Database nation: the upside of "zero privacy"

Reason, June, 2004 by Declan McCullagh

Most of us know people who misuse their credit cards through holiday spending sprees or random acts of profligacy. But millions of us do not; we use credit cards because they're safer and more convenient than carrying thick wads of dollar bills. Cash is dirty and carries germs. It can be ripped or torn accidentally. Unlike a credit card, if you lose it, you're out of luck.

Also, few of us can buy our homes outright. By giving us a schedule of regular payments, a bank loan to buy our home lets us plan for the future.

Building on Reputation

All this was made possible by the convergence of several trends half a century ago. After the Depression, the pent-up demand for consumer goods exploded and the desire for an entirely cash-based society evaporated. The end of World War II brought a population boom and greater mobility. The most crucial change was the invention of the computer, which permitted more-efficient information storage and retrieval. The invention of high-capacity hard drives, fatter memory chips, and ever-speedier integrated circuits completed the databasification of American life.

While computers were essential to this latest phase of data gathering, the need to compile and exchange financial information is hardly new. Stanford economist Avner Greif's history of trade between 11th-century Mediterranean cities, published in the Journal of Economic History in 1989, showed how merchants used overseas agents, backed up by a web of information flows, to save money. For merchants, hiring agents to receive shipments when they arrived at the destination port was cheaper than traveling with the goods. To prevent agents from absconding with the merchandise, Maghrebi traders relied on a social network that provided agents and kept track of those who cheated. "Information was crucial to business decision-making," Greif noted. To keep agents honest," coalition members blocked a cheater's access to the coalition's internal information flows." The traders' rudimentary paper ledgers served the same purpose as today's electronic credit reports: helping to distinguish honorable traders from frauds and deadbeats.

Adam Smith came to a similar conclusion in a 1766 paper titled "Lecture on the Influence of Commerce on Manners." He stressed the importance of a positive reputation, which necessarily means that others have access to information about your past actions and therefore feel they can predict your future behavior. "A dealer is afraid of losing his character, and is scrupulous in observing every engagement," Smith wrote. "When a person makes perhaps 20 contracts in a day, he cannot gain so much by endeavoring to impose on his neighbors, as the very appearance of a cheat would make him lose."

Modern databases trace the reputations not just of individuals but of corporations as well. Probably the most famous example is the credit reporting firm Dun & Bradstreet, which provides one of the most important tributaries to the pool of information about corporations and government agencies. It was founded as two different firms--New York's Mercantile Agency in 1841 and Cincinnati's Bradstreet Company in 1849--that merged in 1933. Both were created in response to a 19th-century problem: false letters of credit.