'An Economic Theory of Privacy' by Richard A. Posner in (1978) 26
Regulation: AEI Journal on Government and Society 19
comments -
Much ink has been spilled in trying to
clarify the elusive and ill-defined concept
of "privacy." I will sidestep the
definitional problem by simply noting that
one aspect of privacy is the withholding or
concealment of information. This aspect is of
particular interest to the economist now that
the study of information has become an important
field of economics. It is also of interest
to the regulator, and those affected by him, because
both the right to privacy and the "right to
know" are becoming more and more the subject
of regulation.
Heretofore the economics of information
has been limited to topics relating to the dissemination
and, to a lesser extent, the concealment
of information in explicit (mainly labor
and consumer-good) markets - that is, to such
topics as advertising, fraud, price dispersion,
and job search. But it is possible to use economic
analysis to explore the dissemination and
withholding of information in personal as well
as business contexts, and thus to deal with such
matters as prying, eavesdropping, "self-advertising,"
and gossip. Moreover, the same analysis
may illuminate questions of privacy within organizations,
both commercial and noncommercial.
I shall first attempt to develop a simple
economic theory of privacy. I shall then argue
from this theory that, while personal privacy
seems today to be valued more highly than organizational privacy (if one may judge by current
legislative trends), a reverse ordering
would be more consistent with the economics
of the problem.
Theory
People invariably possess information, including
the contents of communications and facts
about themselves, that they will incur costs to
conceal. Sometimes such information is of
value to other people - that is, other people will
incur costs to discover it. Thus we have two
economic goods, privacy and prying. We
could regard them as pure consumption goods,
the way turnips or beer are normally regarded
in economic analysis, and we would then speak
of a "taste" for privacy or for prying. But this
would bring the economic analysis to a grinding
halt because tastes are unanalyzable from
an economic standpoint. An alternative is to
regard privacy and prying as intermediate rather
than final goods - instrumental rather than
final values. Under this approach, people are assumed
not to desire or value privacy or prying
in themselves but to use these goods as inputs
into the production of income or some
other broad measure of utility or welfare. This
is the approach that I take here; the reader will
have to decide whether it captures enough of
the relevant reality to be enlightening.
Not So Idle Curiosity
Now the demand for private
information (viewed, as it is here, as an intermediate
good) is readily understandable
where the existence of an actual or potential
relationship, business or personal, creates opportunities
for gain by the demander. These opportunities
obviously exist in the case of information
sought by the tax collector, fiance, partner,
creditor, competitor, and so on. Less obviously,
much of the casual prying (a term not
used here with any pejorative connotation) into
the private lives of friends and colleagues that
is so common a feature of social life is, I believe,
motivated - to a greater extent than we
usually think - by rational considerations of
self-interest. Prying enables one to form a more
accurate picture of a friend or colleague, and
the knowledge gained is useful in one's social
or professional dealings with that friend or colleague.
For example, one wants to know in
choosing a friend whether he will be discreet or
indiscreet, selfish or generous. These qualities
are not necessarily apparent on initial acquaintance.
Even a pure altruist needs to know the
(approximate) wealth of any prospective beneficiary
of his altruism in order to be able to
gauge the value of a gift or transfer to him.
The other side of the coin is that social
dealings, like business dealings, present opportunities
for exploitation through misrepresentation.
Psychologists and sociologists have
pointed out that even in everyday life people
try to manipulate other people's opinion of
them, using misrepresentation. The strongest
defenders of privacy usually define the individual's
right to privacy as the right to control
the flow of information about him. A seldom-remarked
corollary to a right to misrepresent
one's character is that others have a legitimate
interest in unmasking the misrepresentation.
A seldom-remarked corollary to a right
to misrepresent one's character is that
others have a legitimate interest in
unmasking the misrepresentation.
Yet some of the demand for private information
about other people seems mysteriously
disinterested - for example, that of the readers
of newspaper gossip columns, whose "idle
curiosity" has been deplored, groundlessly in
my opinion. Gossip columns recount the personal
lives of wealthy and successful people
whose tastes and habits offer models - that is,
yield information - to the ordinary person in
making consumption, career, and other decisions.
