51. Types of Cooperation

Note: This post is the fifty-first 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.


The topic of this post is an essay by Joseph Heath on 'The Benefits of Cooperation (pdf)'

Heath posits that there are 5 different ways that people can benefit by working together:
1) Economies of Scale
2) Benefits from trade
3) Risk sharing
4) Self-binding
5) Information sharing

Heath notes that the first theorem of welfare economics demonstrates that competitive markets (which achieve benefits by allowing people to trade with one another) will achieve a perfectly efficient outcome, but that the assumptions behind the theorem rule out all other forms of cooperation:

"The 'invisible hand theorem' (or 'first fundamental theorem of welfare economics'), shows that the competitive equilibrium of a market economy will be Pareto-optimal as long as certain 'standard' conditions obtain. The list is quite long, but includes inter alia constant returns to scale, individuals with well-behaved utility functions, symmetric information, a complete set of futures markets, and in cases of
uncertainty, a complete set of insurance markets.

In other words, the theorem shows that markets achieve perfect efficiency, so long as every other mechanism of cooperative benefit is excluded from consideration – either by assuming that no such benefits are possible, or that all such benefits are freely available. To see how uninformative this is, consider how we would respond
to someone who proposed a model for the 'optimal' production of scientific knowledge, based upon the assumption that both material resources and labor were available in unlimited supply and at zero cost. Whatever its technical merits, such a model would give us very little assistance with real-life policy questions."

Heath goes on to point out how circumstances often force us to choose between pursuing different types of benefits. In the case of economies of scale, there is an obvious conflict between having a large number of firms to make a market more competitive, and having a smaller number of firms so that the bigger firms can achieve greater economies of scale. It's worth nothing that, due to network externalities, any organization that physically extends across geographic territory (i.e. power grid, sewer system, road network) tends to be operated as a monopoly, with the economies of scale overwhelming the gains from competition leading to more trade in this particular case.

The story (conflict between benefits from trade vs. benefits from other forms of cooperation) is similar with risk sharing. Heath gives the example of the enclosure of the commons that occurred in England prior to the industrial revolution. Allowing individuals to take ownership of parts of the commons created far more opportunity for specialization and trade to take place by ensuring that anyone who took the trouble to improve or develop a piece of land could expect to reap most of the benefits from their efforts, rather than sharing them with everyone else in the commons. But the commons system provided a great benefit by insulating individuals from the uncertainties of having their fortunes entirely dependent on one piece of land. Splitting the land into privately owned chunks removed the benefit that arises from reducing uncertainty for individuals by diversifying risks across a large group of people.

By self-binding, Heath means situations where we want to pre-emptively prevent ourselves from taking actions we know we will regret (due to hyperbolic discounting) and enlist others to aid us. The thought reminds me of this passage from Plato's Republic,

"Tell me then, O thou heir of the argument, what did Simonides say, and according to you truly say, about justice?

He said that the repayment of a debt is just, and in saying so he appears to me to be right.

I should be sorry to doubt the word of such a wise and inspired man, but his meaning, though probably clear to you, is the reverse of clear to me. For he certainly does not mean, as we were just now saying, that I ought to return a deposit of arms or of anything else to one who asks for it when he is not in his right senses; and yet a deposit cannot be denied to be a debt.

True.

Then when the person who asks me is not in his right mind I am by no means to make the return?

Certainly not.

When Simonides said that the repayment of a debt was justice, he did not mean to include that case?

Certainly not; for he thinks that a friend ought always to do good to a friend and never evil.

You mean that the return of a deposit of gold which is to the injury of the receiver, if the two parties are friends, is not the repayment of a debt,—that is what you would imagine him to say?

Yes."

On the topic of self-binding, Heath makes the same analogy between borrowing and substance abuse that I did in last week's post,

"Economist David Laibson has argued that financial innovation, by increasing the overall liquidity of assets, has made it increasingly difficult for individuals to create 'golden eggs.' The difference between savings and checking accounts has become purely nominal; the introduction of ATMs has meant that everyone has access to their money at all hours (and so withdrawing a fixed amount at the beginning of the week can no longer be used as a self-control mechanism); reverse mortgages allow people to drain the asset value of their homes; and, of course, consumer credit has rendered the practice of 'saving up' for a major purchase almost obsolete. This sort of 'easy money' is a mixed blessing to consumers, in the same way that a 24-hour beer store is a mixed blessing to the alcoholic."

Again, making it easier to complete trades conflicts with a different form of cooperative benefit.

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What this notion of 5 different forms of cooperative benefits means with regard to the two syndromes identified by Jacobs is not entirely clear to me. The view I'm drifting towards is that the guardian syndrome represents cases where perfect monopoly is required and the commercial syndrome represents something close to the perfect competition ideal.

Cases where economies of scale are all that matters would seem to lead to a monopoly which would fall under the guardian syndrome. Cases where there the benefits to risk sharing far outweigh gains from trade would be similar. Self-binding relies on a hierarchical relationship (the one who is binding themselves submits to the authority of the person who will bind them) such as we find in the guardian syndrome and measures to encourage the generation of new information (intellectual property) often seem to do so by guaranteeing a monopoly to the producer of the information.

