Crawl Across the Ocean

Sunday, July 03, 2005

The Efficient Society: Cooperation vs. Competition

Note: This post is a continuation of this post and this post.

Second note: This post doesn't really add much new to this excellent post from Andrew Spicer from over 2 years ago (which you really should read), but I wanted to write it all out in my own words to get a grasp on the ideas involved

Chapters 3 through 5 of 'The Efficient Society' all revolve around the concept of the Prisoner's Dilemma1.

From the wikipedia site on the Prisoner's Dilemma:

"The classical prisoner's dilemma (PD) is as follows:

Two suspects A, B are arrested by the police. The police have insufficient evidence for a conviction, and having separated both prisoners, visit each of them and offer the same deal: if one turns Kings Evidence against the other and the other remains silent, the silent accomplice receives the full 10-year sentence and the betrayer goes free. If both stay silent, the police can only give both prisoners 6 months for a minor charge. If both betray each other, they receive a 2-year sentence each.

Assume both prisoners are completely selfish and their only goal is to minimise their own jail terms. Each prisoner has two options: to cooperate with his accomplice and stay quiet, or to betray his accomplice and give evidence. The outcome of each choice depends on the choice of the accomplice. However, neither prisoner knows the choice of his accomplice. Even if they were able to talk to each other, neither could be sure that they could trust the other.

Now, let's assume our protagonist prisoner is rationally working out his best move. If his partner stays quiet, his best move is to betray as he then walks free instead of receiving the minor sentence. If his partner betrays, his best move is still to betray, as by doing it he receives a relatively lesser sentence than staying silent. At the same time, the other prisoner thinking rationally would also have arrived at the same conclusion and therefore will betray. Thus, in a game of PD played only once by two rational players both will betray each other and the world will become a place for monsters. Betrayal is their only rational choice.

However, if only they could arrive at a conspiracy, if only they could be sure that the other player would not betray, they would both have stayed silent and achieved a better result. However, such a conspiracy cannot exist, as it is vulnerable to the treachery of selfish individuals, which we assumed our prisoners to be. Therein lies the true beauty and the maddening paradox of the game.

If only they could both cooperate, they would both be better off; however, from a game theorist's point of view, their best play is not to cooperate but to betray. This treacherous quality of the deceptively simple game has inspired libraries full of books, made it one of the most popular examples of game theory and made some people appeal for banning studies on the game.

If reasoned from the perspective of the optimal interest of the group (of two prisoners), the correct outcome would be for both prisoners to cooperate with each other, as this would reduce the total jail time served by the group to one year total. Any other decision would be worse for the two prisoners considered together. However by each following their selfish interests, the two prisoners each receive a lengthy sentence."

Clearly, the outcome of the dilemma depends upon where on the axis running from perfect cooperation to perfect competition the people involved happen to be. If people always cooperate then prisoner's dilemmas have no impact at all. If people always compete then the prisoner's dilemma becomes inescapable no matter how obviously damaging it becomes.

Now consider the following two prisoner's dilemmas (both taken from 'The Efficient Society'.

Dilemma #1:
"Imagine a situation in which there are no police or security guards, and no official rules to prevent you from doing what you want. Everyone will therefore be responsible for his or her own protection. In order to guarantee your personal security, you might reasonably decide to carry a weapon. Let's say you have a choice between carrying a knife and carrying a gun. Your potential assailant will have the same choice. So if you do get attacked and need to defend yourself, the set of possible scenarios looks something like the following (in descending order of desirability):

1. You have a gun; your opponent has a knife.
2. You both have knives.
3. You both have guns.
4. You have a knife; your opponent has a gun.

Both of you will try to get your own number one, and as a result you will both get number three. Everyone will carry a gun. Thus the desire to achieve greater personal security has the effect of increasing the deadliness of any eventual conflict (and thus the overall level of insecurity).

Dilemma #2:
Suppose you and your competitor each are holding substantial quantities of some good. If you both charge six dollars per unit, buyers will purchase 100 units total, probably 50 from each of you. However, at a price of five dollars, buyers would be willing to purchase 120 units. Suppose that your cost is three dollars per unit. Here are the possible scenarios:

1. You lower prices; your competitor doesn't. Sold: 120 @ $5. Profit: $240 [120 * (5-3)]
2. Neither of you lowers prices. Sold: 50 @ $6. Profit $150 [50 * (6-3)]
3. Both of you lower prices. Sold: 60 2 $5. Profit $120 [60 * (5-3)]
4. Your competitor lowers prices; you don't. Sold 0. Profit 0.

