Crawl Across the Ocean

Tuesday, May 18, 2010

53. Personal, Group and Public Interests

Note: This post is the fifty-third in a series. Click here for the full listing of the series. The first post in the series has more detail on the book 'Systems of Survival' by Jane Jacobs. Just a short post this week as I'm going to be on the road for a bit, so time is a bit tight.

"Ask not what your country can do for you, ask what you can do for your country"

- John F. Kennedy.

"By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."
- Adam Smith

To a large extent, people pursue their own interests, and this is in the public interest as well. For example, people don't want to starve to death so they take care that they have enough food to eat, and similarly society has no interest in its members starving to death either.

In some cases, people form groups to better pursue their goals. The reasons people form groups generally were covered previously in a post on the types of cooperation - in order to take advantage of economies of scale, to share risk or to share information, groups are generally helpful*.

But once groups form, the potential for conflict between group goals and personal goals, as described by Mancur Olson is unavoidable. Olson makes the point that one way to overcome the weakness of large groups due to the conflict between personal and group interest is through moral values which 'reward' people for contributing to group activities and 'punish' them for free-riding on the efforts of other group members.

For the most part, society places a (positive) moral value on cooperation, where cooperation means putting the group interest ahead of the personal interest. To me, this suggests that society recognizes that cooperation is beneficial in ways that free-riding on the cooperation of others is not.

But to say that group interests are better than personal interests is overly simplistic. Naturally, it's possible that groups can be formed with interests that are inimical to the wides social interest. Where a group is formed with an intention that is hostile to the public interest, the action generally goes by the name conspiracy rather than cooperation.

But there is one particular case, the case of the marketplace, where cooperation goes by yet a different name, collusion.

One of the fundamental insights that Adam Smith had in 'The Wealth of Nations' was that, in the case of a market, cooperation could be harmful to the public interest, while competition - which is inimical to the pursuit of the other forms of cooperation - is helpful in this particular case.

If all the grocery store owners get together and agree to raise prices, this will be good for their group, but will, most likely, be harmful to the public interest because the higher prices will prevent win-win transactions from taking place.

A common view of this is that the difference between the competing market participants and the cooperating group members is that the market participants are acting in a self-interested manner while the group members are acting in a selfless manner (but the invisible hand yields a public benefit from the self-interested market behaviour).

But we know that the market participants are doing something more than simple pursuit of self-interest - they are also following a moral code that restricts them from taking actions that would harm other people through the use of force, through fraud or through breaking promises. By the other side of the same token, we wouldn't necessarily say that OPEC members, for example, are sacrificing their self-interest by maintaining a cartel.

The point I'm trying to make is that the distinction between pursuit of the benefits of cooperation through groups vs. pursuit of the benefits of cooperation through trade is not a distinction between self-interest and selflessness, it is really just a distinction between cooperation and competition. In the case of (market) competition, the interests outside of the self that we take into consideration are those of the person we exchange with (and possibly any third parties affected by externalities). In the case of cooperation, the interests outside of the self that we take into consideration are those of our fellow group members.

* The case of gains from trade is different in that it does not require forming a group to take advantage of this gain, it merely requires that each individual entity respect the commercial precepts in its dealings with other entities.

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