We Need Privacy From the Government

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In Monday’s Wall Street Journal, L. Gordon Crovitz had an op ed, "Privacy? We Got Over It." The article is amazing not for what it says, but for what it omits. That someone could discuss privacy concerns with virtually no reference to the danger of government abuse is astounding, and shows that the writer doesn’t really understand the issues at stake.

Crovitz’s main point is probably true. He argues that even though people wail about wanting privacy, they give information to businesses all the time:

We seem to be following the advice of Scott McNealy, chairman of Sun Microsystems, who in 1999 said, "You have zero privacy anyway. Get over it." And the observation by Oracle CEO Larry Ellison: "The privacy you’re concerned about is largely an illusion. All you have to give up is your illusions, not any of your privacy."

These comments could be dismissed as technology executives trying to minimize complaints about technology. But whatever we say about how much we value privacy, a close look at our actual behavior suggests we have gotten over it. A recent study by AOL of privacy in Britain found that 84% of people said they would not disclose details about their income online, but in fact 89% of them willingly did.

Amazon closely records our taste in books, Gmail scans our emails to deliver relevant ads, and electronic tolls track where we drive. Profiles on MySpace and Facebook are accessible, forever.

Because of these trends, Crovitz concludes: "We’re in the early stages of adapting to more digital and visible lives, with privacy expectations better defined by what we do than by what we say."

What Crovitz doesn’t discuss is that there is a tremendous difference between private businesses knowing selected bits of your personal habits, versus a government agent having access to all of your personal information. In a related context, Friedrich Hayek pointed out in The Road to Serfdom that it makes the difference between tyranny and liberty when central planners "merely" accumulate in one group of bureaucrats all of the power that had previously been dispersed among thousands of CEOs and other decision-makers in the private sector.

Let me spell this point out to make sure it sticks. Even in a completely free society where everyone respected private property rights, it would still be the case that your doctor would know what medications you were taking, your ob-gyn (if you are a woman) would know whether you had had an abortion, your bank teller would have a pretty good idea of how much money you made (especially if you ran your own business and deposited written checks from your customers), and the teenager at Blockbuster would know if you rented naughty movies.

The reason consumers would tolerate these "invasions" of privacy is that the goods and services provided, would be much cheaper if the providers didn’t have to adopt costly screening measures. For example, it would certainly be possible for Blockbuster to set up its stores and checkout procedures, so that the kids working the cash register didn’t actually see which movies each customer rented. For example, the physical DVDs or cassettes could be bar-coded with no other identification on them. The customers would use a key to go find their desired title. So unless Rain Man were on duty, nobody would know if you rented Sister Act 2 every week. (Please tell me you don’t.)

Even with something as intimate as medical examinations, strictly speaking it would be possible to make them much more secure than they currently are. Yet consumers currently don’t insist on such extreme safeguards — and presumably in a free society they wouldn’t either — because they prefer the convenience, lower prices, and higher quality (in other respects) of the goods and services when they are provided with a lower threshold of privacy. Just as consumers could have safer cars if they were willing to pay more, so too could consumers have "safer" (from a privacy viewpoint) movie rentals and medical examinations if they were willing to pay more and suffer other offsetting features.

Ultimately, in a free market competition would ensure that customers’ privacy was protected as much as possible, consistent with other desirable product features. In this sense we can say the market provides the "optimal" or "efficient" amount of privacy. If a bank had poor safeguards and its clients’ personal information repeatedly were stolen by hackers, it would eventually go out of business. Third-party agencies could provide consumers with ratings on privacy issues for various businesses.

In contrast, nobody gets to fire the FBI if they think its warrantless searches and wiretaps — not to mention all the tax dollars it receives — are too high a price to pay for the "services" it provides in, say, finding anthrax killer(s).

In closing, let me deal with a good example of why I personally don’t worry about protecting my privacy from businesses per se, except insofar as the government can lean on them and assemble a portfolio of your entire life. I have an uncle-in-law (if that’s a real term) who is a great libertarian guy, a real gold bug and gun nut. He’s also a wise aleck — he carries around one of those counterfeit-detecting pens, and whenever a cashier checks to see if his $100 bill is phony, he does the same in her face with the $20 bills she gives as change.

Anyway, one of this guy’s worries is that at some point, grocery stores will use your "shopper’s club" ID cards (on your keychain or whatever) to tailor the prices based on the customer who is walking by the shelf. So the price of bread for me will be different from what you see on the (electronic) label on the shelf, because our purchasing histories are different.

I admit that at first that sounds Orwellian, but what’s the big deal? Right now grocery stores charge different prices based on which shoppers are cheapskates who clip coupons. The whole point of personalized shopper cards is so that the stores (and other marketing groups to whom they presumably sell the data) can learn more about consumer behavior. Without those cards, stores would be able to tell how many more hot dogs they sell when ketchup is on sale, but they wouldn’t be able to tell how many people who respond to a ketchup sale also responded to the Rice Krispies sale three months earlier.

Yes, in a sense it’s true that if the store knows "all about you," and had the technology to do so, it could adjust the prices you see as you walk its aisles, in order to extract as much profit out of you as possible. But so what? That’s what all stores do right now, except it’s not tailored to you specifically. That is, they set their prices with the goal of making as much profit as possible, based on their experience with shoppers and their expectations of how many units they will sell at various prices.

So long as there is competition, "price discrimination" — charging different prices based on the customer — actually promotes efficiency. For example, suppose that after installing the new technology, every grocery store sees its profits go up 3 percent. Even so, at this point every sale would have been voluntary; shoppers would still value their groceries more than the cash they surrendered for them. But beyond that, the higher profits in the grocery industry would attract more entrants, and/or existing stores would try to attract more business by either lowering prices across the board, building bigger parking lots, hiring more employees to answer questions, etc. The ability to charge individualized prices would be beneficial to consumers, just as they benefit from bulk discounts, frequent flier programs, and other non-uniform pricing strategies.

The free market has mechanisms to ensure the optimal amount of privacy is provided, consistent with the tradeoffs between other objectives. The real privacy danger comes not from business, but from government.

Bob Murphy [send him mail] runs the blog Free Advice.

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