Whether you are chasing after windfall profits or simply trying not to get frozen out of the market, your best strategy is to lower prices. The same goes for your competitor. As a result, you will both lower prices, and so instead of making profits of $150 each, you will make only $120 each. It is clearly not in your interest to pursue this competition, but you don't have much choice. ... That is why they say every free market is but a failed cartel.

Note that from the perspective of the person involved in the dilemma, these two situations are identical. In both cases they will benefit by cooperating and suffer by competing. But from the perspective of society as a whole the two cases are quite different: in the first case cooperation is beneficial (less deadly violence is good for society) but in the second case competition is beneficial (lower prices are good for society).

So what does an efficient society do? Clearly, an efficient society encourages cooperation in the first type of dilemma but encourages competition in the second kind.


So, chapter 3 of the Efficient Society looks at the role of government in solving dilemmas with negative impacts on society. Because the government has, by definition, a monopoly in any given territory, if the government takes responsibility for some activity than we can ensure that there is no competition within that particular territory for that particular activity. Here we see why the monopoly on the use of force is so fundamental to government. Not only is competition in the use of force (violent crime/civil war) the most devastating prisoner's dilemma problem we face, but unless the government controls the use of force, it has no power to enforce its monopoly in any other area.

The above examples and Chapter 3 may give the misleading impression that we always need government to intervene in cases where cooperation is beneficial. In fact, for the vast majority of these situations, government intervention is not required, and we rely on our sense of what is right to cooperate rather than having the government force it on us.

In chapter 4, Heath looks at situations where moral suasion replaces the role of government in helping us to cooperate with each other,
"the practice of lining up is itself an efficiency promoting institution. The reason we line up for things is that any kind of rationed access to a good generates a prisoner's dilemma. Everyone has an incentive to push his or her way to the front, but when everyone does this, the mob scene that ensues results in everyone getting through more slowly. This is especially true in the case of emergency exits. When I was young, it always seemed strange to me that parents and teachers expected us to line up to escape from burning buildings. The reason, I later discovered, is that more people can escape in a given time if the exit is conducted in an orderly fashion. This is not much comfort to those at the back of the line, and so the rule requires fairly powerful moral incentives in order to have any force."

The fact that morals supporting cooperation have always been a bulwark of society not falling apart into a million prisoner's dilemmas helps explain why trade, in which competition is promoted over cooperation, has been, throughout history, consistently regarded as a base or shameful occupation.

In chapter 5, Heath looks at prisoner's dilemmas which have positive outcomes for society and shows how markets, by facilitating competition, make it impossible for sellers to get out of their prisoner's dilemmas.

The one thing I would take issue with Heath on here is his statement,
"In point of fact, the central "discovery" that led to the development of the market economy is not that one can do without morality but that one can permit a selective decline in morality without having society fall apart."

In fact, I would argue, based on 'Systems of Survival' by Jane Jacobs, that the market system does not depend on a decline in morality as much as on the usage of a second set of (equally valid) morals - ones specifically suited to prisoners dilemmas with positive outcomes for society. Instead of looking at prisoner's dilemmas, Jacobs tracks the two systems of morals back to 'taking' and 'trading' as our two means of making a living - but clearly there is considerable overlap between activities based on 'taking' and prisoners dilemmas with negative outcomes for society and a similar overlap between trading activities and prisoner's dilemmas with a positive outcome for society2.

Jacobs tracks 'commercial' morality back to the ancient Greeks and through societies such as the Romans, Japanese, Indians and medieval Europeans which were effectively divided into classes or castes with one caste living by 'taking' / cooperative morality and one caste living by commercial / trading / competitive morality.

Somewhere along the line, for some reason, the commercial set of morals became greatly strengthened in Europe coming out of the middle ages leading to the expansion of markets, the enlightenment, the industrial revolution etc. etc.

