Bad Economics in Fiction, Star Trek edition

Sometimes, fiction can be used to effectively communicate ideas from economics. Other times, the economics you see in fiction make no sense. This post is another example of the latter, from a fictional series I generally like – Star Trek. (For the record, Deep Space Nine was objectively the best Star Trek series.)

One of the distinctive traits of the Star Trek universe is how, among all of the most prominent and regularly featured species, it seems like only humans are multifaceted. Every other of the major Star Trek species is fundamentally built around a single trait, taken to extreme degrees. Warrior culture is a component of humanity’s culture, but it is the entirety of Klingon culture. (How Klingons ever developed faster than light travel is a mystery to me.) Logic, too, is part of how humans operate, but it is the end-all-be-all for Vulcans. Both Cardassian and Romulan society seem to be built entirely around militarism. And Ferengi are supposed to be a society entirely dedicated to the relentless pursuit of profits.

The Ferengi are guided in their behavior by The Rules of Acquisition. As the name suggests, this is a list of rules that are supposed to help a Ferengi acquire as much wealth as possible. But in reality, the actual rules are a terrible guide to how one should run a profitable business. To be fair, a few of the rules are pretty sensible. “Small print leads to large risk” seems like a decent rule of thumb. So does “Never gamble with a telepath.” (It’s also advice I follow by default, because for me that rule just ends at the second word.) But overall, any real-world business that tried to operate by these rules would quickly fail.

The first (and presumably, most important) of these rules is “Once you have their money, you never give it back.” According to this rule, the way to maximize profits is by having a strict policy of no returns and no refunds. But compare that to what we see in the real world. Huge – and hugely successful – companies not only don’t follow this rule, they often go out of their way to highlight how accommodating their return and refund policy is. Online brands that want to attract new customers often bend over backwards to reassure customers that trying the product is risk-free – if you don’t like it, you can easily return it, with the company paying for the shipping costs to have it returned. If you were looking to buy a product from two different companies, with one company declaring “once we have your money you’ll never get it back” while the second company says “If you’re not 100% satisfied you can get a full refund”, which would you choose? Clearly the second is a more attractive prospect. Following the first rule of acquisition would be shooting yourself in the foot.

The fundamental mistake in thinking behind most of these rules is a failure to appreciate the difference between finite and infinite games. Finite games are close-ended with a specific, final “winner.” Infinite games are not literally infinite – what distinguishes them is that they are open-ended with no defined final state, and are meant to be carried on indefinitely. Or, as James Carse put it, the point of an infinite game isn’t to finish, it’s to keep the game going. In this sense, operating a successful business is an infinite game rather than a finite one. A successful business isn’t one that reaches some pre-determined end point, at which point business activity ceases. A successful business is one that is able to operate continuously over time. Perhaps in a finite game, consisting of a single interaction, the first rule of acquisition might yield better results. But for an infinite game, it’s much better to have a generous refund policy.

Thomas Sowell called this error “one-stage thinking” in his book Applied Economics:

When I was an undergraduate studying economics under Professor Arthur Smithies of Harvard, he asked me in class one day what policy I favored on a particular issue of the times. Since I had strong feelings on that issue, I proceeded to answer him with enthusiasm, explaining what beneficial consequences I expected from the policy I advocated.

“And then what will happen?” he asked.

The question caught me off guard. However, as I thought about it, it became clear that the situation I described would lead to other economic consequences, which I then began to consider and to spell out.

“And what will happen after that?” Professor Smithies asked.

As I analyzed how the further economic reactions to the policy would unfold, I began to realize that these reactions would lead to consequences much less desirable that those at the first stage, and I began to waver somewhat.

“And then what will happen?” Smithies persisted.

By now I was beginning to see that the economic reverberations of the policy I advocated were likely to be pretty disastrous – and, in fact, much worse than the initial situation that it was designed to improve.

Casting aside the few sensible bits of advice in the Ferengi Rules of Acquisition, these rules all immediately fail if you view business as an infinite game, as an ever-continuing process rather than a static interaction. If you view the world in static terms and entirely through the lens of one-stage, finite games, you might think the Ferengi rules would lead to profit maximization, and that businesses will all behave this way if given the chance. But when you cease to think in static terms and think dynamically, things look very different.

Think of a company that operated by rules like “A deal is a deal, until a better one comes along” and “The flimsier the product, the higher the price” and “Once you have their money, you never give it back.” This is a company that will renege on their contracts, sell overpriced junk, and decline all returns and refunds. As soon as you ask “And then what will happen?” you can see why any company that wants to be successful and maximize their profits would commit the Ferengi Rules of Acquisition to the flames.