This post is (almost surely) the last one that I’ll write on my disagreement with Arnold Kling’s praise of the Consumer Financial Protection Bureau  for taking action against Capital One for pushing products that Arnold thinks (as I do) to be worthless.
Arnold writes :
What concerns me is that this is how Capital One is spending its resources–developing expert methods for separating fools from their money. Here is a company with tremendous executive talent, sophisticated use of experiments and data (from a Jim Manzi perspective, they are a positive role model), and powerful computer systems. They have a lot more money to spend on training their customer service people to dupe consumers than consumers have to spend training themselves to avoid being duped.
Those are resources that could be used to come up with innovations that increase consumers’ surplus. Instead, they use their advantages to target unsophisticated consumers for scams.
I agree that the world would likely be a better place if Capital One spent no time and other resources marketing products that are potentially appealing only to consumers who are unsophisticated. But Arnold’s criticism sounds to me to be too close to mid-20th-century criticisms of advertising. J.K. Galbraith , for example, famously argued that advertising creates demands for things that consumers don’t really want – or wouldn’t want absent the advertising. And, therefore, resources spent, not only on advertising, but also on producing the goods and services that consumers demand because of the advertising, are resources wasted. (Galbraith, of course, believed that these resources are better used to produce whatever it is an enlightened government would produce.)
Even Henry Simons , on page 57 of his 1934 pamphlet, A Positive Program for Laissez Faire , called upon government to put a “limitation upon the squandering of our resources in advertising and selling activities.”
Many top economists a few generations back took seriously the proposition that advertising wastes resources so obviously and so harmfully – including in the form of creating consumer demands that would otherwise not exist absent the advertising – that among the proper functions of government was the regulation and restriction of advertising in order to reduce such wastes. Private firms would, in the face of such wise regulation, waste fewer resources. More resources would therefore be available to be used in ways that these economists judged to be socially productive.
We know now what most of those earlier economists – and regulators – did not, namely, that advertising serves several worthwhile social goals. (One of the best summaries of the 1960s, ’70s, and ’80s revolution in the economics of advertising, btw, remains Robert B. Ekelund’s and David S. Saurman’s 1988 volume, Advertising and the Market Process . See also this superb essay by George Bittlingmayer .)
That advertising serves such worthwhile goals – e.g., bonding firms to maintain their product qualities, and better enabling start-up firms to compete with established producers – doesn’t mean that some advertising isn’t truly wasteful. Of course some is. Perhaps by reasonable measures even much of it is wasteful. But the better rule is to live with all advertising that isn’t obviously fraudulent – that is, to permit all advertising that doesn’t lie about matters that the reasonable person targeted by an advertising campaign cannot be expected to know or cannot be expected to want to know independently of the information fed to him or her by the advertiser.
No reasonable person falls for Capital One’s absurd claims about the products here in question. Those claims cannot be expected to mislead – and, hence, to harm – a reasonable adult. Those claims, therefore, aren’t fraudulent. Contemptible. Unsavory. Uncivilized. Harmful to the victims who fall for the claims. I grant the applicability of those descriptors. But not the applicability of the descriptor “actionably fraudulent.”
Empowering government to protect unreasonable (“unsophisticated”) adults from their own unreasonableness not only risks empowering government to regulate well beyond this very limited boundary , it also – by elevating the well-meaning assessments of some of us into guides for public policy – risks elevating the well-meaning but mistaken assessments of some of us into guides for public policy.
At the end of the day, I must concede to the adults who buy the Capital One products in question the possibility that they know better than I know how they should spend their own money when they spend their own money on themselves – even when I cannot, try as I might, imagine a set of preferences that would lead a reasonable person to choose to buy such products.