Many thanks for all the good suggestions regarding the return puzzle. Here are just a few of the many ideas that I received. My apologies to those not mentioned by name.

Mark Garbowski stated one thesis very nicely:

Demand forced the Sears catalogue to offer easy returns because people were buying things they could not see or touch. Back in 1895, I suspect this was a pretty unusual experience. If you go to a small local shop and know the owner, you probably have a good opportunity to inspect the merchandise before purchase, but this was not possible with mail order. Generalizing, I would opine that the combination of a significant rural population spread over a vast geographic landmass, together with improved communication and transportation, allowed those rural people the ability to purchase (at least occasionally) high quality, exotic (meaning from far away) goods to a degree that was never before possible, and never duplicated in Europe. Before a consumer would send a check or hard cash in advance of receiving an item he or she had never seen or touched, it became necessary to develop a good return policy as insurance.

I suspect that the economies of scale you discuss allow the insurance to be economical, but did not drive its creation. I believe it is a demand side creation, but based on historical circumstances, and not current class or income circumstances. Once the demand side forced mail order retailers to offer it, consumers discovered how much they liked it and forced other retailers to follow suit, even though it was not as necessary.

Ian MacCleod and others mentioned that retail trade in Europe is organized more often on the boutique model than on mass retailing. Salespeople don’t turnover as often as in the U.S., they spend more time with the customer and they personally represent the product to a greater extent. As a result, returning a product can be seen as an affront.

Adam Shostack writes that the credit card companies often reward firms that offer easy return policies because it is less costly than handling a billing dispute. Credit card usage is much lower in Europe thus supporting the theory.

Tim Worstall points out that there are legal restrictions in much of Europe on things like “as is” sales. Similarly, there is a large wholesale market for “as is” items in the US but not in Europe. Both of these factors make offering easy returns more costly. Of course, these differences may be as much “caused by” as “causes of” differences in the return policy but its useful to remember that there is a whole web of practices involved with easy returns.

‘Bananas must be free from abnormal curvature of the fingers’ says Commission Regulation 2257, Quality Standards for Bananas.”

That’s courtesy of the EU, hat tip to the Adam Smith blog.

Short parts of this Mises classic have been put on-line, courtesy of the Mises Blog.

This has long been my favorite Mises book, and my favorite Mises title, here is one juicy passage:

There has never been an era in which the many were pre­pared to do justice to contemporary art. Reverence to the great authors and artists has always been limited to small groups. What characterizes capitalism is not the bad taste of the crowds, but the fact that these crowds, made prosper­ous by capitalism, became “consumers” of literature–of course, of trashy litera­ture. The book market is flooded by a downpour of trivial fic­tion for the semibarbarians. But this does not prevent great au­thors from creating imperishable works.

And how is this for polemic?:

John Ruskin will be remembered–together with Carlyle, the Webbs, Bernard Shaw and some others–as one of the gravedig­gers of British freedom, civilization and prosperity. A wretched character in his private no less than in his public life, he glorified war and bloodshed and fanatically slan­dered the teachings of political economy which he did not understand. He was a big­oted detractor of the market econ­omy and a romantic eulogist of the guilds. He paid homage to the arts of earlier centuries. But when he faced the work of a great living artist, Whistler, he dis­praised it in such foul and objurgatory language that he was sued for libel and found guilty by the jury. It was the writings of Ruskin that popularized the prejudice that capitalism, apart from being a bad economic system, has substituted ugliness for beauty, pettiness for grandeur, trash for art.

When was the last time you heard the word “objurgatory” used so effectively?

Mises was no paleo-conservative, rather he embodied the radical streak in classical liberalism at its best.

In his post on Medicaid (just below) Tyler writes “The fiscal burdens of Medicare are, by far, the biggest economic problem in today’s America.” Hmmm… might one even say that they are a big enough problem to make one rationally gloomy?

It’s much easier to return a purchase in the United States than in Europe. An old joke has it that Germans are very nice people until you try to buy something from them. Imagine then how difficult it is to return something in Germany. The no questions asked, easy return is not common in most of Europe.

It’s puzzling why this should be so. One explanation offered at lunch yesterday when I raised this question focused on the demand side. Incomes are lower in Europe, perhaps people of lower income don’t demand easy return policies. The theory here is a little odd – an easy return policy is a form of insurance and the poor should demand more insurance not less – but we do observe the poor buying less insurance in other areas so it’s not ruled out completely. The differences in return policy, however, are striking while the differences in income are modest. It’s not like we observe large differences in return policy across the U.S. states, for example, and Germany is among the richer countries in Europe. Return policy has also been relatively good in the United States for a very long time – going back at least to the 1895 Sears Roebuck catalog.

From the supply side the question becomes why is it cheaper for U.S. firms to offer easy returns than it is for European firms? I think part of the answer is suggested by that Sears-Roebuck guarantee. Retailers in the United States tend to be larger than in Europe and because of this they can take advantages of economies of scale both in insurance and in establishing a reputation for quality. European retailers are smaller and have greater monopoly power (even though there are more of them they have local monopoly power that the big boxes in the United States do not.)

If the supply theory is correct then multi-national firms that offer easy return policies in the United States ought to offer similar policies in Europe – the demand theory, in contrast, says that return policy should differ by country according to income. I bet, however, that Ikea offers easy returns in Sweden just as in the United States.

Email me if you have other ideas, experiences or evidence on this question. The return puzzle may seem minor but it has widespread implications. Return policy is not chosen alone but in conjunction with product quality. Easy return policy increases the incentive to produce high-quality products that consumers will not want to return and high-quality products reduces the cost of offering an easy return policy.