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At the end of the previous post it
looked as if, so long as enough consumers  are prepared to
pay a premium for ethically-produced goods, Happy Shoes should be able
to make a profit, pay its workers better than Sweatshoes, and satisfy
customers all at the same time.

But — contrary to what Potter & Heath claim — it is difficult for companies to make money by selling
"shoes made by happy workers" because "ethical production" is a credence good.  When you buy shoes, you can tell if your new shoes fit well, you
can tell what they are made of, and you can tell whether you like the style. But you can’t tell what the person making them got paid.
Like the benefits of fluoridated toothpaste and organically-grown vegetables,
it’s something you basically have to take on trust.

This lack of information provides an opening for unscrupulous
vendors. To understand this market we have to think not only about Sweatshoes
offering their $100 shoes and about Happy Shoes offering their $120 pair, but
also about a third company. "Ethical Feet" comes to town
with some fine-sounding words about their commitment to fairness and decency,
offering to sell you an ethically made pair of shoes for $115 — $5 less than
Happy Shoes. It sounds like a good deal — the benefit of ethical consumption, and an extra $5 left in your pocket.

But the difference is that Ethical Feet doesn’t
actually pass on any of the extra $15 you pay to the people making the
shoes. It just keeps your money. Ethical Feet would sell the shoes
cheaper than Happy Shoes, but make more profit — $25 profit per pair
rather than $20.

It looks like Ethical Feet may drive Happy Shoes out of
business by making unverifiable false promises, but the story does not stop here. This is not a tale of corporate trickery and consumer
stupidity. As George Akerlof writes: this problem of trust is "as old
as markets themselves. It concerns how horse traders respond to the natural
question: "if he wants to sell that
horse, do I really want to buy
it?"

Smart consumers who are
prepared to pay more for ethically produced goods are still not
prepared to be suckers. We are not going to pay $115 or even $120 for a
pair of shoes just because a company says they
are made by happy workers — a claim we cannot verify. In a market of
smart consumers wanting to buy shoes made by happy people, the $115 Ethical Feet shoes and the $120
Happy Shoes  – stay on the shelf.  As consumers we can’t tell the difference between Ethical Feet and Happy Shoes, and we know that a company that carried out its promises is vulnerable to unscrupulous competition.

The company that stays in business is Sweatshoes. It pays cheaply and
sells cheaply, and as consumers we pay $100. We may not feel good about
this, but at least we are not being tricked. The end result is just the
same as if we didn’t care about the salaries at all. As consumers, it
seems we are not sovereign when it comes to ethical production.

The next post will probably deal with ways around this problem.

This is the first in a meandering, loosely-related series of posts about consumer activism. I haven’t worked things out to the end so I won’t say where I think it’s going, and the series may fizzle out but this is, after all, just a blog – and a slow-moving occasional one at that.

Here is a quotation from Andrew Potter and Joseph Heath’s book The Rebel Sell (based on a provocative 2002 This Magazine article you can find here ):

If
consumers are willing to pay more for shoes made by happy workers — or for eggs
laid by happy chickens — then there is money to be made in bringing these goods
to market. It’s a business model that has already been successfully exploited to
great effect by The Body Shop and Starbucks, among others. [p2]

True, or not?

Here is how it is supposed to work. Suppose
you want to buy a pair of shoes and you only have one choice — the
only shoes available are from Sweatshoes Inc. , which makes their shoes
in a sweatshop, pays their employees very little, sells shoes for $100,
and makes a profit of $10. You buy them because you need shoes.

Along comes Happy Shoes,
which makes shoes "ethically" and pays their employees better. Because
you are a decent person, you’re willing to pay an extra $20 for an
ethically-produced pair from Happy Shoes.

Happy Shoes could pay its employees $10 more than Sweatshoes pays theirs, sell you the
shoes for $120, and still collect a hefty $20 profit. The
Happy Shoes employees are happy because they get paid more, the Happy Shoes customers are happy because they have got their
ethical shoes at a price they’re prepared to pay, and
Happy Shoes shareholders are
happy because they have made $20 profit rather than $10. Everyone is better
off if you buy Happy Shoes, except for Sweatshoes – and good
riddance to them.

There have been some successes for ethical consumer products. Ben and Jerry’s ice cream and
The Body Shop were long-time standard bearers of companies that have traded on
their ethically-spotless image. Smaller businesses that sell organic foods
or village-produced trinkets do the same. Even Adbusters has got into the
buying and selling game with their Blackspot shoes. It’s an appealing
idea: replace the moustache-twirling, cigar-smoking sweatshop-runners
with enlightened and decent people, and you can change the world.

But after a decade or so of consumer activism the successes are still few and far between. As Bill McKibben writes in the November 2006 Mother Jones:

Ben and Jerry didn’t change the way Haagen and Dazs viewed the world. Somehow, Bounty has been willing to leave the thoughtful paper towel market to Seventh Generation. For several decades now, environmentalists have been citing the work of Ray Anderson and Interface, and it’s a great example — but why is there still only one Ray Anderson?

