For background, I recommend Fast Company’s article from 1999, which lauds Capital One’s creative use of the customer service process for up-selling. Those of you who are curious about the details of what is going on should find this helpful.

Anyway, Don Boudreaux writes,

The fact that a good number of people in fact do choose to spend their own money purchasing these products suggests either that Arnold’s imagination isn’t sufficiently expansive about this matter, or (as is likely the case) that the people who buy these products reveal themselves (through these very purchases) to be so lacking in reasonableness that the merits of all of their other choices are called into question.

I would be ok with saying that people chose to spend their own money on these products if they picked them out of a catalog or brochure, or if they inquired about these products. Instead, as the article above describes, the typical case is that the person called with a customer service question. The Capital One employee then proceeds to give a highly trained pitch to the customer touting a product that the consumer would never have been interested on his own and, if he were skeptical and calculating, he would turn down.

I realize that I cannot protect the consumer from his or her own stupidity. A fool and his money are soon parted.

What concerns me is that this is how Capital One is spending its resources–developing expert methods for separating fools from their money. Here is a company with tremendous executive talent, sophisticated use of experiments and data (from a Jim Manzi perspective, they are a positive role model), and powerful computer systems. They have a lot more money to spend on training their customer service people to dupe consumers than consumers have to spend training themselves to avoid being duped.

Those are resources that could be used to come up with innovations that increase consumers’ surplus. Instead, they use their advantages to target unsophisticated consumers for scams.

I think that markets work well when most people behave ethically, most of the time. Economic activity would shrivel if we had to operate under the assumption that parties with whom we transact are trying to figure out how to sell us worthless merchandise.

Also, note that when Sam Wilson writes,

the thing about regulatory agencies is that they are very much civil law-type organizations. They’re all about prior restraint rather than ex post compensation.

that is not a fair criticism of the CFPB’s action here. In this case, the CFPB imposed a fine and required Capital One to pay compensation. Of course, you are welcome to question the generic ability of the CFPB to play the role of the deity. You can question where they come off deciding what level of compensation is just. But they were not “all about prior restraint.”

I will grant that, often, when it comes to markets and ethics, government is part of the problem rather than part of the solution. If Don wants to suggest that the CFPB consists of imperfect human beings who usually will not make a useful distinction between ethical and unethical behavior, I would not disagree. However, in this case, I think they made the right call.