Sometimes fiction can be used to effectively communicate ideas in economics. Sometimes the economics you see in novels doesn’t make sense. This post is another example of the latter from Star Trek, which is generally my favorite fictional series. (For reference, deep space nine It was objectively the best Star Trek series.)
One of the unique features of the Star Trek universe is that of all the most prominent and regularly appearing species, only humans seem to be multifaceted. Every other major Star Trek species is basically built around a single trait, to an extreme degree. Warrior culture is a component of human culture, entire The logic of Klingon culture (how the Klingons evolved faster than light travel is a mystery to me) is also part of how humans operate, but is the ultimate goal of the Vulcans. Both Cardassian and Romulan societies seem to be built entirely around militarism. And the Ferengi are seen as a society entirely devoted to the relentless pursuit of profit.
The Ferengi’s actions are as follows: Acquisition rules. As the name suggests, this is a list of rules to help the Ferengi acquire as much wealth as possible. But in reality rule It’s a terrible guide to how to run a profitable business. To be fair, some of the rules are very reasonable. “Small words bring big risks” seems like a good rule of thumb. The same goes for “don’t gamble with telepathy.” (For me, the rule ends at the second word, so that’s also the advice I basically follow.) But overall, any real business that tries to operate by these rules will quickly fail.
The first (and perhaps most important) of these rules is “Once you get money, never give it back.” According to this rule, the way to maximize profits is to strictly prohibit returns and refunds. But compare that to what we see in the real world. Not only do huge, wildly successful companies not follow this rule, they often go out of their way to emphasize how acceptable their return and refund policies are. Online brands trying to attract new customers often hold back to convince customers that trying their product is risk-free. If you don’t like the product, you can easily return it and the company will pay for return shipping. . If you want to buy a product from two different companies, one company declares, “Once you get your money, you can never get it back,” while the second company says, “If you’re not 100% satisfied, you can get my full money back.” “Refund”, which would you choose? Clearly the second is a more attractive prospect. If you follow the first rule of acquisition, you’re shooting yourself in the foot.
A fundamental mistake in the thinking behind most rules is the failure to recognize the difference between them. finite and infinite games. A finite game ends with a certain final “winner”. Infinite games are not literally infinite. What sets it apart is that it is an open-ended game with an undefined end state and continues indefinitely. Or, as James Carse puts it, the point of infinite games is not to finish, but to keep going. In this sense, running a successful business is an infinite game, not a finite one. A successful business is not one that reaches a predetermined end point where business activity ceases. A successful business is one that can continue to operate over time. Perhaps in a finite game consisting of a single interaction, the first-gain rule might yield better results. However, for endless games it is much better to have a generous refund policy.
Thomas Sowell called this error ‘Level 1 thinking’ in his book. applied economics:
When I was studying economics under Professor Arthur Smithies at Harvard, one day he asked class which policy I preferred on a particular issue of the day. Because I had strong feelings about the issue, I answered him passionately, explaining what beneficial results I expected from the policy I advocated.
“Then what will happen?” he asked.
The question perplexed me. But after thinking about it, it became clear that the situation I described would lead to different economic outcomes, which I then began to consider and explain.
“And what happens after that?” Professor Smithies asked.
As I analyzed how further economic responses to the policy would unfold, I began to realize that these responses would lead to far less desirable outcomes than in the first phase, and I began to feel somewhat uneasy.
“and then What will happen?” The Smithies continued.
Now I am beginning to realize that the economic ramifications of the policies I advocate are likely to be quite disastrous. And in reality, the situation was much worse than the initial situation the policy was intended to improve.
If we set aside some of the sensible advice of the Ferengi rules of acquisition and see business as an infinite game, an ever-continuing process rather than a static interaction, then all of these rules immediately fail. If we look at the world in static terms and entirely through the lens of a one-stage finite game, we might think that Ferengi rules will lead to profit maximization and that, given the opportunity, firms will all behave this way. But when you stop thinking in static terms and think dynamically, things look very different.
Consider a company that operates by rules such as “A deal is a deal until a better deal comes along,” “The flimsier the product, the higher the price,” and “Once you make money, you never give it back.” This is a company that breaks contracts, sells overpriced junk products, and refuses all returns and refunds. “and then What will happen?” You can see why any company looking to succeed and maximize profits would burn the Ferengi takeover rules.