Which brings us back to chapter 2. In chapter 2, Heath suggested that our move to a society where the state stayed out of questions of values was a result of improved technological weaponry which made disagreements much more deadly than in the past. At this point, I am more inclined to think that the shrinking role of the state has more to do with the increased role of commercial/competitive morality in our society than it did to the Reformation, the invention of gunpowder or to the European civil wars. I suspect that Hobbes, with his social contract, was simply reflecting the changes in society which had already had taken place rather than actually having much of an impact on the course of events himself.

For instance, Jacobs tracks most our current individual rights back to the development of the medieval European Custom of Merchants, noting that, "So many of what we call civil rights are actually rights to make contracts as equals" and that, "Another variety of sexism has often denied homosexuals the benefit of contractual law". Of course, none of this disputes the truth of what Heath wrote in chapter 2, just the source of the changes he described.

And of course I don't really have any answer to explain how it was that in Europe at that particular time commercial morality became so much stronger and more influential than it ever had anywhere else. I suppose Heath's guess is as good as any.

Well, my head hurts, so I think I'm going to leave it at that for now. The amazing thing is that there is actually still a lot more stuff in 'The Efficient Society' that I want to discuss (the usefulness of bureaucracies, problems with GDP as a measurement tool, the need for global government and the challenge presented by an information economy, among others), but I'll have to save that for future posts.

1As Andrew points out in his post,
"the more applicable generalization is that of the problem of suboptimization. As defined on the Principia Cybernetica web site:

Optimizing the outcome for a subsystem will [in many cases] not optimize the outcome for the system as a whole. This intrinsic difficulty may degenerate into the "tragedy of the commons": the exhaustion of shared resources because of competition between the subsystems."

2To see why, note that when you take for a living you are basically relying on nature's bounty (or the work of others), and when you take something for yourself, then nobody else can take the same thing. So taking amounts to being a zero-sum game.

When trading, however, it can be assumed that because both people make the exchange voluntarily, both must benefit so the outcome of a trade is a net gain.

Now imagine introducing competition into a taking activity and into a trading activity. In the zero sum world of taking, increased competition accomplishes nothing other than to make everybody work harder (and to fight more), so an optimal strategy in a taking environment is to cooperate rather than to compete. In the positive sum world of trading, however, competition makes everybody work harder which (because it is a positive sum game) leads to a better outcome for everybody - assuming that everybody competes within the rules of the trading game, sticking to voluntary exchange rather than using force.

This is why when people who take for a living start to compete with each other it is generally referred to as treason, while when people who trade for a living stop competing with each other it is known as collusion.

Of course, trading can occur and be beneficial even without competitive markets, but competitive markets help a lot because it is the competition which creates the prisoner's dilemma which ensures that prices are set efficiently and which motivates traders to work hard.

A couple of other related posts on this topic:

Andrew Spicer describes in detail an interesting (and surprising) prisoner's dilemma involving trucks passing other vehicles on the highway.

I write about when competition is good and when it is bad in the context of industrial subsidies, as per Systems of Survival.

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  • Excellent post. I enjoyed that a lot.

    I'm inclined to agree with this: "the shrinking role of the state has more to do with the increased role of commercial/competitive morality in our society than it did to the Reformation, the invention of gunpowder or to the European civil wars." This has made ALL contracts into business contracts. In the case of marriage, it's not even as strong as that. One party can wreck it without much in the way of penalty. Why? It's 'good for business.'

    For some things we need to remember what a Covenant is.

    In other reading that I've done on evolutionary psych, treating the prisoners delimma as recurring chnaged the outcome considerably. If an event is a one of, then it was considered 'rational' to cheat. The game was used to criticsize 'rationality'. The new, recurring formula does seem to make a lot more sense.

    Of course, if the state is shrinking so much, why are taxes now in the rnage of 40% to 50% for so many Canadians? And why is the government telling private clubs what they can and can't do? It seems we can do things if we 1) pay up and 2) don't cost the guv'ment too much, 3) don't annoy its power base.

    Looking forward to more posts on these subjects.

    By Blogger Curt, at 8:35 PM  

  • Thanks Curt.

    I'd say marriage is treated about equal with commercial contracts but I take your point.

    The difference in 'rational' behavior between a one-off prisoner's dilemma and a repeated game is pretty interesting. Some day I'll do a post on the program tit-for-tat which won the first iterated prisoner dilemma contest, as described in the book, 'The Selfish Gene' by Richard Dawkins.