Cases where gains from trade need to be balanced against one of these other sources of cooperative benefit would seem to involve a grey area of competition mixed with monopoly in some measure. Perhaps it's not surprising that these areas tend to be an ongoing source of controversy.

Remind Me Again, Why Do We Own This?

Is it time to nationalize the tobacco industry? There were a few headlines made last week by a book which recommends exactly (or something like) that. You can read the preface and the executive summary of 'Curing the addiction to Profits: A supply-side approach to phasing out tobacco', at the site of the Center for Policy Alternatives. I haven't read the book, but based on the executive summary and the preface, the argument seems to be as follows:

1) It is in society's best interest to enact measures which will reduce the incidence of smoking.
2) It is in the nature of corporations whose product is cigarettes to fight any measures which would reduce the incidence of smoking.
3) If cigarettes were manufactured and distributed by a government agency this resistance would be eliminated / reduced.
4) Therefore, the government should replace tobacco companies as manufacturer and distributor of cigarettes.

I think it is fairly safe to assume that a majority of people would agree with the premises 1) an 2), so it is just premise 3) and the resulting conclusion (4) which are in doubt.

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David Olive had an article in the Star the other day which attempted to explain why it makes sense for the distribution of liquor in Ontario to remain a public monopoly (under the control of the Liquor Control Board of Ontario (LCBO)). I say attempted because, while I normally find Olive to be pretty good, this particular article seemed weak, as if Olive himself knew he was trying to make the best of a bad case.

Chris Selley does a pretty good job deconstructing Olive's article in detail over at Tart Cider, but the main point I want to make here is that Olive's approach to arguing for the existence of liquor stores is to argue that the government does a better (or at least as good) job running it's monopoly than the private sector would do if liquor could be sold by private retail outlets. That is, the government is more efficient than the private sector.

Regular readers will know that I'm a big fan of Joseph Heath's, 'The Efficient Society' which argues that, contrary to popular conception, most markets fail and there are many industries which can be more efficiently managed through other (non-market) means such as, in some cases, the government. Says Heath, "Markets tend to work very well when it comes to exchanging medium-sized dry goods. Other types of exchanges can be much more difficult - sometimes impossible - to organize."

But of course alcohol *is* a medium-sized dry good. And thus precisely the kind of item which you would expect the private sector to do well at managing the market for. There is nothing special about alcohol which makes it likely that a government could distribute it more efficiently than the private sector that couldn't also be applied to soft drinks, milk or bottled water and I don't see Olive ever arguing that 7-Up should e only sold at stores run by the Soft Drink Control Board.

Both theoretically and empirically, the argument that a government monopoly will do a more efficient job of distributing alcohol to the population than private enterprise is a non-starter. Even if one were to stretch and say that the current management of the LCBO is so good that they are more efficient than the private sector for the moment, any kind of organizational disruption could lead to a deterioration in performance. If this happened to a private provider they would just go bankrupt and be replaced by better providers, but with a government monopoly you are stuck with what you've got (see Ontario Hydro).

What puzzles me is why Olive would even bother arguing this way to begin with (and he's not an isolated example, almost all of the arguments I've seen opposing privatizion of the liquor stores are similar). I imagine that when the LCBO was setup after the days of prohibition, the founders did not set it up with the goal being that it should distribute the maximum quantity of alcohol to the population as cheaply and conveniently as possible.

I'm no historian, but it seems to me that the purpose of having a public monopoly in sales of liquor was so that it would be legal enough to shut down black markets and the associated organized crime, while at the same time trying to minimize the volume and convenience of alcohol sales.

Now you might argue that times have changed, people are more responsible than they once were (or people aren't as uptight as they once were) and there is no longer a need to treat alcohol as a social ill to be minimized. It involves weighing on the one hand the increased enjoyment of life people get from easier/cheaper access to alcohol and on the other hand increased loss of life from drunk driving / family disruptions due to alcohol addiction and so on.

People who argue that making it easier and cheaper to buy alcohol won't cause any increase in alcohol related social problems are (in my opinion) dreaming. On the other hand, people who argue that we should keep a public monopoly on alcohol sales because that is the more efficient approach have already conceded on the social impact side, choosing instead to argue on unwinnable ground.

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In his rebuttal to David Olive, Chris Selley suggested that alcohol should be treated like any other controlled substance, citing cigarettes as an example. But cigarettes aren't really the most useful comparison. We can divide controlled substances (which are also consumer products) into two groups. Those which used to be considered perfectly acceptable but have gradually become less acceptable, and those which used to be considered unacceptable but are gradually becoming more accepted. In the first group we have cigarettes as the main example, with junk food as another candidate. Guns might fall into this group as well. The second group contains alcohol as well as gambling and marijuana and, arguably, sex (prostitution).

Given the substantial political inertia in our society, it is unsurprising that, if you take two products which are considered equally (un)acceptable at the present moment, it is likely that the one which was acceptable in the past is more likely to still remain in private hands while the one which was unacceptable in the past is more likely to be in public hands.

