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Tom Slee: Happy Feet

Tom Slee writes about information blockages and consumer sovereignty:

Whimsley: Happy Shoes II: At the end of the previous post it looked as if, so long as enough consumers  are prepared to pay a premium for ethically-produced goods, Happy Shoes should be able to make a profit, pay its workers better than Sweatshoes, and satisfy customers all at the same time.

But -- contrary to what Potter & Heath claim -- it is difficult for companies to make money by selling "shoes made by happy workers" because "ethical production" is a credence good.  When you buy shoes, you can tell if your new shoes fit well, you can tell what they are made of, and you can tell whether you like the style. But you can't tell what the person making them got paid. Like the benefits of fluoridated toothpaste and organically-grown vegetables, it's something you basically have to take on trust.

This lack of information provides an opening for unscrupulous vendors. To understand this market we have to think not only about Sweatshoes offering their $100 shoes and about Happy Shoes offering their $120 pair, but also about a third company. "Ethical Feet" comes to town with some fine-sounding words about their commitment to fairness and decency, offering to sell you an ethically made pair of shoes for $115 -- $5 less than Happy Shoes. It sounds like a good deal -- the benefit of ethical consumption, and an extra $5 left in your pocket.

But the difference is that Ethical Feet doesn't actually pass on any of the extra $15 you pay to the people making the shoes. It just keeps your money. Ethical Feet would sell the shoes cheaper than Happy Shoes, but make more profit -- $25 profit per pair rather than $20.

It looks like Ethical Feet may drive Happy Shoes out of business by making unverifiable false promises, but the story does not stop here. This is not a tale of corporate trickery and consumer stupidity. As George Akerlof writes: this problem of trust is "as old as markets themselves. It concerns how horse traders respond to the natural question: "if he wants to sell that horse, do I really want to buy it?"

Smart consumers who are prepared to pay more for ethically produced goods are still not prepared to be suckers. We are not going to pay $115 or even $120 for a pair of shoes just because a company says they are made by happy workers -- a claim we cannot verify. In a market of smart consumers wanting to buy shoes made by happy people, the $115 Ethical Feet shoes and the $120 Happy Shoes  - stay on the shelf.  As consumers we can't tell the difference between Ethical Feet and Happy Shoes, and we know that a company that carried out its promises is vulnerable to unscrupulous competition.

The company that stays in business is Sweatshoes. It pays cheaply and sells cheaply, and as consumers we pay $100. We may not feel good about this, but at least we are not being tricked. The end result is just the same as if we didn't care about the salaries at all...