Sometimes, myths can be used to effectively communicate ideas from economics. Sometimes, the economics you see in fairy tales don’t make sense. This post is another recent example, from one of my favorite fantasy series – Star Trek. (For the record, Deep Space Nine it was the best Star Trek series.)
One of the unique features of the Star Trek universe is that, among all the prominent and frequent species, humans seem to be the only ones with multiple traits. All the other major Star Trek franchises are basically built around one element, taken to the highest levels. Warrior culture is part of human culture, but it is completely of Klingon culture. (How the Klingons ever developed faster than light travel is a mystery to me.) Mind, too, is part of how humans work, but it’s the end all for Vulcans. Both Cardassian and Romulan society seems to be built entirely around the military. And the Ferengi must be a society completely devoted to the relentless pursuit of profit.
The Ferengi were disciplined by their behavior Rules of Adoption. As the name suggests, this is a list of rules that should help the Ferengi get as much wealth as possible. But in reality, the actual rules are a rough guide on how one should run a profitable business. To be honest, few rules make sense. “Small print leads to big risk” seems to be a decent rule of thumb. Likewise “Never gamble with a telepath.” (It’s a piece of advice that I automatically follow, because to me that rule is just the second word.) But overall, any real business that tries to work by these rules will quickly fail.
The first (and possibly, most important) of these rules is “Once you have your money, you can never get it back.” According to this rule, the way to maximize profits is to have a strong no-returns and refunds policy. But compare that to what we see in the real world. The biggest – and most successful – companies not only follow this rule, they often go out of their way to highlight how it fits into their return and refund policy. Online brands looking to attract new customers often go out of their way to convince customers that trying a product is safe – if you don’t like it, you can easily return it, with the company covering the shipping costs for the return. . If you wanted to buy a product from two different companies, one company says “if we have your money back” while the second company says “If you are not 100% satisfied you can get a full one.” refund”, where can you choose? Obviously the second is a more attractive prospect. Following the first rule of thumb would be shooting yourself in the foot.
A key flaw in the thinking behind many of these rules is a failure to understand the difference between infinite and infinite games. Completed games are closed with a final “winner”. Endless games are literally infinite – what distinguishes them is that they are open-ended with no defined end state, and are meant to continue indefinitely. Or, as James Carse puts it, the point of an endless game is not to end, it’s to keep the game going. In this sense, running a successful business is an endless game rather than a finite one. A successful business is not one that reaches a predetermined end, where business activity ceases. A successful business is one that is able to operate consistently over time. Perhaps in a finite game, involving only one interaction, the first discovery rule may yield better results. But for an endless game, it’s best to have a generous refund policy.
Thomas Sowell called this error “one-stage thinking” in his book Applied Economics:
When I was a graduate student studying economics under Professor Arthur Smithies of Harvard, he asked me in class one day what principle I liked about a certain periodical. As I had strong feelings on the matter, I answered him with enthusiasm, explaining to him what beneficial results I expected from the policy I was advocating.
“And what will happen?” he asked.
The question bothered me. However, when I thought about it, it became clear that the situation I was describing would lead to other economic consequences, so I began to consider and explain it.
“And what will happen after that?” Professor Smithies asked.
As I analyzed how the continued economic response to the policy would take place, I began to see that this response would lead to more unfavorable results than those in the first phase, and I began to waver a little.
“And again then what’s going to happen?” Smith insisted.
Now I was beginning to see that the economic consequences of the policy I was advocating could be very disastrous – and, in fact, worse than the original situation that was designed to be better.
If we discard a few pieces of advice from the Ferengi Rules of Acquisition, all these rules quickly fail if you look at business as an endless game, as an ongoing process rather than a static interaction. If you view the world statically and entirely through the lens of one-stage, finite games, you might think that Ferengi rules can lead to profit maximization, and that all businesses will behave this way if given the chance. But when you stop thinking statically and think dynamically, things look very different.
Think of a company that operates with rules like “A deal is a deal, until a better one comes along” and “The simpler the product, the higher the price” and “Once you have your money, you never get it back.” This is a company that will renege on their contracts, sell overpriced junk, and refuse all returns and refunds. As soon as you ask “And then what’s going to happen?” you can see why any company looking to succeed and increase its profits would fire the Ferengi Rules of Discovery.
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