So a better comparison for alcohol than cigarettes is another product subject to a government monopoly: gambling - and the comparison is, if you'll pardon the expression, a sobering one.

I happened to run across this blog about issues with gambling around the world. The post in question is called, "Another Canadian Province addicted to Gambling" and it's a reprint of a Halifax Herald article describing the battle over Video Lottery Terminals (VLTs) in Nova Scotia:

Nova Scotia should make it tougher to gamble, says the head of the Atlantic Institute for Market Studies.

Brian Lee Crowley says he's not proposing gambling be outlawed, just made more difficult to indulge in.

"I'm pretty sure we're not getting the difficulty the ease of access to VLTs has caused around the province," Mr. Crowley, president of the right-of-centre think-tank, said in an interview Monday.

...

Governments have to become more objective about gaming and its costs, he said.

"When you are getting as much money as they are from it, you can't," Mr. Crowley said."

At one point in time, government was in the gambling business, like alcohol, not because it was a nice stealthy way to raise money, and not because the government is 'more efficient' than the private sector at providing convenient access to gambling, but because a government gambling monopoly could provide enough gambling to avoid the creation of a black market, without just opening the doors wide open and ending up with countless lives ruined by gambling addictions.

Just imagine, if you can, a provincial government these days actually trying to deter it's citizens from gambling. If gambling is a drug, then governments have become pushers extraordinaire, producing a seemingly endless barrage of (annoying) advertisements tempting you to part with your money for the sake of some imagined good life which you just might win access to.

I'm not one for ideology, most times, but I do generally believe in the principles of free enterprise, so I was blown away by this quote from the article,

"Last week, Premier John Hamm said there will always be gambling in Nova Scotia, and the best way to deal with it is to regulate the industry.

Mr. Hamm said the revenue the province receives from gambling is important.

"We would rather have (gambling dollars) going to government and paying for health care, education, than going to the private sector and making a number of Nova Scotians millionaires off of the proceeds of gambling," the premier said Thursday after cabinet."

First of all, there's a big difference between regulating an industry and owning it. But second of all, does Hamm feel that he'd rather have potato profits going to government and paying for health care, education rather than going to the private sector and making a number of French Fry millionaires even richer? Perhaps we was taken out of context but it sounds like he is literally arguing for communism.

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So what's my point? My point is that, if we are concerned with efficienct production and distribution of consumer products, we are better off to leave things to private enterprise. If we are concerned with providing enough of a market to avoid a black market while still trying to minimize the long term consumption of something, then the picture is less clear.

On the one hand, having private players in a market can create powerful lobbyists who will try to increase consumption of the product and fight efforts to reduce consumption. On the other hand, having the government run one of these (highly profitable) markets can create a powerful lobby which will try to increase consumption of the product and fight efforts to reduce consumption. Furthermore, this approach combines the entity trying to reduce consumption for the good of society (government) and the entity trying to increase consumption for the good of health care and education funding (government) into one highly conflicted entity (as Olive noted).

Another angle to consider. On the one, uh, foot, having a number of smaller entities competing will tend to drive prices down causing consumption to go up while having a single monopoly player will tend to drive prices up, reducing consumption. On the other foot, small players competing fiercely with thin profit margins (think retail stores selling cigarettes and lottery tickets) don't make powerful lobbyists, while a monopoly or oligopoly firm will have lots of political and financial clout to lobby for rules to support increase consumption.

This is kind of a lame conclusion to come to after all this rambling, but, to be honest, I don't see a clear, universally applicable solution. In fact, the best solution might vary even for the same product depending on both the time and the place. I recall doing a school project investigating the feasibility of selling make-your-own wine kits in Europe. Looking into the existence of players already in the market it quickly became apparent that products were competing on different criteria in different markets. As you moved South in Europe, into countries like France and Italy and Spain, make-your-own wine kits emphasized quality, with the goal being that you could make wine almost as good as what you could get from a vineyard. Further North in Europe, and especially in Scandinavia, kits emphasized speed, with the goal being that you could get really drunk, really cheap. In this context, it is perhaps not surprising that liquor laws are a lot stricter in the North of Europe than they are in the South.

So my answer is, no easy answers, each case has to be looked at on its own merits. For cigarette manufacturers, there is so much momentum already against the tobacco companies that I would be inclined to leave the status quo as is. Canada has declining smoking rates which are among the lowest in the world, and, as much as political interference and lobbying by the tobacco companies drives me crazy, I would be hesitant to break up a system which generally seems to be headed in the right direction.

For alcohol, I think Ontario is probably mature enough in its attitude towards alcohol that it could afford to ease the rules slightly without doing so much social damage that it offsets the increased satisfaction for consumers. Following B.C.'s example of allowing independent beer and wine (but not liquor) stores might be a good way to start.

For gambling, I think public pressure is required - like that being applied in Nova Scotia. This pressure needs to go beyond just having VLTs banned from bars, to banning advertisement for gambling period. Given the natural synergy between organized crime and gambling I'd be opposed to any privatization on this front, but I do think that as citizens we need to begin staging interventions to help get the government off its gambling addiction and make it remember why it is in that particular business in the first place - to reduce gambling not to increase it.