1. Why Economists Often Under-Value Privacy Peter Swire Federal Trade Commission Staff Briefing May 28, 2015

2. Overview of the Talk  I wrote in 2013 about economists: “My appreciation of this different view arose when I was in government, discussing privacy with people from many intellectual and political backgrounds. In these conversations, I came to believe that there was one important predictor of people who did not ‘get’ the privacy issues. That predictor was having received graduate training in economics.”  Some recent policy discussions have suggested that economic analysis, preferably quantifiable, should be sole or dominant way to assess privacy issues  Today:  Why economists don’t value privacy as much as others  Some possible answers from within economics  Some answers from outside of economics

3. My Critique is Founded in My Own Economics Experience  My view that economists generally under-value privacy was developed within my own extensive experience in economics  Economics major in college, plus grad work  Lots of my scholarship is law and economics  Special Assistant to President Obama for Economic Policy, 2009-2010 (Larry Summers)  Earlier versions of today’s talk:  “Efficient Confidentiality for Privacy, Security, and Confidential Business Information” (Brookings 2003)  “Privacy and the Use of Cost/Benefit Analysis”, FTC Workshop 2003  I gave a version of this talk at Penn Law School this spring

4. Privacy and Neo-Classical Economics  The model of the competitive market assumes perfect information  Limits on information to match buyers and sellers make the market less competitive, reducing efficiency  Efficiency is the primary goal  Posner and other economists thus see privacy limits as presumptively inefficient & contrary to the single most important model in economics  For an economist, some special justification is needed to overcome the presumption of inefficiency of data limits

5. Economics Alternatives: Behavioral & Experimental Economics  Acquisti and others have challenged the neo-classical approach in a variety of ways  Various biases and heuristics are used by individuals, so more information does not necessarily help achieve an efficient outcome  How choices are framed (endowment effect, etc.) can have large effect on outcome, and online businesses generally control the frame  In my view, these are promising empirical and theoretical critiques of the neo-classical approach  Acquisti: “it is not possible to conclude unambiguously whether privacy protection entails a net ‘positive’ or ‘negative” change in purely economic terms: its impact is context specific.”  Many economists, though, fundamentally start with the model of perfect competition having perfect information - in a complex world, it’s a simpler model to keep in mind

6. An Economics Counter-Narrative of Property (1)  Many economists, interestingly, favor copyright laws and other intellectual property  Copying is a limit on information transfer, but property rights are protected by copyright law against “theft”  Similar rationale for the combination to a safe (or SSN or other data that is a “leak” and can harm me) – inefficient to let the criminal steal my property – privacy as an intermediate good (Joe Farrell), where don’t want data flow because it facilitates identify or other theft

7. An Economics Counter-Narrative of Property (2)  A key point is the baseline  Coasian analysis, with high negotiating costs, key is who has the property right  If assume individual owns, then large costs from privacy invasions; HIPAA Privacy Rule CBA makes this point. Endowment effect heightens this effect.  If assume business owns, then large costs from restrictions on flow  We have high transaction costs, so allocation of the property right matters: opt-in vs. opt-out matters  Economics, in a Coasian view, does not have much to say about to whom the allocation should go initially  Interestingly, this insight makes the European approach easier for an economist to understand. The (property/fundamental) right is assigned to the individual.

8. Critiques from Outside of Economics – the Role of “Power” (1)  Much writing about privacy addresses possible mis-uses of power  Government/citizen  Employer/employee  Holder of dossier/subject of surveillance  My experience – if you ask people what they are concerned about, the answer is often “they will know things about me and have power over me”  Economists, by contrast, have a very narrow definition of power  “Market power” where monopoly exists  Chicago School of antitrust rarely finds that

9. Economists and Power (2)  Economists see horizontal, contractual relationships where others see vertical, power relationships. U.S. has reacted in other settings by putting limits on freedom of contract.  Corporation as a “nexus of contracts” among consenting parties, Jensen & Meckling  Others see power relationship of top managers vs. mere employees  Employees should have “freedom of contract” for labor  Others support minimum wage, maximum hour laws, and could have minimum standards for privacy  Others think it was not voluntary “assumption of the risk” when a factory worker had a limb smashed by an unsafe assembly line  Consumers voluntarily accept EULAs, T&Cs  Others see adhesion contracts that merit regulatory scrutiny; in part due to power imbalance, have the whole realm of consumer protection law

10. Other Things Economist Don’t Address That Others Do  Anita Allen recent list included: civility, human dignity, limited government, toleration, autonomy, individualism; self-expression, reputation, repose, intellectual life, intimacy and formality Plus, possible long-run effects of pervasive surveillance  Revised Sunstein version of CBA recognizes importance of being systematic, but go well beyond quantitative:  Short run vs. long run, and the importance of avoiding a long-run slide into a surveillance society. With discounting, may not get large numbers for large harms in the future.  Privacy worries are hard to quantify, and literature on “dwarfing of soft variables” shows that quantifiable items over-valued  Rights don’t count: if privacy is a human right, violations of those rights are often not included in the cost/benefit analysis

11. Conclusion  Economists are trained to be skeptical of limits on information flows, because optimal market has perfect information  Economists may also consult their own intuitions and believe others have the same view – interesting to see empirical research about privacy attitudes of economists vs. others  Internal critiques – multiple critiques from within economics show reason for caution in applying the “perfect information” intuition  External critiques – non-economists can say: “There are more things in heaven and earth, Horatio, than are dreamt in your philosophy.”  My suggestion – use the economic techniques that have served the FTC well, but do so with humility  Avoid believing that an economics-only approach, or a quantitative approach, is the optimal regulatory strategy