One of the most rich and interesting components of economics is associated with the management of Risk and Knowledge. As Taylor puts it in his textbook Principles of Economics: Economics and the Economy
This interplay between knowledge and risk (I prefer the term knowledge over information as the former implies a judgment that the latter lacks) is profound. Management of risk in the face of what the future holds for securities is at the heart of hedge funds and derivatives.
Similarly, the issuance of insurance policies and the premiums by which they are underwritten is based on actuarial science where probabilities and impacts lead to expected outcomes and costs.
Interest required of a borrower is also linked to the risk that borrower represents in repayment and thus the interest rate is set accordingly – both in personal loans and in the offering or corporate bonds and stocks.
Naturally, we expect that a legitimate function of government is to ensure as free a flow of information as possible and we rightly view the pursuit of violators as a function of the courts. Just ask Martha Stewart about insider trading or Ford about the Pinto.
With the advent of the internet, it was natural to expect that there would be better flows of information now that most everyone was ‘wired’. Certainly CNet Reviews and Angie’s List seem to provide a forum for consumers to trade information on their experiences thus allowing others to gather knowledge and to make more informed decisions.
However, all is not well in paradise. An increasingly larger number of companies are making ‘gag orders’ a part of the implicit contract between seller and buyer, with often draconian punishment awaiting a buyer who has the temerity to place a bad review on Yelp or to speak unfavorably on Facebook.
These gag orders are the digital equivalent to insider trading. They are designed to keep information in the hands of a few and away from the buying public at large in the hope that, with less information, the public will make ill-informed and unknowledgeable choices.
And so it was with a some delight that I heard that Senator John Thune was providing Yelp Help by sponsoring S.2044 - Consumer Review Freedom Act of 2015.
Under this act, consumers will be protected from the bullying gag clauses by declaring such clauses, usually hidden in the terms of service (talk about a lack of information), invalid, thereby ending the punishment that would accompany honest reviews. Gone would be stories of customers placing bad reviews on Yelp and then finding that they owe $3500 in fines for a dispute over $20 of merchandise. Businesses would still retain rights to sue for libel for any grossly inaccurate reviews. So kudos to what seems to be a sensible law that moves us one step closer to the ideal of a free flow of information.