Sometimes, fiction can be used to effectively communicate ideas from economics. Other times, the economics you see in fiction make no sense. This post is another example of the latter, from a fictional series I generally like – Star Trek. (For the record, Deep Space Nine was objectively the best Star Trek series.)
One of the distinctive traits of the Star Trek universe is how, among all of the most prominent and regularly featured species, it seems like only humans are multifaceted. Every other of the major Star Trek species is fundamentally built around a single trait, taken to extreme degrees. Warrior culture is a component of humanity’s culture, but it is the entirety of Klingon culture. (How Klingons ever developed faster than light travel is a mystery to me.) Logic, too, is part of how humans operate, but it is the end-all-be-all for Vulcans. Both Cardassian and Romulan society seem to be built entirely around militarism. And Ferengi are supposed to be a society entirely dedicated to the relentless pursuit of profits.

The Ferengi are guided in their behavior by The Rules of Acquisition. As the name suggests, this is a list of rules that are supposed to help a Ferengi acquire as much wealth as possible. But in reality, the actual rules are a terrible guide to how one should run a profitable business. To be fair, a few of the rules are pretty sensible. “Small print leads to large risk” seems like a decent rule of thumb. So does “Never gamble with a telepath.” (It’s also advice I follow by default, because for me that rule just ends at the second word.) But overall, any real-world business that tried to operate by these rules would quickly fail.
The first (and presumably, most important) of these rules is “Once you have their money, you never give it back.” According to this rule, the way to maximize profits is by having a strict policy of no returns and no refunds. But compare that to what we see in the real world. Huge – and hugely successful – companies not only don’t follow this rule, they often go out of their way to highlight how accommodating their return and refund policy is. Online brands that want to attract new customers often bend over backwards to reassure customers that trying the product is risk-free – if you don’t like it, you can easily return it, with the company paying for the shipping costs to have it returned. If you were looking to buy a product from two different companies, with one company declaring “once we have your money you’ll never get it back” while the second company says “If you’re not 100% satisfied you can get a full refund”, which would you choose? Clearly the second is a more attractive prospect. Following the first rule of acquisition would be shooting yourself in the foot.
The fundamental mistake in thinking behind most of these rules is a failure to appreciate the difference between finite and infinite games. Finite games are close-ended with a specific, final “winner.” Infinite games are not literally infinite – what distinguishes them is that they are open-ended with no defined final state, and are meant to be carried on indefinitely. Or, as James Carse put it, the point of an infinite game isn’t to finish, it’s to keep the game going. In this sense, operating a successful business is an infinite game rather than a finite one. A successful business isn’t one that reaches some pre-determined end point, at which point business activity ceases. A successful business is one that is able to operate continuously over time. Perhaps in a finite game, consisting of a single interaction, the first rule of acquisition might yield better results. But for an infinite game, it’s much better to have a generous refund policy.
Thomas Sowell called this error “one-stage thinking” in his book Applied Economics:
When I was an undergraduate studying economics under Professor Arthur Smithies of Harvard, he asked me in class one day what policy I favored on a particular issue of the times. Since I had strong feelings on that issue, I proceeded to answer him with enthusiasm, explaining what beneficial consequences I expected from the policy I advocated.
“And then what will happen?” he asked.
The question caught me off guard. However, as I thought about it, it became clear that the situation I described would lead to other economic consequences, which I then began to consider and to spell out.
“And what will happen after that?” Professor Smithies asked.
As I analyzed how the further economic reactions to the policy would unfold, I began to realize that these reactions would lead to consequences much less desirable that those at the first stage, and I began to waver somewhat.
“And then what will happen?” Smithies persisted.
By now I was beginning to see that the economic reverberations of the policy I advocated were likely to be pretty disastrous – and, in fact, much worse than the initial situation that it was designed to improve.
