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How Entire Industries Become Unethical (bhargreaves.com)
94 points by thesyndicate on Aug 28, 2010 | hide | past | web | favorite | 66 comments

It seems to me that the industries that trend to the most unethical (airlines, commercial real estate, cell phone carriers) also have the highest barriers to entry. Unfortunately, this only leaves cumbersome instruments like government regulation and unpredictable changes in the marketplace to impose ethics on industries that appear most likely to trend unethical.

Government regulation is what creates most barriers to entry. In general, the most unethical industries and professions are those that are most tied in to government in the first place. Especially where government provides the barriers to entry - professional and occupational licensing being just the tip of the iceberg.

"Government regulation is what creates most barriers to entry."

Maybe the government regulation as practised by cronyist goverments. Seriously, I don't think that a hypothetical government enforcing standards for square feet measurement would create a huge barrier to entry into the property business.

As soon as there's a law about how to calculate square footage there will either be an agency to do the calculate the square footage, an agency to enforce it, or both. Oh, and some sort of tax/fee levied against commercial land-lords and the possibility of lawsuits all around. And that's assuming that the law doesn't require auditing and/or some sort of compliance documentation. I don't think you're really allowing for how onerous even "simple" regulation can be when lawyers and bureaucrats get ahold of it.

Weights and measures are already regulated in the U.S. This is why, when you pay for a gallon of gas, you can be sure you are getting an actual, standard gallon of gasoline. This in itself doesn't seem to create a barrier to entry for gas stations and protects the consumer.

It seems to me that you can't be sure unless someone is auditing the weights or measures actually in use. Consumers can do a rough audit using their gas gauges, but it's not particularly precise.

In the US at least the state DOT's do go out and check on the pumps and check both that they are calibrated for liquid measure and that the gasoline falls within the acceptable temperature range (because warmer gasoline occupies a greater volume).

As soon as there's a law about how to calculate square footage there will either be an agency to do the calculate the square footage, an agency to enforce it, or both. Oh, and some sort of tax/fee levied against commercial land-lords and the possibility of lawsuits all around

You'd prefer it to be legal if your gallon of gas only actually contained 3/4 of a gallon?

One little thing like this isn't a huge barrier to entry, but a hundred little things like this make a whopper of a barrier to entry.

The "little things" involved in setting up a restaurant are in totality encyclopedic, and yet mom-and-pop teams start restaurants every day in the US.

if you worry about what laws you might be breaking every time you want to do something, you'll never get anywhere. i suspect that most new restaurants are in violation of dozens if not hundreds of laws, but in reality they either aren't enforced or the owners are given an opportunity to fix whatever is wrong without penalty. follow the laws you know, don't go looking for ones you might be breaking, and when the government tells you that you're breaking a law remind them how many people you're employing.

You're probably right in some sense, but there are many laws --- liquor licensing, health inspection, and employment, in particular --- that are actively enforced and a day-to-day reality for restauranteurs.

The money in commercial real estate is in larger projects.

Govt gets more involved as the amount of money goes up.

The NYC govt doesn't much care about a small deli. It gets seriously involved if you're developing a whole block, or trying to build a wal mart.

You are reading it backwards. What I wrote is (rearranged for those with weak comprehension):

"Most barriers to entry are created by government regulation."

I did not say:

"Most government regulation creates barriers to entry."

From what I hear, commercial real estate is actually fairly easy to get into if you have the capital required--a lot for a person, but small compared to many other lines of business. One sufficiently intelligent person can certainly do it (I know one).

But I think it suffers a different kind of barrier to entry. It's an unsexy line of business, and for people who want to own property it has to compete with mindshare for the far more familiar field of residential property management. So you don't see the average Joe thinking he can buy an office building and make it profitable--what does Joe know about office buildings, compared to houses and apartments?

Oligopolies, which are dependent on a limited number of competitors, are ripe for corruption, collusion, and cooperative behavior. This is pretty much exactly why the US has antitrust law. Its history is an interesting read on wikipedia if you have the time.

In exactly what sense is commercial real estate an oligopoly?!

