Economic Analysis of Privacy

We discussed Posner’s economic analysis of the right to privacy. This comes in two parts.

  1. An economic analysis of privacy: an examination of how privacy rights either favor or hinder social wealth.
  2. A review of the decisions of judges to see if they conform with the economic analysis when deciding privacy cases.

We only discussed the first part. The second part is like the Warren and Brandeis article: it reviews judicial decisions and claims that these decisions fit a pattern, even though the judges who wrote the decisions were not aware of this fact. It is interesting, but I decided we would not have time to do it properly.

What is an economic analysis?

As Posner describes it, the economic analysis of law is:

“the hypothesis that the common law is best explained as if the judges were trying to maximize economic welfare. … common law adjudication brings the economic system closer to the results that would be produced by effective competition — a free market operating without significant externality, monopoly, or information problems.” (Posner 1981, 4–5)

That is, judges tend to assign legal rights in ways that either make people pay for the costs of their economic activities to third parties (externalities), foster economic competition, or reduce information problems that hinder people from making mutually beneficial exchanges. When they cannot do those things directly, they assign rights in ways that reflect the results that ideally competitive markets would have reached.

In the case of privacy, he claims, judicial decisions reflect the economic analysis of privacy that he gave in the section we discussed.

According to Posner, the primary economic case for giving legal, enforceable rights to keep information private concerns information that is costly to acquire. If this information could not be kept private from others, no one would have an incentive to go to the trouble of finding it: others could just sell the fruits of their labor. The idea is that everyone is better off with the system of property rights. Those who can get the information are willing to do so, provided they can charge a price, and those who would pay to buy it from them can do so as well.

Personal information, by contrast, is usually used to deceive others. To put it another way, it is used to get people to buy things they do not want. So, for example, job applicants seek to get employers to make hiring decisions that the employer would not otherwise want to make by hiding criminal records and other facts about themselves.

That said, this point about the privacy of personal information does not apply to information that has no social cost and for which the barriers to negotiating a market exchange (“transaction costs”) are low. For example, there is no social cost to my keeping the information about what I look like in the shower private: I cannot use that information to make you worse off in an exchange. (Well, maybe I could, but the fraud would be quickly detected. You’re going to have to use your imagination here.) And if you really want the information, you can easily find me and make me an offer. I probably won’t accept it, but that just means we can’t agree on a price; it does not mean that my having a privacy right prevents desirable kinds of negotiation and exchange. To use the economist’s lingo, the transaction costs are low but my reservation price is higher than you are willing to pay.

Finally, there is an economic case for protecting communication. Without it, it is harder to get candid information and opinions from others.

The value of privacy

I think Posner’s article is valuable as a reminder of the fact that privacy can be used to manipulate others. I think he is also right to say that quite a lot of what is written in favor of privacy is pretty shallow. Even Warren and Brandeis, whose article I greatly admire, only really spent a paragraph or two explaining the value of privacy. And they had a tendency to indulge in some overheated prose like this:

“The intensity and complexity of life, attendant upon advancing civilization, have rendered necessary some retreat from the world, and man, under the refining influence of culture, has become more sensitive to publicity, so that solitude and privacy have become more essential to the individual; but modern enterprise and invention have, through invasions upon his privacy, subjected him to mental pain and distress, far greater than could be inflicted by mere bodily injury.” (Warren and Brandeis 1890, 196)

For Thomson, our interest in privacy is the same as our interest in the rights from which the right to privacy is derived. So it’s hard to say anything general about why privacy is desirable on her view.

For Scanlon, our interest in privacy is an interest in having a space where we do not have to think about being observed. Posner has some sharp remarks about that sort of idea. We did not have time to discuss them, but I think they would be worth considering (see Posner 1978, 407–8).

Our discussion

We spent a lot of time talking about Posner’s speculation about our interest in gossip about the lives of the rich and famous. We got into this because Posner said that Warren and Brandeis were wrong to think that newspapers represented a unique intrusion into private life. (They wrote the paper because Warren was upset about the way his daughter’s wedding was covered in the society pages of the Boston papers.) As Posner sees it, newspaper gossip columns substitute for the kind of information that people who lived in pre-industrial societies used to have all the time. Then he added his speculation about our interest in the rich and famous, namely, that it is motivated by the thought that we can learn how to be successful ourselves from those people.

Samuel bought Posner’s story. Savannah said that she thought at least part of the story had to do with so-called water cooler effects: what you want is to be able to talk about what everyone else is going to talk about and the rich and famous are simply prominent enough to serve as the focus for everyone’s attention rather than being especially interesting in their own right. Patrick thought that we feel bad about about being intrusive into the lives of poor people, I think through sympathy with their plight (but I might have missed exactly what he had in mind). Austin noted that we love stories of failure, especially when it is the high and mighty who are brought low; this is probably compatible with Posner’s speculation.

Finally, we had a brief discussion of privacy in employment law. There is a lot of interest in forbidding employers from asking about felony convictions on employment applications: “ban the box” means banning the checkbox on the form that asks if you have had a felony conviction. Peter said that he is generally sympathetic with that, but noted that we would very much like to confirm that people applying to, say, work in elementary schools are not pedophiles. Excellent point there!

Key concepts

  1. Posner’s claims about the costs of privacy rights.
  2. When Posner thinks privacy rights would be economically efficient and when they would not.


Posner, Richard A. 1978. “The Right to Privacy.” Georgia Law Review 12 (3): 393–422.

———. 1981. The Economics of Justice. Cambridge: Harvard University Press.

Warren, Samuel D., and Louis D. Brandeis. 1890. “The Right to Privacy.” Harvard Law Review 4 (5): 193–220.