Rewriting our social norms: Part two

(Editor’s note: This is the second of two parts. Read Part one.)

The asymmetry of knowledge (where one party has more knowledge than the other) has been the cornerstone of our economy for all of recorded history.

In a 1970 paper titled, “The Market for Lemons: Quality Uncertainty and the Market Mechanism,” economist George Akerlof first introduced the concept of information asymmetry.

He explained the economic advantages of when a seller knows more about a product than the buyer.

As Akerlof explains, there are good used cars (”cherries”) and defective used cars (”lemons”). Because many important mechanical parts and other elements are hidden from view and not easily accessible for inspection, the buyer of a car does not know beforehand whether it is a cherry or a lemon. So the buyer’s best guess for a given car is that the car is of average quality.

For this reason, the buyer is only willing to pay the price of an average quality car.

This means that the owner of a carefully maintained, never-abused, good used car will be unable to get a high enough price to make selling that car worthwhile. Therefore, owners of good cars are less likely to place their cars on the used car market. The fewer number of good cars reduces the average quality of cars on the market even further, causing buyers to revise downward their expectations for any given car.

Akerlof, Michael Spence, and Joseph Stiglitz jointly received the Nobel Memorial Prize in Economic Sciences in 2001, all for their research related to the economics of asymmetric information.

As a counterbalance to this, transparency becomes a powerful tool.

In the very near future, sellers will not be able to hide defects, make unsubstantiated claims, or overcharge for non-essential and non-time-sensitive goods and services.

You may say that the auto industry has been dealing with this since the beginning of the Internet, and that they have somehow survived the onslaught of commodity pricing. You may also think that online auto sellers and brick & mortar dealerships have reached equilibrium. However, this is not true.

The sticker price on a car has nothing to do with the price the dealer is paying, neither does the invoice price. If it did, there wouldn’t be any car dealers. Do you really think you can run a car showroom making $25 per transaction?

According to a recent column by DigitalLiving editor Shelly Palmer:

“When you are looking at a Samsung 46″ HDTV Model number UN46D7000LFXZA at an electronics retailer, then take out your handheld device and search the web, you will instantly find it at a significantly lower price. You know it is exactly the same unit you are looking at in the showroom. Can the brick & mortar retailer match the online price? Will it? As this problem gets bigger, retailers are going to be highly de-incentivized to purchase inventory they cannot sell at a profit.”

“If retailers don’t stock items, manufacturers will have to perfect just-in-time inventory. They will (many already have). But what will become of the post-4G retail store? How will the retail environment have to adapt to be relevant in a world where everyone who walks-in has instant access to the lowest price, free shipping and no tax from an online vendor? Buyers already know more than sellers about the features and benefits of products – the web is the perfect tool for that – what does the retail store or showroom have to offer? How will manufacturers adapt production and finance to accommodate the change?”

“Now, let’s expand this idea to every other business we can think of. As we move towards transparency, retail transactions certainly get tougher, but service businesses get hit just hard.”

“If the job of a service professional is to transfer the value of their intellectual property into wealth, how much will transparency hurt?”

Information asymmetry in a buyer-seller relationship is where the real power lies. And now, thanks to transparency, information asymmetry is becoming harder to create. To survive, the basic structure of transactions will have to adapt.

Rewriting Social Norms

According to Mark Zuckerberg, “Transparency increases integrity.�� His entire business model for Facebook is oriented around society’s growing embrace of transparency.

Nowhere in society are our values shifting faster than when it comes to our thinking about privacy vs. transparency. But we are still in the middle of this evolution so we have no way of fully embracing the “new norms” to live our lives.

So were do we go from here?

There are several “unfinished pieces” that will leave us in limbo for the foreseeable future.

First, the technology of transparency has not stabilized. Technology is moving quickly and may never be fully complete.

Video cameras are improving in resolution, and will soon have additional capabilities. Where once they were limited to grainy black and white images silhouetted against a fuzzy background, videos today are improving on almost every front.

Future video technology will have the capability of seeing through walls, into buildings, and even watch us while we sleep. This can be a good thing, but in the hands of the wrong person it turns into a disastrous thing.

We are also a long ways from establishing a well-structure public policy around personal privacy. Any laws created around today’s thinking will need to be constantly updated to better mirror our evolving sense of right and wrong.

Final Thoughts

We can understand this better if we look at the economics of perversion. If only one person has photos of a naked celebrity, it becomes a valuable commodity. If you can find the same photos on 10,000 different websites, the value of that photo approaches zero, and our thinking about perversion suddenly shifts along with the proliferation. Nakedness becomes the new norm.

At one time, selling alcohol was illegal until we decided it was ok.

Selling marijuana is still illegal, but as a society, we are on the verge of changing those laws as well.

Many of our fears are framed around the old notions of right and wrong, legal and illegal. As those standards change, how does this cause us as a society to reframe our lives?

As I bring this discussion to a close, I am probably leaving you with far more questions than answers. But to those rare people who can find the answers, answers that everyone will embrace, a golden opportunity awaits.