When it comes to actually putting down cash, are we not prepared to pay the additional money for
Happy Shoes? That’s the next post.

Which explanation for Google’s announcement of a $600 million data centre in Iowa is the right one?  This?

Google is interested in placing data centers in
the middle of the country because it is a "busy crossroads of Internet
activity," it said in a statement.

or this?

"Last month, Gov. Culver signed a bill upgrading Iowa’s tax system
related to sales tax, use tax, and property tax for computer related
businesses," the governor’s office said. "The state legislature’s work
exempts the electricity and capital investment necessary for this kind
of a facility from sales tax, as is common in the manufacturing sector."

The first report is from trade magazine InfoWorld. Google is saving all those electrons from having to go all the way across the country – it’s probably some kind of nice green initiative. The second comes from the Register, which is the Private Eye of trade magazines.

Sorry InfoWorld, I’ll be getting my tech news from the Register.

Yesterday I read that Paul Krugman has a lot more time for opponents of free trade than he used to:

It’s no longer safe to assert, as we could a dozen
years ago, that the effects of trade on income distribution in wealthy
countries are fairly minor. There’s now a good case that they are quite
big, and getting bigger.

This doesn’t mean that I’m endorsing
protectionism. It does mean that free-traders need better answers to
the anxieties of those who are likely to end up on the losing side from
globalisation.

This from the man who wrote some of the most persuasive pro-free-trade essays of the 1990s. He describes the change as a change in the world (specifically, China being bigger than Korea) rather than a change in his position, but it made me wonder what’s going on…

Now today I see some responses from other professional economists:

Brad DeLong finds himself skeptical of Krugman’s argument.

Dani Rodrik is moderately pro-Krugman.

Tyler Cowen thinks DeLong is on the right track.

Will Wilkinson of the Cato Institute disagrees with Krugman.

Now all these folks are experts, while I wouldn’t know a Heckscher-Ohlin model if it jumped up and hit me in the nose, but I can’t help notice that they pretty much all adopt the side you’d expect them to. Krugman has been switching away from the kind of pro-free-trade view he used to endorse steadily. Cowen and Wilkinson are pro-free-trade, libertarian enthusiasts. Rodrik is a long-time sceptic (or skeptic, depending on where you come from). DeLong could have gone either way, because he leans leftwards politically but is very committed to standard economics as a way of looking at the world – the economist has won out this time.

Can we believe that these experts have taken a dispassionate look at the situation and have coincidentally come to conclusions that line up  with their politics? It’s just not plausible.Are they just using their economic expertise as a cover for their prejudices? I’ve read enough of most of them (Wilkinson aside) that I don’t think so. So how come their politics and expertise line up so nicely?

Opinions – even expert opinions – are like magnetism, in that they exhibit hysteresis. Here’s a graph:

The X axis is the applied field, and the Y axis is magnetization. Take an unmagnetized needle and apply a magnetic field to it, and sooner or later the needle becomes magnetized (goes up the right-hand curve to the high point on the top right). But take away that field and the needle does not revert to its nonmagnetic state. It stays trapped, with all its dipoles lined up, along the top line. You have to apply a significant field in the other direction to get it to demagnetize (go down to the bottom line at the lower left). The magnetization over-shoots. It switches between two relatively stable states, and the state its in depends on its history.

A lot of things behave like this, and opinions are one of them. We all have pre-formed opinions – imagine the bottom of the graph is "free trade is good". If we accumulate evidence that leads us to change our mind we move to the top "free trade is not so good" line. Now suppose we hear some more evidence that pushes us the other way – do we switch back right away? No, we hang on to our existing beliefs until the weight of evidence becomes unavoidable.  Switching basic views is a big thing, and we can’t be forever changing back and forth.

In the middle of the graph, a free trader and a non-free-trader can both look at new evidence without changing their mind. Neither is being dishonest (well, they might be, but they don’t need to be) but both look at the evidence and says "is this enough to make me change my mind?" and conclude "No."

Krugman’s writing for the New York Times over the last several years have shown, in addition to a consistent and admirable articulation of the million ways the Bush administration has screwed people around, an increasing scepticism that the free market will solve our problems. He’s made the switch from one level to another, and his view is coloured by where he sits now ( public intellectual) just as it used to be coloured by his position in the professional economist culture.

I’ve thought of this graph a lot in the last few years. It applies to trust, our opinion of others (who do you give a break to, and who don’t you) our political views, and so on.  I think it explains why experts disagree – and why those of us watching experts debate from the sidelines won’t often change our minds either.

Polly Jones has a fine post on the subject. I’d quote from it, but it really needs to be read of a piece to be appreciated.

Why are you still here? You should be there now.

