Working as a freelancer, I often see strange requests from my customers, some of which can negatively affect my daily work¹, and others trying to set some sort of control. I usually encounter those things during preliminary negotiations, so it's easy enough at this stage to explain to the customer that I do care about my work and productivity and expect my customers to trust my work.
Things were much harder² on a project I just accepted, since it's only after the end of the negotiations (the contract has already been signed and did not mention anything about video tracking) and after I started to work on the project that my customer requested that I record a video of all I do on my machine when working on his project, that is, a video which will show that I move the cursor, type a character, open a file, move a window, etc.
I work in my own company, using my own PCs.
I answered to this customer that such request cannot be accepted, since:

Hundreds of hours of work on a dual-screen PC will require a large amount of disk space for the recorded videos. If I don't care about space, I do care about this customer wasting my bandwidth downloading those videos.
Recording a video can affect the overall performance and decrease my productivity (which is not actually true, since the machine is powerful enough to record this video without performance loss, but, well, it still looks like a valid argument).
I can't always remember to turn the video recording on before starting the work, and off at the end.
It may be a privacy concern. What if I switch to my mails when recording the video? What if, to open the directory with the files about this customers project, I first open the parent directory containing the list of all of my customers?
Such video cannot be a reliable source to track the cost of a project (I'm paid by the hour), since some work is done with just a pencil and a paper (which is actually true, since I do lots of draft work without using the PC).

Despite those points, the customer considers that if I don't want to record the video, it's because I have something to hide and want to lie about the real time spent on his project³.
How to explain to him that it is not usual practice for freelancers to record videos of their daily work, and that such extravagant requests must be reserved for exceptional circumstances⁴?

¹ The most frequent example is to be requested to work through Remote Desktop on a more-than-slow server which uses a more-than-slow Internet connection, or to be forced to use outdated software such as Windows Me without serious justification such as legacy support.
² In fact, I already did a lot of management and system design related work, which is essential, but usually misunderstood by customers and perceived as a waste of time and money. Observing the concerned customer, I'm pretty sure that he will refuse to pay a large amount of money for what was already done, since there is actually zero lines of code. Even if legally I can easily prove that there was a lot of work undertaken on the design level, I don't want to end my relation with this customer in a court.
³ Which is not as risky as it could be, since I gave this customer the expected and the maximum cost of the project, so the customer is sure to never be asked to pay more than the maximum amount, specified in the contract, even if the real work costs more.
⁴ One case when I effectively record on my own initiative the video of actions is when I have to do some manipulations directly on a production server of a customer, especially when it comes to security issues. Recording those steps may be a good idea to know precisely what was done, and also ensure that there were no errors in my work, or see what those errors were.
First update
Since the question attracted much more attention and had many more answers than I expected, I imagine that it can be relevant to other people, so here is an update. First, to summarize the answers and the comments, it was suggested to (ordered randomly):

Suggest other ways of tracking, as shown in Twitter Code Swarm video, or deliver a "short milestone with a simple, clear deliverable, followed by more complex milestones", etc.
Explain that video is not a reliable source and can be faked, and that it would be difficult to implement, especially for support.
Explain that video is not a reliable source since it shows only a small part of the work: a large amount of work is done without using a computer, not counting the extra hours spent thinking about a solution to a problem.
Stick with the contract; if the customer wants to change it, he must expect new negotiations and a higher price.
Do the video, "but require that the customer put [the] entire fee into an escrow account", require a lawyer to video tape all billable time, etc., in other words, "operate in an environment void of trust", requiring the customer to support the additional cost.
Search for the laws which forbid this. Several people asked in what country I live. I'm in France. Such laws exist to protect the employees of a company (there is a strict regulation about security cameras etc., but I'm pretty sure nothing forbids a freelancer to sign consciously a contract which forces him to record the screen while he works on a project.
Just do it and send the videos: the customer will "watch a few ten second snippets of activity he won't understand", then throw those videos away.
Say no. After all, it's my business, and I'm the only one to decide how to conduct it. Also, the contract is already signed, and has nothing about video tracking.
Say no. The processes and practices I employ in my company can be considered as trade secrets and are or can be classified.
Quit. If the relation starts like this, chances are it will end badly sooner or later. Also, "if he's treating you like a thief - and that is what he's suggesting - then it's just going to get worse later when XYZ feature doesn't work exactly the way he envisioned".

While all those suggestions are equally valuable, I've personally chosen to say to my customer that I accept to do the videos, but in this case, we must renegotiate the contract, keeping in mind that there will be a considerable cost, including the additional fee for copyright release. The new overall cost would be on average three times the actual cost of the project. Knowing this customer, I'm completely sure that he would never accept to pay so much, so the problem is solved.
Second update
The customer effectively declined the proposal to renegotiate the original contract, taking into account the considerable additional cost. He agreed to continue the project without video recording.
The project continued without video recording. Eventually, the customer seemed satisfied by the final result and cost, so the video recording was not mentioned again.

(Or, the flip-side of my previous advice...)

You stop giving protestations, and say yes.

"Yes, I would be happy to write a new contract for these additional deliverables.  Project-complete tutelege in my proprietary tradecraft is valued at (value of my projected income for the next $N years).  There will also be a licensing fee $Y, for physical file ownership rights.  If you would like to also own the video's content, I'll get back to you shortly with an additional fee for copyright release."

Lest you think that preposterous: seriously, what price makes it worthwhile to risk your business?


A competitor could use that video to criticize, mimic, or undercut your practices.
The client could edit it to make you look dishonest.
You've sacrificed the potential to monetize your business through video tutorials if he chooses to post excerpts of this one for free (or heck, what if he sold them?).


Value of a work product is not equal to the value of (work product + expertise + work processes)

An employer gets to own and direct all of these.  A client only gets to ask "Do you offer__, and if so what do you charge for it?"

So, yep, these are reasonable terms for accommodating an unreasonable request.

BUT unless he accepts those terms and without further howling, I still say a flat "no" is the most persuasive you can possibly be that what he wants is infeasible.
