Complexity has been something that thoughtful souls have worried about regarding consumers. For a couple of decades policy makers’ first instinct in dealing with problems in the consumer market has been better disclosure. It can’t do any harm and may do some good. Once you’ve got disclosure then consumers can make their own decisions. Except that’s not what we do. When I buy a ticket with Jetstar, I don’t read the 2,474 word contract that defines our legal relationship (my word count software vouches for that number) – and lets them take my children hostage if I don’t do what I’m asked when they’re doing the safety demonstration.
God knows how many words the licences of the software packages are that we agree to every day with nary a care. In fact considering, as I’ve been doing, government’s attempts to embrace Web 2.0, you quickly realise that there are two economies: that part of the economy where people just agree to whatever terms appear before them and get on with their lives – consumers and small firms. And that part that doesn’t – which is large firms and governments. It sounds easy for government to do what you or I can do and load up a YouTube video. But their legal department gets to the clause that says that the poster of the video grants to YouTube an unlimited indemnity for damages, and that’s the end of the gig (for several weeks or months while their lawyers and YouTube’s lawyers see if they can haggle out an agreement).
As a consumer, reading what you’re agreeing to is a recipe for a very low pace of living and I don’t know anyone who does it.
In any event in a well received recent speech, a senior Treasury official (for whom I can independently vouch) quoted an article showing that us consumers have it easy.
1onsider an investor conducting due diligence on a set of financial claims: RMBS, ABS CDOs and CDO². How many pages of documentation would a diligent investor need to read to understand these products? For simpler products, this is just about feasible for example, around 200 pages, on average, for an RMBS investor. But an investor in a CDO² would need to read in excess of 1 billion pages to understand fully the ingredients 2”.
We have seen this kind of complexity before. One thing that tames it is standards. Thus this intriguing article about the way in which standardised reporting and the publication of data in some format that enables manipulation and thus analysis over a wide field. Unfortunately however this remedy is very far from universally applicable and I’m not sure what it’s relevance is in disclosure. In general, commerce, like life, evolves by a process according to which things that used to be deliberate, become automatic. As ever, Hayek was someone who thought about this earlier than most economists, though philosophers had thought about it before him. The head quote of the first chapter of Hayek’s Constitution of Liberty quoted Whitehead thus.
Civilistion advances by extending the number of important operations which we can perform without thinking about them. Operations of thought are like cavalry charges in a battle – they are strictly limited in number, they require fresh horses, and must only be made at decisive moments.
People who bought CDO²s decided not to make a cavalry charge and just assume that all was well. Much like I do with Jetstar. In this case they made a mistake, for which we’re all paying.