The models are not always positive. The
story of Howard Hughes, for example, is usually
told as a morality play, warning of the pitfalls
of success. That does not make it any less
educational. The fascination with the notorious
and the criminal - with John Profumo and with
Nathan Leopold - has a similar basis. Gossip
columns open people's eyes to opportunities
and dangers; they are genuinely informative.
Moreover, the expression "idle curiosity"
is misleading. People are not given to random
undifferentiated curiosity. Why is there less curiosity
about the lives of the poor (as measured,
for example, by the infrequency with which
poor people figure as central characters in popular
novels) than about those of the rich? One
reason is that the lives of the poor do not provide
as much useful information for the patterning
of our own lives. What interest there is
in the poor is focused on people who were
like us but who became poor, rather than on
those who were always poor; again, the cautionary
function of such information should be
evident.
Samuel Warren and Louis Brandeis once
attributed the rise of curiosity about people's
lives to the excesses of the press (in an
article in the Harvard Law Review, 1890) . The
economist does not believe, however, that supply
creates demand. A more persuasive explanation
for the rise of the gossip column is the increase
in personal income over time. There is
apparently very little privacy in poor societies,
where, consequently, people can readily observe
at first hand the intimate lives of others. Personal
surveillance is costlier in wealthier societies,
both because people live in conditions
that give them greater privacy and because the
value (and hence opportunity cost) of time is
greater-too great, in fact, to make the expenditure
of a lot of it in watching the neighbors a
worthwhile pursuit. An alternative method of
informing oneself about how others live was
sought by the people and provided by the press.
A legitimate and important function of the
press is to provide specialization in prying in societies
where the costs of obtaining information
have become too great for the Nosy Parker.
Who Owns Secrets?
The fact that disclosure of
personal information is resisted by (is costly
to) the person to whom the information pertains, yet is valuable to others, may seem to
argue for giving people property rights in information
about themselves and letting them sell
those rights freely. The process of voluntary
exchange would then ensure that the information
was put to its most valuable use. The attractiveness
of this solution depends, however,
on (1) the nature and source of the information
and (2) transaction costs.
The strongest case for property rights
in secrets is presented where such rights
are necessary in order to encourage
investment in the production of socially
valuable information.
This is the rationale for giving legal protection
to the variety of commercial ideas, plans, and
information encompassed by the term "trade
secret." It also explains why the "shrewd bargainer"
is not required to tell the other party
to the bargain his true opinion of the values
involved. A shrewd bargainer is, in part, one
who invests resources in obtaining information
about the true values of things. Were he forced
to share this information with potential sellers,
he would get no return on his investment and
the process-basic to a market economy--by
which goods are transferred through voluntary
exchange into successively more valuable uses
would be impaired. This is true even though
the lack of candor in the bargaining process
deprives it of some of its "voluntary" character.
At some point nondisclosure becomes
fraud. One consideration relevant to deciding
whether the line has been crossed is whether
the information sought to be concealed by one
of the transacting parties is a product of significant
investment. If not, the social costs of
nondisclosure are reduced. This may be decisive,
for example, on the question whether the
owner of a house should be required to disclose
latent (nonobvious) defects to a purchaser. The
ownership and maintenance of a house are costly
and productive activities. But since knowledge
of the house's defects is acquired by the
owner costlessly (or nearly so), forcing him to
disclose these defects will not reduce his incentive
to invest in discovering them.
As examples of cases where transaction cost
considerations argue against assigning a
property right to the possessor of a secret, consider
(1) whether the Bureau of the Census
should be required to buy information from the
firms or households that it interviews and (2)
whether a magazine should be allowed to sell
its subscriber list to another magazine without
obtaining the subscribers' consent. Requiring
the Bureau of the Census to pay (that is, assigning
the property right in the information
sought to the interviewee) would yield a skewed
sample: the poor would be overrepresented,
unless the bureau used a differentiated price
schedule based on the different costs of disclosure
(and hence prices for cooperating) to the
people sampled. In the magazine case, the costs
of obtaining subscriber approval would be high
relative to the value of the list. If, therefore, we
are confident that these lists are generally
worth more to the purchasers than being
shielded from possible unwanted solicitations
is worth to the subscribers, we should assign
the property right to the magazine, and this is
what the law does.
