70. War and Peace

Note: This post is the seventieth in a series about government and commercial ethics. 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 which inspired this series.

Many years ago, I read 'Century Of War' by Gabriel Kolko. It's not actually about war itself, but rather about the impact of the war on the society that wages it. I don't remember any of the details of the book (it was many years ago), but I do remember coming away completely convinced of his argument that the wars led to a shift to more progressive policies. And I also remember not being nearly as clear about why war had that effect.

This post will look into that question, in a roundabout fashion, first returning to a story I related way back near the start of this series, "One of my childhood friends happened to have his birthday on the same day as Halloween. Naturally, a group trick or treat outing was incorporated as part of his birthday celebration. Afterwards, the group of us would pile into his bedroom and dump out our accumulated loot into a pile on the floor (one pile for each person - not one big pile). Note that at this point, the distribution of loot has been determined by the random allocations at each front door, and does not take into consideration each trick or treaters particular tastes. This raises the possibility of making trades that benefit all parties involved. For example, I always liked the Rockets and Mint Laura Secord bars the best, whereas others preferred items such as the Coffee Crisp that I had little interest in.

So the initial distribution was Pareto-inefficient in that changes could be made that would benefit people without making anyone else worse off.

So, naturally, we set about trying to achieve a Pareto optimal distribution of candy in a free wheeling round of candy exchange that would last until everyone was satisfied enough with their adjusted haul such that no further exchanges could be made that were agreeable to both parties."

Now, imagine if you were one of the trick or treaters, and you were about to embark on the candy exchange when your friend suggested that the two of you team up in order to trade more effectively. The immediate question that comes to my mind is, how would teaming up help? In fact, teaming up might well be harmful since if the two of us had to agree to trades together, that might mean that I have to compromise and trade for things we both like. If I love malted milk but my friend hates malted milk, then teaming up makes me less likely rather than more likely to get what I want. The more correlated our tastes are to one another, the less compromise and less sacrifice comes from teaming up, but why make any sacrifices at all, why not just have everyone remain as sole traders. And of course, that is what we did as kids.

Now, let's imagine that a couple of your friends haven't learned proper manners and they begin to violate commercial (trading) ethics by stealing candy and a fight breaks out, with everybody trying to grab candy from everybody else's pile. And further suppose that your best friend turns to you and offers to team up. In this situation, the benefits of teaming up are obvious. A two person force would be much more effective in a physical battle than two people fighting alone, especially if you and your friend are able to place your piles beside one another in order to form a more geographically contiguous territory to defend.

OK, another scenario. This time, you and your friends (let's say there are 5 of you in total) are getting along, but a couple of kids who are up to no good, start making trouble in your neighbourhood and come over and demand that you give them all your candy or they will beat you up. You figure that if all 5 of you stand together and fight, you can fight these older kids off, but if anyone gets scared and bails, you might well lose all your candy. In this situation, you need everyone to team together in an all or nothing battle.

So, let's say that you and your friends stick together and the older bullies are scared to attack you. So one of the bullies has an idea and makes the following offer, "The first one of you little punks to come over to our side gets an equal share of the candy after we beat up the rest of your friends." Now there is an extra incentive for one of your friends (or you) to betray the rest and side with the bullies. Strong bonds of loyalty will be required to keep the group together. A moral viewpoint that says this kind of trading, or selling out, is shameful behaviour wouldn't hurt either.

OK, final scenario, same as the last one, but this time, instead of the candy being divided relatively equally between you and your friends (as you might expect after a night of trick or treating together), let's say the candy is divided the same way that wealth is in the United States. So if you collected 100 candies in total, then one friend has 84 candies, another friend has 11, one friend has 4, the second last friend has 0.2 (one fifth of a pack of rockets, perhaps), and you have 0.1 candies (one measly rocket). Do you think the chances of someone selling out their friends to the bullies goes up in this scenario? I do. How much loyalty can the person with 0.1 candies really feel towards the 'friend' sitting across from them with 84?

In a situation where you need cooperation from everyone to succeed, then everyone has equal worth, since the withdrawal of any one person dooms the enterprise. And in a situation where people are tempted to defect, the more unequal the distribution of benefits, the greater the temptation to defect. The World Wars were just this sort of situation, and it's no surprise, looking at it this way, that they led to policies which tried to take care of everyone in society (more so than what came before, at any rate).

And now, 65 years since World War 2 ended and since any collective effort or sacrifice was needed in our society, we have settled into the mindset of candy traders, preferring private schools and health care to paying taxes for public services, driving our car exactly where we want to go, rather than compromising by riding transit, staying at home watching exactly what we want to watch rather than compromising by watching what others are watching as well, and bowling alone, rather than compromising by organizing our schedule around a time everyone can come.

56. Keystone Economics

Note: This post is the fifty-sixth 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.

----
"A chain is only as strong as its weakest link"

Proverb


I was driving across the prairies a couple of weeks ago (long story) and I noticed the sign on the Manitoba border claimed that Manitoba was the 'keystone' province, and it got me thinking.