Casting aside the few sensible bits of advice in the Ferengi Rules of Acquisition, these rules all immediately fail if you view business as an infinite game, as an ever-continuing process rather than a static interaction. If you view the world in static terms and entirely through the lens of one-stage, finite games, you might think the Ferengi rules would lead to profit maximization, and that businesses will all behave this way if given the chance. But when you cease to think in static terms and think dynamically, things look very different.
Think of a company that operated by rules like “A deal is a deal, until a better one comes along” and “The flimsier the product, the higher the price” and “Once you have their money, you never give it back.” This is a company that will renege on their contracts, sell overpriced junk, and decline all returns and refunds. As soon as you ask “And then what will happen?” you can see why any company that wants to be successful and maximize their profits would commit the Ferengi Rules of Acquisition to the flames.
READER COMMENTS
Dylan
Oct 8 2024 at 9:54am
Good post, but to be fair to the Ferngi doesn’t much of their business look more like a finite game? I haven’t watched much of DS9, but in ST:TNG I got the impression that they were operating in far off space stations and their customers were likely to only pass through once. They seemed reminiscent of roadside diners that catered to motorists in the days before fast food chains, the customer would rarely return for a second visit, so there wasn’t much incentive to focus on quality.
Kevin Corcoran
Oct 8 2024 at 10:10am
Hey Dylan –
In general, even Ferengi business was run as an infinite game. In DS9, Quark ran a bar and gaming operation that did, as you say, operate on a far off space station and catered to customers that were passing through, but he also had a significant fraction of his business dependent on a more permanent customer base, such as the station staff and the local Bajoran population. And the Ferengi are explored in much more depth in DS9 – in TNG they were initially tried out as an attempt to replace Klingons as the omnipresent antagonist from the original series, but the writers could never make that stick.
As one example, in an episode of DS9, Quark laments the greater success of his cousin, who happens to own his own moon, and who runs a business as a weapons dealer. That episode establishes his cousin’s business is heavily dependent on repeat customers. Other episodes also establish Ferengi frequently operate businesses that are in fixed locations, with an established, repeating customer base.
Dylan
Oct 8 2024 at 10:37am
Fair enough! It did seem like the Ferengi were bigger characters in DS9 and I’m not surprised that the writers would have half baked ideas about economics, that’s pretty much universal it seems in entertainment.
Funnily enough, I did just buy a shirt yesterday from a store in the neighborhood that had the equivalent of a “Once we have your money, we’ll never give it back” sign by the cash register. By the number of people I see carrying their bags on the subway, they seem to be doing quite well despite this policy. I think the overall value prop for the customer is good, despite one policy that can be seen as customer unfriendly.
Richard W Fulmer
Oct 9 2024 at 11:45am
Even if Quark’s bar catered to one-time customers only, could he still cheat them and expect to stay in business? Wouldn’t his customers post unfavorable reviews on the interstellar version of Yelp?
Craig
Oct 8 2024 at 12:04pm
Star Trek at times portrayed a ‘post-scarcity’ society and for plot purposes the show would seem to arbitrarily note some scarcity from time to time. In Star Wars one sees droids but somehow Daisy is scavenging on some Third World desert planet but the economy supports interstellar travel.
steve
Oct 8 2024 at 12:23pm
Sowell’s argument leads to adherence to the status quo. Pick a point in time and make sure nothing ever changes. You dont have to imagine what happens after that.
Steve
robc
Oct 8 2024 at 12:40pm
Not really, because its already happened. Politicians regularly pass laws that seem good at the first order but have bad second order effects and awful third order effects. Unwinding those laws is a net improvement and moving away from the status quo.
However, I do think we are far past the point of diminishing returns on regulations to the point that almost any new regulation will be net negative. So, yes, the status quo would be better than adding on. But that is why I stressed rolling back instead of adding on.
I am not an anarchist, some laws and regulations are good. But they need to be so few in number that they don’t have entangling interactions.
Jon Murphy
Oct 8 2024 at 1:09pm
I don’t follow your argument. Stagnationists often commit “one-stage” thinking (see, eg, the recent port strike fighting against automation or protectionism).
All Sowell’s teacher’s point is that one needs to think things through. Time matters, after all. We should think about the long and the short term consequences of various actions.
