Everyone is for privacy, but not everyone agrees what “privacy” means. Privacy as used in popular parlance can become little more than an inkblot into which one reads attitudes toward information disclosure. Privacy should not be viewed as a free- flowing right, but rather as a preference that can be satisfied by voluntary arrangements in the marketplace. This is especially true in the area of finance and consumer credit, where calls for “privacy” are used to promote greater government intrusion into private contractual arrangements.
Information has always been an important element of financial interactions. In the Small Town America of yesterday, “everyone” knew that Joe was a deadbeat, while John would always pay his bills. But, strangers were excluded from that world. As a result, Johns were lumped in with Joes, and many deserving individuals were excluded from credit markets.
In America, institutions developed to expand consumer credit, especially for the poor and middle class. Homes and other stable (or even appreciating) assets were recognized as adequate collateral. The challenge was simply to ensure that the outstanding loan remained within the asset value. Since owners had every reason to maintain the value of their property, this risk was viewed as acceptable. The result was a steady democratization of credit.
The next stage was the gradual freeing of credit from an asset base to a statistical predictability of likelihood of payment. Initially, that “reputational” credit was local. Stores and other retail outlets began to allow preferred customers credit, keeping records of payments to guard against loss. As markets grew, finance companies and retail stores each began to pool their data among similar firms to create a more accurate consumer credit data base. Those smaller pools gradually were integrated into today’s vast consumer credit bureaus.
This process of merging, editing and rectifying consumer credit records accelerated as the costs of information storage and acquisition dropped. Credit systems became more anonymous and formalized. The strengths and weaknesses of small town credit systems moved to the national level.
Better targeting of marketing efforts also offers the promise of massive improvements in consumer welfare – reducing the transaction costs of bringing buyer and seller together. Declining information costs make this an ever more attractive area, but we’re sometimes slightly uncomfortable when preference information is collected by hotels or stores. The information gathered by direct observation seems somehow more legitimate, more “friendly,” than that generated by voluntary exchange. But is it any less “private”?
Should government intervene to police the aggregation and use of that information? Very few people are knowledgeable enough about information technology and the evolving electronic information world to understand information flows and how they might be policed, and I doubt any of them work for the government.
To address privacy concerns, we can rely upon technology, voluntary transactions, market forces and self-regulation, or we can cede control to a politicized bureaucracy. In this less-than-perfect world, I know which side I come down on.