of a growing interest in this approach by statists.
Auren Hoffman, a creative West Coast individual, recently wrote this related comment “Differences of Entrepreneurs and Consultants.” He describes a standard “test” similar to those produced by behavioralists.
I toss a coin. Heads you win $10,000. Tails you lose $6,000. Do you play and, if so, why?
To our elite friends, the answer seems simple. The expected payoff is $4,000 and, thus, you should play. People often reject that option, leading the Chattering Class to argue the irrationality of the individual.
But, Auren notes that the entrepreneurial individual will view this question in a larger context:
- How do I know the coin is fair? Maybe tails is much more likely to come up. Can I test the coin by flipping it 500 times to gain more information?
- How do taxes affect my wins and losses? Can I apply losses only to gambling gains? How are state and city taxes affected?
- Do I have the cash to pay if I lose and do I get cash if I win? Will I have to show up with the money and, if so, is the transfer secure? Can I get frequent flyer miles if I pay by credit card?
- How can I be sure I’ll be paid if I win? Will the money be held in a third-party escrow account? How much will that (and other transaction costs) affect the overall economics of this bet?
Real world bets are made in context — there are always questions to be raised before rushing into a transaction. Many policy proposals from behavioral economists ignore that insight — that transactions have transaction costs. This is one reason why those policies are so often foolish.
As of May 1, American Airlines will charge $8 to customers who want to use a blanket and pillow. JetBlue and US Airways already charge for them. This is only the latest example of a nickel-and-diming trend that has been going on for at least a decade. Passengers can also expect to be nicked for checked baggage, food, and drinks.
It’s also terrible PR. An unscientific CNN.com poll shows that 96 percent of passengers are unwilling to pay. More than that probably also harbor some resentment against the offending airlines.
Given how much customers resent extra charges, it is a mystery to me why airlines have so many of them. Why don’t they just include those expenses in their ticket prices? People don’t mind paying once. But if they have to take out their wallet a second or a third time, they often get angry. This anger is completely avoidable. Just put those extra nickels and dimes in the initial ticket price.
There has to be a reason why airlines so readily incur their customers’ wrath. My theory is that airlines think the nickel-and-dime approach can lower total costs. If people stick to carry-ons to avoid a checked baggage fee, that saves the airline some money. If they set the fees right, they’ll save more in labor costs than the forego in baggage fees.
Maybe they’re thinking the same theory applies to pillows and blankets. They’re on every seat in every flight. But most people don’t even use them. I rarely do. Seems like a waste of resources, doesn’t it? By only giving blankets to people who want them enough to pay for them, the airline has to buy fewer sets of pillows and blankets. It also has to clean fewer of them. If they’ve calculated correctly, this will result in a net savings. That means lower fares. And hopefully, more business.
I have no idea if this theory is correct. But it does make some sense.
But the fact remains that people are transaction-averse. Southwest Airlines has had great success with its concsious business strategy of keeping its nickel-and-diming to a minimum. While I personally prefer the Southwest approach, there seems to be room for both business models in the market. Time will tell if one eventually proves superior in giving people what they want. Even if it involves much grumbling, cursing, and reaching for wallets.
Over at the Detroit News, Hans Bader and I explain why corporations have human rights despite not being human. The reason why? Transaction costs.
This has implications for everything from Intel’s EU antitrust battle to newspapers’ free speech rights.
Intel’s defense in its EU antitrust case has taken the surprising line that the company’s human rights were violated. Over at Real Clear Markets, CEI colleague Hans Bader and I take a closer look. We conclude that Intel actually has a pretty good argument.
Corporations have human rights because doing so greatly reduces transaction costs: “suppose your company wants to buy some computer chips from Intel. You could have each shareholder sign the sales contract – good luck finding them all – or you could treat Intel as a person with the right to sign a contract, and the obligation to honor it. To deal with one person or millions? That is why corporations have legal standing as individuals.”
In short: no corporate rights, no modern economy. No exaggeration. There is a reason why legal conventions emerge as they do, even if they appear strange at first glance.
Iain Murray was kind enough to point out to me that the idea of corporate human rights has very deep roots. The 18th-century legal scholar William Blackstone, in his revered analysis of the English common law, wrote that corporations have the right “[T]o sue or be sued,, implead or be impleaded, grant or receive, by its corporate name, and do all other acts as persons may.”*
*William Blackstone, Commentaries on the Laws of England, Volume 1: Of the Rights of Persons, (Chicago: University of Chicago Press, 1979 [1765]), p. 463.
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