Used car dealers, real estate agents, building contractors, even pool cleaning services, whatever: Whenever I hear something or see something questionable or confusing in a contract or agreement that's explained to me as "boiler-pate" or "industry standard", I now just assume that its institutionalized dishonesty designed to screw me and give it an extra careful look.

Like the subject of the article, I think this is a kind of low-grade dishonesty. Annoying but basically how people a living.

I'd see really high-grade dishonesty in the entertainment industry, the gambling industry, in defense contracting or oil and extractive industries.

These are the industries that occur to me who wield monopoly power and/or buy governments.

Why is this perfectly reasonable, civil comment being downvoted?

>>>The airline industry is also clearly trending in this direction, as is higher education. Once an industry is at the bottom of an ethical slope, it is ripe for disruption by young companies that can sell through an honest, straightforward process.>>>

Sometimes I hope that companies like YC will disrupt the higher educational system in the US.

Going through YC is a much more strait forward process than education. The process is essentially join YC and work your ass off to make yourself a job.

This makes a lot more sense to me than, pay a bunch of money for college, learn a bunch of random junk, get a degree after a set period of time, then show that degree to people who will hopefully be impressed and possibly give you a job.

While I do think that higher education needs an overhaul, the larger problem is that HE is too often misunderstood. It's not a place where you learn skills that explicitly help you get a job; that's called vocational training, and a whole bunch of places do that extremely well. Hell, if all you're looking to do is work, you probably don't need college at all. Zoho's been hiring kid straight out of high school, with no discernible difference in productivity with their college educated counterparts (http://blogs.zoho.com/general/how-we-recruit-on-formal-crede...).

HE is a place where you go to interact with people and ideas fundamentally different from what you know, receive mentoring on how to consider such ideas, and how to create those ideas on your own. It does not claim to make you a smarter individual, and its value is largely dependent on your own drive to make the experience a success. In essence, it is exactly the same as YCombinator - even in the obfuscated and oft frustrating admissions processes, which is what I believe the article refers to.

What you are describing is a finishing school for the rich, which is what higher education used to be, a long time ago. That is no longer true.

If you want a white collar job in the US, you must go to college. Yes, there are some outliers, but having a degree is damn close to a hard requirement.

Pretending that is no longer true and indulging the liberal arts fantasy just makes the problem worse. There are too many kids who come out of college with debt and a degree in not having people take them seriously.

Turning universities completely into vocational schools seems like it'd have a number of downsides though. The idea that students should be well-rounded and that it's good for society for educated people to have some basic core knowledge isn't only a "liberal arts fantasy", but also a "science fantasy". If you're training people strictly vocationally, not only humanities cores, but also science cores should go, or at least both should be greatly cut down to only those students who specifically need a particular class for their future careers (e.g. maybe CE students will still take intro physics as a prereq for semiconductor physics, but CS students would no longer take Physics 101, or Bio 101, or Chem 101, or any math classes not strictly needed for their CS training, etc.). If you wanted to be really hardcore about it, you could even assess classes based on their predictive earnings power, so if Physics 101 doesn't produce measurable gains in its graduates' earning power within 10 years, axe it.

Why can these students not have equivelent "Physics 101, or Bio 101, or Chem 101" within a highschool curriculum?

I think there's truth in both these points. That is, some of the vast difference in unemployment between college graduates and those without right now is just due to hiring managers (who are largely college graduates) being more comfortable with the sort of person who has gone to college. Part is due to the more advanced skills required in the modern American economy.

Regardless, this bad recession has dramatically underscored the value of college experience as an important thing for someone who places even a mild value on lifestyle security. Or to put it another way, it is a huge risk to bet that in the future, college experience will stop being seen as important. You might be right. But if you aren't, and you experience misfortune, your expectations are going to be much better with a college degree to wave around than without.

I don't disagree with you; in fact, it's the hiring manager's misunderstanding as much as the prospective student's.

The Bachelors is required simply because it's an easy screening mechanism; the colleges have already whittled the list down to a more manageable size for the manager to go through. It used to mean that a person had an interest in learning beyond what was required, which was nice for jobs. Now it's just that their parents/friends/teachers have told them to go.

Really I'm saying simply that people are expecting and demanding the wrong things out of a liberal arts (traditional definition) degree. Most of the time what they'd really want is a vocational degree, or at least something more similar to what the English do with law school, where you enter directly out of high school.