Dylan
Oct 8 2024 at 2:52pm
I think it is important to remember that the level of uncertainty goes up with each “and then what.” I think Steve might have been alluding to a decision paralysis that could come with trying to think through all the unintended consequences that could lead to a bias against change. It’s important to think through the consequences, but at some point you have to stop and act, even though you haven’t predicted all of the consequences of that action yet.
Kevin Corcoran
Oct 8 2024 at 3:42pm
This is true – if decisions were made only when obtaining absolute certainty about all possible future consequences, then no decisions would ever be made. But absolute certainty about all possible future outcomes is not at all close to what’s being called for by Sowell. There’s a wide gulf between what you describe as “a bias against change” and Steve’s contention that taking the time to ask what happens next ultimately means “nothing ever changes” or that it “leads to adherence to the status quo.” That’s a non sequitur.
Consider Chesterton’s Fence, which itself is (wisely) meant to create a bias against action:
Chesterton here is clearly not calling for everything that exists to remain as it is simply because it exists. He’s only calling on people to make sure they actually understand why things are as they are, before they go about trying to change things. Much like how Adam Smith’s presumption of liberty is a defeasible presumption, both Chesterton’s fence and “think about what happens next” are defeasible as well.
Dylan
Oct 8 2024 at 5:39pm
Absolutely. I agree with everything you said here, and temperamentally I’m much closer to Sowell (or Smithies) on this than I am to Steve. But, I also work with startups for a living where the mantra of move fast and break things is only partially caricature. One of the reasons this works reasonably well is both the cost of any single failure is relatively low, you have pretty quick feedback loops that let you know when something isn’t working, and most crucially, your incentives to try something else when the first 3 things fail is incredibly high. Some of your recent posts have highlighted how hard it is to kill a government program once it starts, even if it long outlived its usefulness. You and others I think rightly argue that we should be cautious about implementing new programs given this reality, even if on the surface they seem worthwhile. I’m trying to think about the problem in the other way; how do we change the incentives so that there isn’t a reason to keep a program long past its sell by date (soon to be illegal in California) and instead to keep experimenting and pivoting programs until we find things that work better than the status quo.
Kevin Corcoran
Oct 8 2024 at 3:07pm
Um…I don’t follow. How exactly do you get from “it’s important to consider the long term consequences of a policy change, not just the short term effects” to “therefore, nothing should ever be changed.” There’s not just a fine line between the two ideas, there’s a Great Wall of China with armed sentries posted every twenty feet separating those two ideas.
James Newlin
Oct 8 2024 at 11:50pm
Riding on the back of DS9 to get clicks? The grand nagus would be proud.
Kevin Corcoran
Oct 9 2024 at 9:32am
Well, maybe he would be proud as he was at the beginning of DS9. But by the time the series ended, he might have changed his tune…
Jim Glass
Oct 9 2024 at 2:23am
Iterated dealings over an indefinite horizon are key not just to successful businesses and economies, but to countless other processes all around us. Take justice systems, which history shows develop through iterated bargaining among the power elites at the top of societies, then spread downward.
By rational self-interst the strong and rich take what they want from the weaker and poorer by violence and threat of it. (“The strong do what they will while the weak suffer what they must”, as the Athenian democracy told the Melians they were extorting.) But the strong can’t do that to each other without great risk, and can’t get rid of each other. This puts them into an iterated game with each other. So they create fair rules and laws for dealing with each other while extorting everyone else. Mob families do this while extorting the public. In the Roman Republic the original mob families, er, Senatorial class, created the constitution so admired by our own Founders for themselves while sticking it to the plebes until they revolted. In the middle ages warlords, er, Kings and Nobles, created the roots of our own law for themselves while extorting the serfs and peasantry. An amusing illustration is in the film Death of Stalin. As Zhukov and the Politburo, mass killers all, take down the infamous Beria, Malenkov protests: “This is madness, he deserves a trial …. No, no, he deserves a fair trial. He’s one of us.”
