Privacy and markets: a love story.

Author:Calo, Ryan


In 2014, a former congressional staffer by the name of Matthew Colbert developed a software application he called "BuyPartisan." (1) The app invites consumers with smart phones to scan the barcodes of just about any product and learn the political leanings of the company that sells it. The display consists of a meter displaying blue or red, depending on the campaign contributions of the company's leadership. "Wouldn't it be great," Colbert asks, "if you could spend how you believed?" (2)

Occasionally market participants depart from the traditional market criteria of price and quality. A conscientious consumer might strongly prefer her coffee to be "free trade" or a diamond to be "conflict free." A certain kind of religious flower shop owner might refuse on moral grounds to provide flowers to a wedding with two grooms. (3) Economists would chalk these departures up to "exogenous preference"--attributes that the market can take into account.

But imagine if consumers and businesses knew everything. Not just the circumstances under which a product was made or the politics of its seller, but whether each other market participant supports a rival sports team, believes in God, or bakes erotic cakes on the weekend. In other words, imagine a marketplace without privacy. Would such a marketplace be desirable? Would it be efficient? Would the market mechanism work at all if price and quality took a backseat to salient but arguably extraneous information about market participants?

This Article examines the complex relationship between privacy and markets. In so doing, it rejects both law and economics' skepticism toward privacy and the hostility many privacy law scholars have toward markets. The thesis of this Article is that privacy and markets are in important ways sympathetic. To paraphrase contract theorist Charles Fried, it is not that privacy will help markets work better, but that the market mechanism quietly assumes and relies upon privacy to work in the first place. (4) And the reverse is true as well.

Privacy supports the basic market mechanism by hiding enough distracting, value-laden information from market participants. A certain absence of knowledge focuses us on market-relevant considerations such as quality and price over salient but distorting information such as personal or political commitments. The beauty of the market mechanism is that you do not need to know that the person you are dealing with voted for a politician you hate or doubts we landed on the moon, or for any other basis for distrust or discrimination, only that he is offering the best quality good at the lowest price.

Privacy also enables the longevity of business partnerships through the facilitation of economic intimacy. Market relationships face an ever-present specter of defection--the prospect of a better deal somewhere else--which participants manage in part through the selective disclosure of preferences and expectations without penalty. In business, as in life, privacy helps you let the right one in, and in the process engenders the trust necessary for economic stability. (5)

Finally, privacy helps keep a check on information asymmetry between people and firms. While economists agree that information asymmetry is undesirable, the standard remedy is to introduce additional information--for instance, through mandatory disclosure laws. (6) But today's firms are increasingly more capable than consumers of processing new information, such that introducing more information only exacerbates asymmetry and its discontents. Privacy can interrupt this dynamic and help save the market from itself.

These arguments build the case for protecting privacy in the market context, including through the force of law. It is important to note, however, that privacy assumes and relies upon markets as well. Privacy is best understood as an instrument of human flourishing. (7) To flourish, people need the separation from others that privacy affords. But they also need access to the material and cultural resources that only other people in society can provide. Self-actualization is the province of the clothed and the fed; regardless, it cannot happen in a vacuum. Markets help us to help one another, a proposition too little remarked in privacy scholarship.

More fundamentally, markets furnish the theoretical means by which to distribute resources in society without having to know everything about everyone. Think just how much a government must know about its citizens truly to enforce the famous socialist maxim, "From each according to his ability, to each according to his needs!" (8) From this perspective, privacy never had a friend like markets.

The Article proceeds as follows. After defining terms, Part I lays out the law and economics case against privacy, including its basis in economic thought more generally. Part II canvasses the literature responding to economic skepticism in the privacy law literature. Some scholars mount an insider critique, accepting the basic tenants of economics but suggesting that privacy actually increases efficiency in some contexts, or else noting that markets themselves will yield privacy under the right conditions. Others critique economic thinking from the outside. Markets "unravel" privacy by penalizing it, (9) degrade privacy by treating it as just another commodity, (10) or otherwise interfere with the values or processes that privacy exists to preserve. (11)

Part III tells the love story from the Article's title. I develop here a novel account of the relationship between privacy and markets, positioning the two concepts as sympathetic instead of antithetical. Neither insider nor outsider, the framework understands privacy as a crucial ingredient of the market mechanism, while simultaneously demonstrating how markets enable privacy to achieve its most important functions. It turns out opposites attract, just as Hollywood has been telling us all along.

The final Part discusses what's at stake. First, at the descriptive level, this Article sheds light on certain institutional puzzles such as why the Federal Trade Commission ("FTC" or "the Commission")--an agency dedicated to free markets and brimming with economists--would arise as the de facto privacy authority for the United States. (12) The Article's framework not only explains and perhaps justifies the FTC's role in policing privacy, but also predicts other agencies such as the Consumer Financial Protection Bureau will increasingly become involved in privacy enforcement.

Second, at the level of discourse, the Article opens up new avenues of analytic inquiry, previously obscured by a mutual skepticism. In particular, the framework helps surface the role of privacy in avoiding market discrimination for the simple reason that it hides many objects of potential bias. And third, normatively, this Article argues in support of laws and policies, such as conditioning access to political databases on non-commercial use, that try to keep personal information out of markets.


    This Part canvases why law and economics tends to be skeptical of privacy, finding privacy overrated, inefficient, and perhaps even immoral. The short answer is that information is the presumed lifeblood of the marketplace, crucial to its proper and efficient functioning. Privacy hides information and in so doing compromises market optimization. We'll complicate the matter in the next two Sections, but here I want to explain why the adherents of economic theory--foremost among them, scholars in the tradition of law and economics--look upon privacy with derision, if they do at all.

    1. Terminology

      Before laying out the case against privacy, a note about terminology: I am going to be using some terms in this Article--privacy, markets, the market mechanism--that do not necessarily have stable or agreed upon definitions. (13) The early literature seems to coalesce around the definition of privacy as control over personal information. (14) More recently, this conversation has pivoted toward defining privacy in terms of the control that holding information about people affords over them. (15) This Article uses the term privacy largely in the negative, as shorthand for the opposite of data promiscuity. Data promiscuity describes a situation, no doubt familiar to citizens of the second millennium, in which information about people flows freely between organizations and contexts. Privacy, as this Article will use the term, stands in as the force that interrupts the free flow of personal information. Privacy here represents data chastity.

      However you define privacy, the concept seems to invite an instrumental justification. (16) We protect privacy, when we do, because its absence would undermine some activity, institution, or value society cares about. Economists care about the efficient operation of markets. (17) And while privacy can be said to support efficiency in narrow circumstances, by and large economic theory sees privacy as an impediment. Perhaps as a consequence, little work to date considers how markets themselves, as a concept, would fare in a world without privacy. (18) This Article takes up this question and answers that the market mechanism assumes and relies upon privacy to accomplish its particular means of value exchange.

      It bears mention at the outset that the market mechanism is not the same thing as capitalism. Hard to define in its own right, capitalism can be thought of as a political system that commits economic and other elements of society to private, profit-seeking individuals and firms over the state. (19) The market mechanism is essential to capitalism, of course, but distinct and far simpler. It represents a conceptual means of transferring property, promises, rights, and so on between parties whereby individuals or groups openly exchange goods and services for prices set by supply and demand. (20) Communist or socialist societies can and do have markets,...

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