Wikipedia notes that,

"The term [keystone] is used figuratively to refer to the central supporting element of a larger structure, such as a theory or an organization, without which the whole structure would collapse,"

while also noting that the actual meaning of keystone is

"the architectural piece at the crown of a vault or arch which marks its apex, locking the other pieces into position."

It was the literal meaning that reminded me of an old figurative use of the word, one we encountered a few posts back from David Hume,

"The happiness and prosperity of mankind, arising from the social virtue of benevolence and its subdivisions, may be compared to a wall, built by many hands, which still rises by each stone that is heaped upon it, and receives increase proportional to the diligence and care of each workman. The same happiness, raised by the social virtue of justice and its subdivisions, may be compared to the building of a vault, where each individual stone would, of itself, fall to the ground; nor is the whole fabric supported but by the mutual assistance and combination of its corresponding parts."

Imagine a prisoner's dilemma type situation with more than two participants. For the sake of example, let's say 10 people. But the cooperative benefit is only gained if all 10 people cooperate. If even just one person defects, then the whole effort of everyone else is wasted. You could imagine a game where 10 people choose to put money in to a collective pot and if everyone contributes, the money is doubled, but any person is able to choose to take what the others have contributed instead of contributing themselves. Are there situations like this in real life? Well, in a military battle, only a single traitor can have a disastrous impact on his/her erstwhile allies. That may be one reason why treason is considered the most serious of crimes.

Or consider another type of prisoner's dilemma. In this one, the cooperative benefit is proportional to how many people cooperate. So if, say 7 out of 10 people cooperate, than there will some benefit, but not as much as if all 10 did. But now imagine that this dilemma is repeated over and over, and that people can see what the others are doing. After the first instance where the 3 defectors take advantage of the 7 cooperators, it seems likely that some of the 7 will cease to cooperate. As the number of cooperators drops, the number of people taking advantage of the remaining cooperators grows larger, and the pressure grows for everyone to defect.

In 'The Efficient Society' Joseph Heath gave the example of littering as a situation where if there is no litter, then people feel embarrassed to litter themselves, but if they are surrounded by litter dropped by other people, the situation reverses and they feel embarrassed to be the sucker carrying their litter to the garbage instead of just dropping it.

These sorts of situations resemble a hand on a clock face that can have one of two equilibriums. One with the hand pointing upwards towards 12 which is unstable because any perturbing of the hand (i.e. defection from the people in the dilemma) will cause the hand to fall toward the other equilibrium with the hand pointing towards the 6. The equilibrium at 6 is stable because, even if you give the hand a little push, it will return to the 6 due to gravity. Similarly, even if a few people try to start a move towards cooperation in the group prisoner's dilemma, unless they can get everyone involved, the effort is likely to fail.

Now, if you assume that people are hardwired to defect in prisoner's dilemma type situations then you might see the problem here as one of how to change the incentives of the situation so that it is in people's self-interest to cooperate. If, on the other hand, you believe that there are 2 (or more) types of people and that some people are inclined to cooperate while others are inclined to defect, you might see the question as being, how do the cooperators keep the defectors in line. This calls to mind another quote we encountered a while back, this time from Hans Ritchsl,

"This understanding of the fundamental power of the communal spirit leads to a meaningful explanation of coercion in the state economy. Coercion is a means of assuring the full effectiveness of the communal spirit, which is not equally developed in all members of the community. Coercion forces the individual to act as if he were inspired by communal spirit. Coercion is only the outer clasp and fastening of the community, but if communal spirit be lacking, coercion can replace it only in part."

The main point of this post is that there are situations where the best outcome can only be achieved if everyone (or very close to everyone) is on board. In these situations, giving people freedom of choice means nothing more than allowing defectors to frustrate the desires of cooperators to achieve a better outcome. Now, you could say (if you had a very good memory) that I'm just rehashing the points Tom Slee made in his book that we covered back near the start of this series - given a prisoner's dilemma type structure, giving people a choice leads to inferior outcomes. And that's true, but what I wanted to emphasize this time around was three things:

1) That the repetition over time of a Prisoner's Dilemma situation can mean that even in situations which don't necessarily have an all or nothing outcome at first, there might be an all or nothing outcome over time
2) In a multi-participant dilemma, full cooperation and monopoly behaviour are equivalent descriptions.
3) If a large group wants to achieve cooperation over time, given different behaviour types regarding defection/cooperation, it is likely to be necessary for an element of coercion or punishment to be employed by the cooperators against the defectors

This is different than simple economies of scale where a larger effort is more productive (per amount of effort) than a smaller effort. This is not a case of natural monopoly as much as it is a case of necessary or efficient monopoly.

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.

----
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.

21. Morals by Agreement, Perfect Competition, Perfect Monopoly and the Market as a Moral-Free Zone

Note: This post is the twenty-first in a series. Click here for the full listing of the series.

This is the third of what should be a few posts on the book Morals by Agreement, by David Gauthier.