The same reality is with us here and now. As a NY lawyer I can say by my experience that the state’s basic trial-level court (confusingly, “State Supreme”) is as clean, honest, fair and efficient as one can plausibly expect. But Family Court, in my one appearance there, was a horror. It was dirty, disorganized, the judge in my case showed up an hour late carrying two shopping bags, and told the dozen-or-so lawyers and litigants waiting for her, “I can be late, you can’t.” I looked agape at my co-counsel who worked there regularly, and he said “Welcome to my world.”
Why the difference? In State Supreme the businesses, insurers and lawyers who appear there do so over and over, and nobody knows who will have the strong or weak hand in the future, so they all want a process that is fair and efficient. If Judge Two-Bags ever showed up, they’d all complain right away to the higher powers and she’d be gone. But Family Court is one-and-done. Everyone’s attitude is: “let’s get this over and never come back.” (That was mine.) There’s no constituecy to complain. So it is free to serve as a dumping ground for political patronage and the system’s hacks. That’s my opinion and I’m sticking with it.
Here’s a quite interesting video about what iterated, indefinite-horizon games “Reveal About Life, The Universe, and Everything” It’s moderately optimistic for the human race!
Todd Ramsey
Oct 9 2024 at 2:17pm
I believe retailers’ current generous return policies are part of a finite game strategy.
When the consumer is making the decision whether to purchase an item, the consumer faces substantial uncertainty about whether the item will perform as expected. By offering easy returns, the retailer eliminates the consumers’ risk from that uncertainty. The consumer, facing less risk, is more likely to buy even in the first iteration.
Ken in MIA
Oct 9 2024 at 2:48pm
Easy: A peaceful interstellar explorer landed on their world in search of knowledge and friendship. The Klingons murdered the explorer and took the ship.
Devin Serpa
Oct 9 2024 at 11:54pm
Sorta, it was actually said the Klingons took advanced technology including warp from the invaders known as the Hur’q.
Monte
Oct 9 2024 at 7:15pm
Fascinating! 🖖
Aren’t the Borg a species possessed of multifarious traits whose singular objective is to achieve perfection through the assimilation of all cultures, knowledge, and technology? And haven’t there been many successful businesses who achieved dominance by hostile takeovers?
Finite games serve their purpose.
Devin Serpa
Oct 9 2024 at 11:51pm
Klingons didn’t develope faster than light travel, it was taken from the Hur’q invaders.
Re. Vulcans: Logic is the begining of wisdom, not the end.
Cardasians are fascists with state control. They focused on growth of the state through war.
The Romulans are a representative democracy similar to the Romans, hence the name. They focused on growth of the empire through war.
The Ferenghi were materialistic. You’d know this if you have listened to the Great Material Continuum.
Pete Smoot
Oct 10 2024 at 11:46am
I think you’re too hard on the RoA. Some of them are sound business advice:
Good customers are as rare as latinum. Treasure them.
Never spend more for an acquisition than you have to.
A wise man can hear profit in the wind.
War is good for business (well, some of them, terrible for others). So is peace.
Some are just good advice in general:
Never make fun of a Ferengi’s mother (which is just being polite, ain’t it?)
Free advice is seldom cheap
Never have sex with the boss’s sister
And my personal favorite:
It never hurts to suck up to the boss.
To be clear, I get your point and agree with it. You just can’t expect to invoke Star Trek and not start a nerd flame war :).
Gerhard
Oct 12 2024 at 9:27am
The article is economically wrong, because it confuses a special case with a general case. Namely, a generous return policy works in our society because a large share of customers appreciates this and only a small share will abuse it, e.g. buy shoes, wear them for a special occassion, then return them. But if many/all people will abuse it, a generous return policy will not be optimal. So if you start out in a low trust society, a no return policy might very well be the most profitable and be a useful rule.
More importantly, the Rules Of Acquisition are clearly a religious text, not just a how-to guide. Rule #1 is as much a value statement (be ruthless, not nice) as much as advice for business.
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