How Privacy Regulation Will Chill Commerce

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Will privacy become the regulatory boot in the door of the Internet? New ways of collecting information about consumer transactions sometimes worry consumers. But business is changing to offer consumers reassurance about privacy. Top-down regulation is not the answer. New privacy proposals introduced in California threaten to strangle small business and electronic commerce in red tape.

The proposed California privacy rules would require businesses that collectand trade information about their customers to satisfy elaborate noticeand consent rules. This radical step would turn the freedom of information onits head. Why should the government stop businesses from learning moreabout real people and real events in the economy? Human beings should befree to learn about each other, as they always have been. Consumers do notneed a law to protect them from people trying to develop and offer goodsand services. "Bad guy" behavior like fraud and identity theft is alreadyillegal.

A top-down regulatory approach to privacy threatens electronic commerce. Anestablished shopkeeper on main street can see and speak to his customers.He can get an idea by just looking if they are regulars or newcomers,locals or tourists; he can chat with them and learn why they decided to buy or notto by a tempting item. By contrast, an electronic commerce merchantworking from the web is blind and deaf. He is a stranger dealing with strangersover vast distances. Are his customers one-time visitors or are they moreloyal? Are they young or old, male or female? If they fill out an orderform and abandon it, why? Under these circumstances, its natural for a website to try to learn more about its visitors.

Regulations that would make it harder for businesses to collect informationabout markets threaten small business, in particular. Big companiesalready know who their customers are and can afford expensive lawyers to complywith complicated new rules. Small businesses would be hit harder.

Imagine that the proposed privacy regulation in California becomes the law.You are starting a new business selling pets and pet supplies. Yourcompetitors are big, well-established chains. You have no customers, andno way to find them. You can't afford television advertising. Your massmailings have only a 2 percent response rate--the costs are far exceedingthe benefits. You want to rent a mailing list from an established companyin order to reach only customers who are interested in pets in your area.Then you discover that the only mailing list available is tiny, outdated,and very expensive. Fearing liability, many companies have stopped tradinginformation about pet supply purchases. You decide that you just cannotafford to be in the pet business.

Over the next decades, entrepreneurs will experiment and discover manyamazing new things to do with information. Consumers will be able to getup-to-date information tailored to their tastes and preferences. Thewasteful practice of sending out thousands of flyers to discover only abare handful of interested customers will end. Prices will fall. New companiescan benefit from what older companies have learned about what consumersreally buy to start new businesses and offer new products. This means morechoice and lower prices for consumers.

Sometimes companies and their employees will make mistakes. But thatdoesn't mean we need top-down regulation. In the age of the Internet,consumers can easily find what company offers the lowest prices and bestservice. Businesses with the best reputation for giving customers whatthey want--privacy, low prices, or anything else--will do best. In competitivemarkets, companies have every reason to respond to a real customer demandfor confidentiality. Markets means that problems will be fixed from thebottom-up, in an endless and flexible process of learning andexperimentation.

This bottom-up process is the only way to address concerns about privacywithout strangling the development of the economy with red tape. It's onething for a company to try to respond to their customer's demandsvoluntarily. It's another thing entirely for an army of lawyers to forceentire industry to implement a one-size-fits all privacy policy.

California's proposals to regulate privacy are a losing proposition.There is nothing sinister about the explosion of innovation, wealth andefficiency that libraries of information about customers' buying habitswill allow. It is a natural part of our evolution from face-to-face dealings insmall towns to stranger-to-stranger electronic markets. Human beings havenever benefited from turning their backs on new sources of information.Let's not start now.