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Bright Lines, State Action, & Fraud

Arnold Kling ably defends his defense of the Consumer Financial Protection Bureau’s action against Capital One for offering to sell to consumers “payment-protection” and “credit-monitoring” products.  These are products for which Arnold cannot imagine a (presumably reasonable) person having a set of preferences that would entice him or her to purchase these products.

Sam Wilson says much, and well, what I would say in reply to Arnold’s response.

The fact that a good number of people in fact do choose to spend their own money purchasing these products suggests either that Arnold’s imagination isn’t sufficiently expansive about this matter, or (as is likely the case) that the people who buy these products reveal themselves (through these very purchases) to be so lacking in reasonableness that the merits of all of their other choices are called into question.  That is, such people reveal themselves in fact to be adult fools who cannot be trusted to care for themselves and their families.  Not only their purchases of products from banks, but a much fuller range of their choices, become appropriate for a (presumably) wise and public-spirited government to override.

I have no doubt that the world has a number of such foolish adults – adults so personally irresponsible that were they to make up a much higher percentage of society’s population, both the common-law’s and economics’s current working assumptions about the decision-making capacities (“rationality”) of ordinary men and women would generate legal and theoretical conclusions that simply don’t fit with reality.

But neither law nor economics – insofar as each is a source of general rules governing social interactions – can have one set of analyses and rules for “rational people” and a different set for “irrational people.”  That is, one bright-line rule is a strong presumption that each and every adult is ‘rational.’  This presumption is rebuttable in individual circumstances, but only on the most weighty of evidence (for example, Jones suffers from Alzheimer’s disease).  Voluntarily spending money on products that the vast majority of people regard to be foolish ought to be insufficient evidence to classify a person as being so irrational that he or she is no longer accorded the respect that law gives, and that economics gives, to typical adults.

Reflection will quickly reveal many pitfalls for analysis if economics – and many dangers to society if government – begin to classify people’s as “rational” or “irrational” depending upon how third parties rank the rationality of people’s choices

A related bright-line rule is that prohibitions against commercial fraud should aim at preventing Smith from misrepresenting the product or service that he offers in an exchange with Williams.  These prohibitions should not, in addition, oblige Smith to inform Williams of facts about Williams’s life or finances or existence that Williams – were he or she genuinely a reasonable person – can be presumed to know.

If Capital One never intended to perform on the contracts in question in the ways that it promised to its customers, that would indeed be fraud (albeit fraud for which there has long been a remedy at common law).  But it is not fraud for Capital One to fail to better inform its customers of objective facts of reality (such as the likelihood that a person will actually need credit monitoring) the knowledge of which is – as Arnold’s posts rightly imply – readily enough available to reasonable men and women.

(This discussion reminds me that it’s been too long since I’ve pored over the vast law-and-economics literature on fraud.  I’ll revisit that literature soon.)


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