June 22, 2020 Reading Time: 3 minutes

Everyone knows the story: Never take candy from a stranger. Or get in the car with a stranger. Or make eye contact with a stranger. After all, you don’t know who they are. They’re strangers. They are other, outside the tribe, not among the set of people with whom we interact regularly. Their intentions may not be honorable.

And yet there I was, at my son’s birthday party, staring at a table littered with candy we had taken from strangers that we were planning to give to our kids and their friends. Even where we knew who had made the finished good — my wife and kids had baked and decorated the birthday cake — there are strangers at every turn along the path from raw and naked earth to the cake that was set before us. The eggs, milk, flour, and sugar that went into the cake? Strangers bought them from other strangers before selling them to us. My family used spoons and scrapers made by strangers and bought from other strangers to mix all the ingredients. They baked the cake in an oven made by strangers. They colored the icing with an unholy mix of chemicals made by strangers. And those strangers rely for their daily bread on still other armies of strangers.

It’s remarkable. If you have a sweet tooth, you take candy from strangers all the time. If you’ve ridden in a cab or with Uber or Lyft, you’ve gone against the advice of your mother and the other people who love you and have gotten in the car with a stranger. You probably didn’t bat an eye. Why not?

It’s a classic problem: Strangers don’t have very strong incentives to honor their promises. They may never see you again, after all, so they don’t suffer any meaningful consequences from deceiving you. In his famous article about the market for lemons, the economist and Nobel laureate George Akerlof showed how asymmetric information can cause a market to unravel completely.

And yet it doesn’t, at least not completely — and it’s robust enough for us to stagger along getting a little better from day to day and year to year. How?

Entrepreneurs do it. It’s not necessarily because they care about you, per se. It’s because they care about themselves and their loved ones: those around them who are very much not strangers in their eyes. When you look at a firm’s valuable assets, its most valuable asset is probably its reputation. After all, if they screw you over you probably won’t be back. The more competitive markets are, the more likely it is that you will be able to find a substitute. Strangers with candy are able to earn your repeat business because they don’t poison you. Strangers who do tend to be punished with tarnished reputations, less business, and lower profits.

“It’s because of regulation.” Not mainly. Regulation can solve information problems, but we live in a world of Yelp reviews, social media, and news outlets looking for any story, no matter how trivial. Reputation is in the driver’s seat. In any case regulation creates a curiously messed-up food environment in which it’s harder to enter the food-service market and therefore people eat more meals prepared at home than they otherwise would. Pathogens flourish in home kitchens, many of which, I suspect, would not pass health department inspections. If you believe that people are wise and responsible enough to clean their own kitchens, consider it possible that they are also wise and responsible enough to make decent choices with respect to restaurants and candy.

Should you trust strangers with candy? If you’re approached by the stereotypical mustachioed weirdo in a windowless van, then it’s probably a good idea to say, “No, thank you” — and maybe call the cops, though whether the cops will really be able to do anything about it is an open question (we’re still “waiting” for resolution from when our house was broken into in 2008, for example). There are multiple layers of redundancy in the candy market, all driven by reputation, that provide the assurance you might want from the products you buy. When you unwrap a Kit Kat or Snickers bar, the biggest threat to your health comes from the sugar — which is really bad for you — and not from the likelihood that it might be tainted (parenthetically, your kids’ Halloween candy is almost certainly safe).

So enjoy — in moderation. The strangers are looking out for you, and they are all too happy to do so. Why? Because by looking out for you, they are better equipped to look out for the non-strangers in their lives.

Art Carden

Art Carden

Art Carden is a Senior Fellow at the American Institute for Economic Research. He is also an Associate Professor of Economics at Samford University in Birmingham, Alabama and a Research Fellow at the Independent Institute.

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