In some cases, using fiction, effectively communicate idea From economics. Also, economics seen in fiction It’s meaningless. This post is another example of the latter, from my general favorite fictional series, Star Trek. (For the record, deep space nine It was objectively the best Star Trek series. )
One of the peculiarities of the Star Trek universe is that among the most prominent and regularly featured species, humans are the only ones that seem to be multifaceted. Star Trek’s other major species are essentially built around a single trait, taken to extreme levels. Although warrior culture is part of human culture, whole of Klingon culture. (How the Klingons developed faster than light travels is a mystery to me.) Logic is also part of the way humans act, but for Vulcans it’s the bottom line. Both Cardassian and Romulan societies seem to be built entirely around militarism. And the Ferengi are considered to be a society entirely devoted to the relentless pursuit of profit.
What guides Ferengi behavior? Rules for acquisition. As the name suggests, this is a list of rules that are thought to help Ferengi acquire as much wealth as possible. But in fact, the actual rule A terrible guide on how to run a profitable business. To be fair, some of the rules are pretty sensible. “Small print means big risk” seems like a good rule of thumb. The same goes for “Never gamble with a telepath.” (This is also the advice I follow by default, because for me this rule ends with the second word.) But overall, real-world businesses that try to operate by these rules quickly fails.
The first of these rules (and perhaps the most important) is, “Once you take their money, never give it back.” According to this rule, the way to maximize profits is to have a strict no-returns and no-refunds policy. But compare that to what we see in the real world. Not only do large and highly successful companies not follow this rule, they often go out of their way to emphasize how flexible their return and refund policies are. Online brands looking to attract new customers often bend over backwards to reassure customers that there is no risk in trying out their products. If you don’t like it, you can easily return it and the company will cover the return shipping costs. . Suppose you are trying to purchase products from two different companies. One company might declare, “Once we take your money, we’ll never give it back,” and the second company might say, “If you’re not 100% satisfied, you can get a full refund.” Refund, which one would you choose? Clearly, the second is the more attractive prospect. Following the first rule of acquisition is shooting yourself in the foot.
The fundamental mistake in the thinking behind most of these rules is not understanding the difference between the following rules and the rules: Finite and infinite games. A finite game ends with a certain final “winner.” Infinite games are not literally infinite. An infinite game is characterized by an undefined end state and is intended to continue indefinitely. Or, as James Kurth said, the point of an infinite game is not to quit, but to keep playing. In this sense, running a successful business is not a finite game, but an infinite one. Success in business does not mean reaching a predetermined end point and stopping business activities at that point. A successful business is one that can operate continuously over a long period of time. Perhaps for a finite game consisting of a single interaction, the first rule of acquisition may yield better results. But for infinite games, it’s much better to have a generous refund policy.
In his book, Thomas Sowell calls this error “one-level thinking.” applied economics:
When I was an undergraduate student studying economics under Professor Arthur Smithies at Harvard University, one day during class he asked me what policies he supported regarding certain issues of the time. I asked if he was there. I had strong feelings on this issue, so I answered him enthusiastically and explained what beneficial results I could expect from the policy I advocated.
“So what happens?” he asked.
The question caught me off guard. But when I thought about it, it became clear that the situation I described causes other economic consequences, and then I began to consider it and explain it in detail.
“And what happens after that?” asked Professor Smitties.
As I analyzed how further economic reactions to this policy would unfold, I began to realize that these reactions would lead to far less desirable outcomes than the first stage, and I began to waver somewhat.
“and after that What will happen? ” continued the blacksmith.
I am now beginning to see that the economic consequences of the policies I have advocated are likely to be quite dire, and in fact are likely to be much worse than the situation I originally sought to improve. did.
Aside from some sage advice in the Ferengi Takeover Rules, all of these rules quickly fall apart if you view business as an endless game, a constant process rather than static interaction. If we look at the world from a static perspective, through the lens of a completely one-stage finite game, we might think that the Ferengi rules lead to profit maximization and that all firms would behave this way if given the opportunity. yeah. But when you stop thinking statically and think dynamically, things look very different.
Consider a company that operates under the following rules: “Until something better comes along, a deal is a deal,” “The flimsier the product, the higher the price,” and “Once you take money, you never give it back.” Please try it. This is a company that breaks contracts, sells overpriced junk, and refuses all returns and refunds. As soon as you ask “and” after that What will happen? ” I can see why companies wanting to succeed and maximize their profits would flame the Ferengi takeover rules.
