I have never practised tax avoidance myself. It’s not that I’m particularly virtuous: it’s just I’d rather pay a few thousand pounds to HMRC than spend an hour talking to an accountant. But I was fascinated by the Jimmy Carr affair for one reason. Why was Mr Carr, alone of the thousand or so participants, hounded to withdraw from the Jersey K2 scheme?
Innate decency aside, Carr had to withdraw because he is famous and a comedian. A comedian’s career is ‘reputationally fragile’. People need to like you before they’ll laugh at you. (Fatty Arbuckle and Woody Allen are two people who, once tainted by scandal, found themselves ‘just not so funny any more’). The other thousand people using the K2 scheme are neither famous nor amusing. They don’t rely on the assent of a wider public to earn their money. Many rich people, who in the modern world are highly mobile, and who can spend their entire lives surrounded only by other rich people, don’t suffer the reputational constraints that Jimmy Carr does. Or which a Victorian aristocrat once did.
Occupy protestors were criticised for buying their coffees from Starbucks. But there is a big difference between Starbucks and, say, a bank. Starbucks, like Jimmy Carr, is reputationally fragile. If we wished, we could run it out of town on a whim. Should it emerge that Starbucks is, say, running a Ponzi scheme, or cruelly mistreating its baristas, even a small customer boycott could dent its profits overnight. With a bank, however, camping outside the headquarters is all you can do.
Reputation acts as a kind of cashless deposit in human dealings. As any mafioso or game theorist knows, you can only trust people who have something to lose. (It’s one reason why proportional representation is such a bad idea. Without a disproportionate electoral system, you can’t hurt the lying bastards hard enough.)
The role of reputation is a central question in evolutionary science, and at the heart of the debate about ‘group selection’ versus ‘gene selection’. An urge to punish cheats and free-riders — even at a net cost to ourselves — may be hard-wired into all of us.
So it is odd that so little attention is paid to the role of reputation in the effective workings of business and government. Benjamin Polak of Yale believes a Nobel prize awaits the first person to master the science of reputational game-theory.
Look at where capitalism works best and you’ll find a business sensitive to shame. Websites such as Trip-Advisor now give people the power to shame bad hotels and restaurants. And, as a result, bad restaurants and hotels are either getting better or closing down.
There is hence a powerful logic for brands such as Tesco moving into banking. Tesco, unlike RBS, is highly sensitive to shame. Any whiff of malpractice or greed at Tescobank and its victims can retaliate by the simple and immediate act of buying their food at Sainsbury’s.
I recently arranged for my family to fly to the US. What struck me when I clicked ‘buy’ on the BA website is that I now feel less anxious when paying an airline a few thousand quid to hurtle my family across Arctic wastelands in a tin tube than I do when handing £2,000 to a financial institution. Why does the aviation industry make very little money doing something immensely complicated astoundingly well, while the finance sector makes a fortune doing a simple thing badly?
There are a few game-theoretic reasons to explain this. Reputation is one. When even a minor aviation incident occurs, it makes headlines. There is also a healthy sharing of risk. Unlike banks, airlines make the pilot sit at the front of the plane.
Rory Sutherland is vice-chairman of Ogilvy Group UK.