There is a difference between vocational school where you learn how to get a job and YC where you learn to create an expandable company.

That is quite idealistic.

Now we only need legislation to mandate this.

Rather than an ethics problem, this seems like a unit of measure and communication problem.

The comparison to higher education is apt. Prices at community colleges (and many universities) are set in dollars per credit hour. Credit hours, though, aren't the same as clock hours. I taught a three credit hour class that met three times weekly and lasted fifty minutes a session. The school, naturally, advertised this discrepancy well in advance of taking payment. (I do wonder whether there's any case law about that.)

It seems that office managers are setting prices in dollars per real-estate square foot, which is a different unit of measure from the commonly understood measure of area. Maybe they should advertise "real-estate square feet of office space" instead of "square feet of office space" to eliminate the confusion that comes from overloading that phrase?

(Whether this sort of linguistic imprecision and flux is a good idea is a separate argument, to be sure. This sort of shenanigans increases the burden-- and therefore the cost-- for people trying to purchase a good or service.)

Credit hours are "points towards graduation".

This seems to be due to asymmetric information between seller and buyer. The buyer can not measure exactly the true area, which only the seller knows (buyer doesn't have access to the standards, the criteria that have been used, doesn't understand them, doesn't have time or is physically not allowed to measure it.)

No. The buyer absolutely can measure the exact area, and can probably do so with a children's plastic ruler, since as near as I can tell nobody rents office space anymore without looking at a PDF of a floorplan first.

Makes sense, but then I don't understand how owners get away with the practices they describe in the article.

Because rsf includes building common spaces, which tenants are in fact renting. This is not complicated.

Yes, it does appear plain that this "common spaces" business is a fig leaf that covers annual rent increases. And yes, that's dishonest. But it's of no practical import, since every tenant knows their rent is going up one way or another once their lease expires.

We're really making a big deal over whether "rent increase" is called "rent increase" or not.

You mean that when the buyer does a walk-through before signing a lease, he or she is not allowed to bring a tape measure?

I'd sue in a minute if someone tried this []. Seriously. They will not be delivering the area you pay for.

[] Well ok, I would measure the area myself to find that the area actually differed from what I was paying for.

Seriously, why isn't this litigated so that it becomes a uniform part of commerce/law?

So in short, it's a slippery slope but no one step looks particularly bad to the participants, but after a while, everyone else see's you playing in the mud at the bottom.

Apart from the semantic goofiness, how is this worse than the landlords simply raising the rent every year (which is clearly not unethical)?

What's not worse about it?

If a landlord raises the rent on a 400 square foot space, they're simply asking more money for it the same space. If a tenant wants to pay that price for 400 square feet, that's his choice.

On the other hand, if the landlord claims it's 420 square feet, no matter how much he charges per square foot, the tenant is paying for something that simply doesn't exist.

Landlords can phrase things in terms of $/rsf, but the lease specifies a monthly flat rate. It can't change until the lease expires. What am I missing about the bind this puts tenants in?

I get the semantic dishonesty, but not the practical issue.

Searching for offers, as explained in the article. The nonexistant square feet put the offer undeservingly high in the sqft/$ order which is what many tenants search by.

That's silly. It's unethical like SEO is unethical: annoying, but hardly damning. There must be something more to it than that.

Yeah, but the SEO might cost you a click while such an offer might cost you a physical visit to a crappy office.

Again, this is pretty silly. If an agent led me into a bait-and-switch situation (ie, something advertised as 1400 rsf turns out to be a closet), I'd simply never use them again.

In practice, though, total moot point: the last time I looked for office space (earlier this year), the first agent I called sent me scaled floor plans for over 100 places. There were rsf numbers to go with them, but the dimensions of every office were right there.

SEO is not inherently lacking in ethical fortitude - I find that suggestion offensive. You might as well say all lawyers are corrupt or all financial advisers are swindlers.

Lying about the objectively measurable characteristics of your product is wrong.

This is the #2 result on the serp for [how to cook a great tasting steak]:


"Take your fork and jab the steak with it. Don't jab it so hard that it gets stuck in the steak, though. Keep tendorizing the steak until it is like pudding. Make sure it stays together, though."