The decision to assign the property right
away from the individual is further supported,
in both the census and subscription-list cases,
by the fact that the costs of disclosure to the
individual are low. They are low in the census
case because the government takes precautions
against disclosure of the information collected
to creditors, tax collectors, or others who might
have transactions with the individual in which
they could use the information to gain an advantage
over him. They are low in the subscription-
list case because the information about the
subscribers that is disclosed to the list purchaser
is trivial and cannot be used to impose
substantial costs on them.
Even though the type of private information
discussed thus far is not in general discreditable
to the individual to whom it pertains,
we have seen that there may still be strong
reasons for assigning the property right away
from that individual. Much of the demand for
privacy, however, concerns discreditable information -
often information concerning past or
present criminal activity or moral conduct at
variance with a person's professed moral standards - and often the motive for concealment is,
as suggested earlier, to mislead others. People
also wish to conceal private information that,
while not strictly discreditable, would if revealed
correct misapprehensions that the individual
is trying to exploit - as when a worker
conceals a serious health problem from his
employer or a prospective husband conceals
his sterility from his fiancee. It is not clear why
society in these cases should assign the property
right in information to the individual to
whom it pertains; and under the common law,
generally it does not. A separate question,
taken up a little later, is whether the decision
to assign the property right away from the
possessor of guilty secrets implies that any and
all methods of uncovering those secrets should
be permitted.
An analogy to the world of commerce may
clarify why people should not - on economic
grounds in any event-have a right to conceal
material facts about themselves. We think it
wrong (and inefficient) that a seller in hawking
his wares should be permitted to make
false or incomplete representations as to their
quality. But people "sell" themselves as well
as their goods. A person professes high standards
of behavior in order to induce others to
engage in social or business dealings with him
from which he derives an advantage, but at the
same time conceals some of the facts that the
people with whom he deals need in order to
form an accurate picture of his character.
There are practical reasons for not imposing a
general legal duty of full and frank disclosure
of one's material personal shortcomings-a
duty not to be a hypocrite. But each of us
should be allowed to protect ourselves from
disadvantageous transactions by ferreting out
concealed facts about other individuals that
are material to their implicit or explicit selfrepresentations.
It is no answer that, in Brandeis's phrase,
people have "the right to be let alone." Few
people want to be let alone. They want to manipulate
the world around them by selective
disclosure of facts about themselves. Why
should others be asked to take their selfserving
claims at face value and prevented
from obtaining the information necessary to
verify or disprove these claims?
Some private information that people desire
to conceal is not discreditable. In our culture,
for example, most people do not like to be
seen naked, quite apart from any discreditable
fact that such observation might reveal. Since
this reticence, unlike concealment of discreditable
information, is not a source of social costs
and since transaction costs are low, there is an
economic case for assigning the property right
in this area of private information to the individual;
and this is what the common law does.
I do not think, however, that many people have
a general reticence that makes them wish to
conceal nondiscrediting personal information.
Anyone who has sat next to a stranger on an
airplane or a ski lift knows the delight that
some people take in talking about themselves
to complete strangers. Reticence appears when
one is speaking to people - friends, family, acquaintances,
business associates - who might
use information about him to gain an advantage
in business or social transactions with
him. Reticence is generally a means rather than
an end.
The reluctance of many people to reveal
their income is sometimes offered as an example
of a desire for privacy that cannot be explained
in purely instrumental terms. But I
suggest that people conceal an unexpectedly
low income because being thought to have a
high income has value in credit markets and
elsewhere, and they conceal an unexpectedly
high income in order to (1) avoid the attention
of tax collectors, kidnappers, and thieves, (2)
fend off solicitations from charities and family
members, and (3) preserve a reputation for
generosity that would be shattered if the precise
fraction of their income that was being
given away were known. Points (1) and (2)
may explain anonymous gifts to charity.
Prying, Eavesdropping, and Formality
To the extent that personal information is concealed
in order to mislead, the case for giving it legal
protection is, I have argued, weak. Protection
would simply increase transaction costs, much
as if we permitted fraud in the sale of goods.
However, it is also necessary to consider the
means by which personal information is obtained.
