I've been reading David Friedman's Future Imperfect: Technology and Freedom in an Uncertain World in anticipation of his talk here in Montreal tomorrow, and it's got me thinking about the power of reputation. In a chapter called "Contracts in Cyberspace," the law professor points out that suing someone for shafting you in an online deal is even more of a nuisance than doing so in the physical world, since you may very well live in completely different jurisdictions. Why, then, don't more deals go sour on the Internet?
The answer is that the threat of legal action is only one of the things that keep people honest—and probably not the most important thing, either. Some people are just good sorts, of course, but even those with malfunctioning moral compasses have a compelling reason to keep their promises. As Friedman writes, "Customers are unlikely to sue a department store, however unreasonable its grounds for refusing to take something back, and the people who mow my lawn are unlikely to sue me, even if I refuse to pay them for their last three weeks of work. What enforces the contract in both cases is reputation."
A store that screws a customer loses a customer, and probably some of that customer's friends as well. A homeowner who refuses to pay for work done loses his workers, and the respect of some of his neighbours, perhaps. Keeping your word, on the other hand, ensures repeat business. This works online as well, where sellers, who value their reputations, don't generally just take the money and run. A seller who doesn't value his reputation doesn't stick around long enough to build up a good one.
David Friedman has a reputation too. Son of the late Milton Friedman, he is a professor of law at Santa Clara University and the author of numerous books, including the classic The Machinery of Freedom: Guide to a Radical Capitalism, a third edition of which is slated to appear later this year. His writing is clear and thought-provoking and a joy to read, and he's a truly wonderful speaker as well. Can't wait till tomorrow!
A store that screws a customer loses a customer, and probably some of that customer's friends as well. A homeowner who refuses to pay for work done loses his workers, and the respect of some of his neighbours, perhaps. Keeping your word, on the other hand, ensures repeat business. This works online as well, where sellers, who value their reputations, don't generally just take the money and run. A seller who doesn't value his reputation doesn't stick around long enough to build up a good one.
David Friedman has a reputation too. Son of the late Milton Friedman, he is a professor of law at Santa Clara University and the author of numerous books, including the classic The Machinery of Freedom: Guide to a Radical Capitalism, a third edition of which is slated to appear later this year. His writing is clear and thought-provoking and a joy to read, and he's a truly wonderful speaker as well. Can't wait till tomorrow!