Sorry I managed to offend you, but you work in a field that tends towards grey areas, so maybe invest in some thicker skin. (Hey, look at my field!)

Every time I read Wikihow and eHow, I think "I am so glad I wasn't a credulous Middle American retiree googling their medical symptoms.". If your chest hurts, apply honey with Tylenol crushed up into it!

(Non-SEOs may not realize, but health is in the top five categories for search volume on some networks.)

>Sorry I managed to offend you ..

I find it offensive because you're wrong and the people here are modding you up. I'm not crying into my soup or anything.


Thanks for your caring comment though.

There are mechanisms by which a landlord can raise a rent inside the bounds of a lease. In my experience, multi-year leases have "elevator clauses" that either allow for pre-negotiated upwards adjustments in price based on property tax, CPI, or other measures.

What if I paid for 420 sq. feet and actually needed 420 sq. feet, not 400?

I assume you've rented in NYC. We do, and in Chicago. This is not complicated; landlords will tell you usable sqft, and give you accurate floorplans.

Besides, who rents based on a sqft number? You always visit and work out the space before signing. It's not eBay!

Don't you get to sue them for fraud if the area figures have been inflated by 5% to purposefully deceive?

It is worse because it involves deceit.

I think people are really just upset because landlords don't want to call "rent increases" "rent increases", and that this is mostly a nerd-brain problem. That's not an insult; I'm the proud owner of one of those weird nerd-brains. Query!

The hard drive industry also has this problem. They adopted an incorrect yet defensible definition for 'MB', 'GB', etc. The result is that consumers and engineers have to multiply the advertised MB by 95%, GB by 93%, TB by 91%, PB by 89%, EB by 87%, etc. This will only get worse as storage sizes increase.

In this case they are using for its profit the difference in GB and GiB. They do not make the GB smaller each year, or add the caches to the total size.


Probably in this case it would be enough to require inclusion of quotient between exclusive and total space in all advertisements and agreements.

There should be some bounds on advertisement. Can commercial lie about facts? Can it promote alcohol? Can it promote medication without obligatory warning?

I think the real problem here is that the owners and leasers of an office space are the ones who are responsible for reporting the "square feet". The system would work just fine if an unbiased third party did the measurements.

Unfortunately, there's no incentive for the landlords to do this. That just leaves legislation or the sudden emergence of ethical competition. Oh, and don't forget that most of the larger commercial land lords have lobbying arms (at a local level at the very least) in order to oppose just that sort of thing.

This need not be legislated. If commercial renters were sufficiently biased in favor of places with an objectively determined square footage rating, landlords would provide it regardless of the lack of a legal requirement. The key is getting demand started.

This is currently an inefficient market, and more information would substantially improve it. And objectively measuring square feet is not particularly difficult or expensive.

What will probably happen is, eventually the misrepresentation of square footage will get so egregious that there will be a movement by commercial renters toward some sort of third-party measurement. The landlords will go along, because they want to rent their office space.

That's a reasonable suggestion if you're willing to wait a couple of generations (or potentially forever) for any improvement in the situation.

The first complication with this suggestion is that in cases of exploitation of information asymmetries like this, you don't know what you don't know. It's nice that this issue is getting a little public scrutiny here now, but one has to wonder how long it's been going on? And getting an issue like this more widely recognized, to a point where demand for transparency would be self-sustaining, is likely to require a lot of someone's time an effort to bootstrap. If a subset of buyer/leasers were to take this on openly, real estate owners would almost certainly seek to punish them directly, in addition to mounting their own counter-education campaign >>> politicization. Alternately, some third party might sense a commercial opportunity here, e.g., to provide public education and neutral measurement services -- but that's the same sort of business model that makes "trial lawyers" so popular...

It's unrealistic to assume that commercial renters are going to be broadly responsive to individual demands for transparency before the overwhelming majority of real estate seekers permanently embrace transparency as a make-or-break requirement for buy/lease decisions.

I think http://en.wikipedia.org/wiki/Megacorporation are doing more harm than good to mankind in the long term.

Don't forget to add title insurance to the list


Is this all commercial real estate in the world, or just NYC?

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