Regarding reputation-building on the Internet, Clive Thompson writes approvingly that

network algorithms do not favor the cagey or secretive. They favor the prolific, the outgoing, the shameless.

Said another way, network algorithms do not favour the quiet or the reflective. They favour the loud-mouthed, the self-promoting, the flashy.

O brave new world that has such algorithms in it.

I’m afraid Clive Thompson has jumped the shark. From being a witty journalist at the interesting This Magazine he now fits right in at the boring Wired Magazine. On the way he seems to have lost his sense of irony (maybe they don’t let you bring irony into Silicon Valley?) and his cynicism. As a result, he has also lost the plot. Come back Mr. Thompson!

His March 2007 article in Wired Magazine called The See-Through CEO coined the phrase Radical Transparency. Like other Silicon Valley catch phrases, it has that air of youthful rebellion, it is self-consciously ignorant of history (who needs history when all the interesting things are happening right now), and – most important of all – it imparts a feel-good sense of anti-corporate attitude to your next venture funding proposal or business plan. Because like other Silicon Valley catch phrases, Radical Transparency has about as much to do with rebellion as riding a mountain bike.

Here are some snatches from the article, and some recent events in the real world, mainly as reported by The Register – which has thankfully managed to keep its senses of both irony and cynicism – and mainly about Web 2.0 poster-offspring Google and its growing Google-hoard of companies.

"You can’t hide anything anymore," Don Tapscott says. Coauthor of The Naked Corporation, a book about corporate transparency, and Wikinomics, Tapscott is explaining a core truth of the see-through age: If you engage in corporate flimflam, people will find out.

Meanwhile, Google plays cat and mouse with regulators. Leif Aanensen, deputy director general of the Norwegian Office of the Data Inspectorate, has been investigating Google’s data retention policy:

   "We are not satisfied," he said. "We didn’t get the proper answers."

   "Our main issue was their data retention policy and the use of the data they   stored. We asked them what they were doing with the personal data – are you   creating profiles – they didn’t answer," he said.

Thompson writes: "You can’t go halfway naked. It’s all or nothing. Executives who promise they’ll be open have to stay open."

Meanwhile, Google – who make repeated references to their own "radical transparency" – are closed-mouth about the introduction of new programs.
Paying select few video producers for example:

YouTube says anyone who wants to get paid can let it know by registering an interest, but provided no timescale for when it will cough up, or what the carve-up will be.

Or will there be   advertising   on the iGoogle front pages?

   The company has not made any noises about placing personalised ads on the new   iGoogle personalised homepage, but industry observers are fairly confident it   is only a matter of time.

When it comes to openness, Thompson writes "there’s no use trying to resist. You’re already naked." How Naked? Hard to tell, because it is not easy to find out what   information   Google keeps about you.

   "Upon arriving at the Google homepage, a Google user is not informed of   Google’s data collection practices until he or she clicks through four links,"   says the section of the complaint which details Google’s alleged deceptive   trade practices. "Most users will not reach this page. In truth and in fact,   Google collects user search terms in connection with his or her IP address   without adequate notice to the user. Therefore, Google’s representations   concerning its data retention practices were, and are, deceptive practices.

   "As a result of Google’s failure to detail its data retention policies until   four levels down within its website, its users are unaware that their   activities are being monitored," says the complaint in the section alleging   unfair trade practices.

Thompson writes:

Secrecy is dying. It’s probably already dead.

Meanwhile, here’s Google being radically opaque:

ord broke this month that Google has purchased 800 acres of land in Pryor, Oklahoma. The company has yet to confirm plans for the site, but I’m betting  on a new data center rather than an amusement park (in all fairness, you can   never tell with this bunch – Ed).

Oklahoma proves a handy spot to have a data center since the state’s Governor signed a new law that affords the largest corporate energy users the right to keep their power consumption figures a secret.

Governor Brad Henry signed the energy law (House Bill 1038) just a couple of   days after news of Google’s land purchase reached the local newspapers.  Coincidence? Sure.

The lawmakers behind the bill denied having chats with Google around any legislation. People familiar with the matter, however, did note that the law proves convenient for an entity such as Google that likes to keep as much information secret as possible.

If you’re a demanding type who needs evidence of Google’s secret ways, have a  listen to head of strategic development Rhett Weiss. He presided over a party celebrating yet another Google data center in South Carolina. When asked about  Google’s water and power usage, Weiss confessed:   "We’re in a highly competitive industry and, frankly, one or two little pieces   of information like that in the hands of our competitors can do us   considerable damage. So we can’t discuss it."

What else does Google not tell us? Here’s Nicholas Carr:

“We never,” says a Google representative, “comment on who we’re talking to, who we’ve considered, who we’ve rejected. We feel that when we come to an agreement, that’s the time to make an announcement.”

So please, Mr. Thompson – exercise some scepticism. Even a little would go a long way.