    But I don't think it makes a big difference to the arguments in this particular post. The problem with the argument that it is 'irrational' to cooperate (in a one-off game) is that it ignores the fact that people can trust each other, and that if they do trust each other then cheating is not rational. But yeah, topic for another post.

    As for government size, it's easy to follow the money and see where most of it goes. The big chunks go to interest on our debt (thanks, last generation!), health care (for which costs are running well ahead of inflation/growth of taxable income) and education.

    So it's mainly economic stuff that our taxes go to - even when the government was more involved in setting values, that aspect didn't really cost that much (some extra money for police, jails, etc.).

    The government interferes with private clubs when they violate individual rights - individual rights which we recognize due to the spread of contractual law under which everyone is treated (in theory) equally. Still, it's a grey area for sure.

    By Blogger Declan, at 9:43 PM  

  • I had a few more thoughts to share. I hope you don't mind.

    I think we do need to work out rights in the public sphere vs. private spaces in which groups of people can alter the rules a bit to suit themselves. Could be as simple as a club which has no smoking restrictions. I wouldn't visit, but I also don't take offense.

    I think those private spaces are being neglected today. Dissent is being pushed out under the guise of a "neutral rationality" that isn't as neutral as it appears.

    The club example is a simple one. It occurs to me that while efficiency has many merits as a guide for public policy, we need to keep some things in mind when we consider choosing between public and private regulation.

    A government's first priority is staying in power and this will cause it to give more weight to its power base, even when good models show something else to be better for society as a whole.

    This is a distortion but it may be something we can live with in some cases and in others we might decide that that price is too high. Private regulation favours the strong. This point is more easily recognized than the first and explains why we get more problems (IMHO) from electoral bias.

    It also occured to me today, thinking of the guns example, that if the government has a monopoly on carrying guns, that guarenteed advantage makes government power even more attractive to those who want to dominate and push dissent to the margins.

    Last point in this rambling comment. I concede the logic of trying to drive conflict into a knife/ knife fight rather than gun/ gun. I also am uncomfortable with denying someone every tool possible for protecting their family. Gun/ gun is more violent but at least it's even. It's one thing to speak in generalities and game theory, but if you are the unlucky one in a knife/ gun draw, all the theory falls out the window, doesn't it? Isn't there a need to account for specific incidents, apart from theory?

    You've given me food for thought. :-)

    By Blogger Curt, at 8:32 PM  

  • I read "The Efficient Society" a few years ago and, while I think most of what Heath says about economics and public policy is bang on, the book left me somewhat disappointed.

    Consider the subtitle: "Why Canada Is as Close to Utopia as It Gets." Unfortunately, Heath never argues that efficiency is the overriding value in Canada - he merely asserts it. Moreover, his dicussion of other values (apart from equality) can at best be called glib. In discussing social contract theorists, he completely omits Rousseau. If Hobbes provides the practical justification for a state founded on the Social Contract, Rousseau provides the heart.

    By Blogger Josh Gould, at 12:08 PM  

  • Curt - I don't mind, share away. The gun-knife example is a tricky one since you could argue that - as long as there is a strong enough moral value in society of only drawing your gun in self-defence - there will be less violence in an armed society since people will be afraid to attack anyone knowing they probably have a gun, but I stil think overall we're better in the no-guns scenario than the all-guns one.

    Josh - "I think most of what Heath says about economics and public policy is bang on" - that's what the whole book is about!

    The subtitle is just marketing BS. I can see how it would be disappointing if you thought that he was actually going to make some international comparisons at some point (which the subtitle would certainly lead you to believe), but luckily I had a good enough sense of what it was about going in, that I knew not to expect a justification for Canada being 'as close to utopia as it gets'.

    I don't think the discussion of social contract theory is meant to be comprehensive (if so, it fails miserably), it just comes up here and there in a few places. It's been a while since I read Rousseau, so I can't recall if there was anything relevant there which should have been brought up.

    Certainly he is glib at times, but generally limits that to his numerous digressions (which are even more numerous in the subsequent 'Rebel Sell') so it doesn't bother me too much.

    By Blogger Declan, at 7:23 PM  

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