Prying by means of casual interrogation
of acquaintances of the object of the prying
must be distinguished from eavesdropping
( electronically or otherwise) on a person's
conversations. A in conversation with B disparages
C. If C has a right to hear this conversation,
A, in choosing the words he uses to B,
will have to consider the possible reactions of
C. Conversation will be more costly because of
the external effects and this will result in less
-and less effective-communication. After
people adjust to this new world of public conversation,
even the Cs of the world will cease
to derive much benefit in the way of greater
information from conversational publicity:
people will be more guarded in their speech.
The principal effect of publicity will be to
make conversation more formal and communication
less effective rather than to increase the
knowledge of interested third parties.
Stated differently, the costs of defamatory
utterances and hence the cost-justified level of
expenditures on avoiding defamation are
greater the more publicity given the utterance.
If every conversation were public, the time and
other resources devoted to ensuring that one's
speech was free from false or unintended
slanders would rise. The additional costs are
avoided by the simple and inexpensive expedient
of permitting conversations to be private.
It is relevant to observe that language becomes
less formal as society evolves. The languages
of primitive peoples are more elaborate,
more ceremonious, and more courteous
than that of twentieth-century Americans. One
reason may be that primitive people have little
privacy. There are relatively few private conversations
because third parties are normally
present and the effects of the conversation on
them must be taken into account. Even today,
one observes that people speak more formally
the greater the number of people present. The
rise of privacy has facilitated private conversation
and thereby enabled us to economize on
communication-to speak with a brevity and
informality apparently rare among primitive
peoples. This valuable economy of communication
would be undermined by allowing eavesdropping.
In some cases, to be sure, communication
is not related to socially productive activity.
Communication among criminal conspirators
is an example. In these cases - where limited
eavesdropping is indeed permitted - the effect
of eavesdropping in reducing communication
is not an objection to, but an advantage of, the
eavesdropping.
The analysis here can readily be extended
to efforts to obtain people's notes, letters, and
other private papers; communication would be
inhibited by such efforts. A more complex
question is presented by photographic surveillance -
for example, of the interior of a person's
home. Privacy enables a person to dress
and otherwise disport himself in his home
without regard to the effect on third parties.
This economizing property would be lost if the
interior of the home were in the public domain.
People dress not merely because of the
effect on others but also because of the reticence,
noted earlier, concerning nudity and
other sensitive states. This is another reason
for giving people a privacy right with regard
to the places in which these sensitive states
occur.
Ends and Means
The two main strands of my
argument - relating to personal facts and to
communications, respectively - can be joined
by remarking the difference in this context
between ends and means. With regard to ends,
there is a prima facie case for assigning the
property right in a secret that is a by-product
of socially productive activity to the individual
if its compelled disclosure would impair the
incentives to engage in that activity; but there
is a prima facie case for assigning the property
right away from the individual if secrecy
would reduce the social product by misleading
others. However, the fact that under this analysis
most facts about people belong in the public
domain does not imply that intrusion on
private communications should generally be
permitted, given the effects of such intrusions
on the costs of legitimate communications.
...
We have now sketched the essential elements
of an economically based legal right of
privacy:
(1) Trade and business secrets by
which businessmen exploit their superior
knowledge or skills would be protected. (The
same principle would be applied to the personal
level and would thus, for example, entitle
the social host or hostess to conceal the recipe
of a successful dinner.)
(2) Facts about people
would generally not be protected. My ill health,
evil temper, even my income would not be
facts over which I had property rights, though
I might be able to prevent their discovery by
methods unduly intrusive under the third category.
(3) Eavesdropping and other forms of
intrusive surveillance would be limited (so far
as possible) to the discovery of illegal activities.
Posner famously concludes
Discussions of the privacy question have contained
a high degree of cant, sloganeering, emotion,
and loose thinking. A fresh perspective
on the question is offered by economic analysis,
and by a close examination of the common
law principles that have evolved under the
influence (perhaps unconsciously) of economic
perceptions. In the perspective offered by
economics and by the common law, the recent
legislative emphasis on favoring individual and
denigrating corporate and organizational privacy
stands revealed as still another example
of perverse government regulation of social and
economic life.