---
While thinking about Jane Jacobs' Guardian and Commercial syndromes, one of the notions that occurred to me was that the Commercial syndrome reminded me of the microeconomic notion of 'perfect competition', while the Guardian syndrome reminded me of the microeconomic notion of 'Perfect Monopoly*'

Given that the ethics in the two syndromes often seem to come in opposing pairs (shun force vs. exert prowess, industriousness vs. making rich use of leisure), it seemed plausible to think they might represent two opposite conceptions, such as competition and monopoly.

However, it was not until reading chapter 4 of David Gauthier's 'Morals by Agreement' that I came across any substantiation of my intuition about the two syndromes. So before I get into chapter 4 of Morals by Agreement, let's first clarify what is meant by perfect competition and perfect monopoly.

Wikipedia describes Perfect Competition as follows:

"In neoclassical economics and microeconomics, perfect competition describes the perfect being a market in which there are many small firms, all producing homogeneous goods.
...
A perfectly competitive market may have several distinguishing characteristics, including:

Many buyers/Many Sellers – Many consumers with the willingness and ability to buy the product at a certain price, Many producers with the willingness and ability to supply the product at a certain price.

Low-Entry/Exit Barriers – It is relatively easy to enter or exit as a business in a perfectly competitive market.

Perfect Information - Prices are assumed to be known to all consumers and producers.

Transactions are Costless - Buyers and sellers incur no costs in making an exchange.

Firms Aim to Maximize Profits - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit.

Homogeneous Products – The characteristics of any given market good or service do not vary across suppliers."

I don’t have much to add to this description. Basically, the idea is that each seller in the market is powerless to change the terms of the market and the only way they can pursue their interest is to maximize the amount of goods that they produce and can sell into the marketplace.

Now, perfect monopoly:

"In economics, a monopoly (from Greek monos , alone or single + polein , to sell) exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. Monopolies are thus characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods.
...
a pure monopoly can -unlike a competitive firm- alter the market price for her own convenience: a decrease in the level of production results in a higher price. … An important consequence of such behaviour is worth noticing: typically a monopoly selects a higher price and lower quantity of output than a price-taking firm; again, less is available at a higher price."

Again, I have little to add here. The idea is that in this case the seller has the power to decide how much they want to produce, since they don’t have to worry that if they cut back production, someone else will just take their place. Economics assumes that both the firm under perfect competition and the monopolist want to maximize their profits. However, under perfect competition, maximum profit is achieved via maximum production whereas under monopoly, maximum profit is achieved via optimal production, where the optimal production level does not equal the maximum production level.



So, back to Gauthier. Chapter 4 of Morals by Agreement is titled, "The Market: Freedom From Morality"

Gauthier comments that

"the idea of such a [perfectly competitive] market illuminates our understanding of rational interaction by revealing a structure in which the divergent and seemingly opposed interests of different individuals fully harmonize. Conceived as an ideal type, the perfect market, as we shall see, guarantees the coincidence of equilibrium and optimality, and so its structure is the very antithesis of the Prisoner's Dilemma"

Gauthier suggests that it might be an ideal world if every market could be perfectly competitive but, "because the world is not a market, morality is a necessary constraint on the interaction of rational persons."

He further notes that,

"the absence of force and fraud is essential to the workings of the market. Before [Adam] Smith's invisible hand can do its beneficent work, [Thomas] Hobbes war of every man against every man must first be exorcized. And this, as we shall see, means that the ideal of free interaction which Smith celebrates is not natural but artificial, arising, for rational persons, only within a framework of agreed constraints. In understanding the perfect market as a morally free zone we shall be led back to its underlying, antecedent morality."

To be honest, I'm not sure I follow the argument that the market is morally free but has an antecedent morality (where people give up using force or fraud to get what they want) which somehow precedes the market but is not a part of the market.

At any rate, Gauthier goes on to specify a few more conditions of the market as a morally free zone:

1) No externalities, either positive or negative.

2) Private ownership, composed of two parts:
- initial factor endowment
- free individual market activity

3) Private consumption, composed of two parts:
- private goods
- mutual unconcern (note that this is an extension of the initial conception of rational behavior from chapter 2 which permitted one person to have an interest in another's well-being (for its own sake) - now in the morally free zone, such concerns are no longer allowed)

4) Both production and exchange are carried out under certainty (perfect information)

Gauthier then makes reference to what is known as the 'The First Theorem of Welfare Economics' which states that a perfectly competitive market is 'pareto efficient' or pareto optimal meaning that given the results of the competitive market, nobody can be made better off without anyone else being made worse off. It might be interesting to see if their are any moral assumptions smuggled into the First Theorem, but that would be a project for another day.

Gauthier then notes that the market takes as given the initial distribution of factor endowments and comments that the results of the market are fair only if these inputs are fair. The question of what makes for fair inputs is left for another chapter.

Gauthier then moves on to argue that the market does not contain any form of partiality that would justify a moral constraint needed to overcome this partiality. I didn't follow exactly what Gauthier means here. He seems to be trying to establish that nobody is unfairly harmed or benefitted by the operation of the market, but I'm not 100% sure on that. At any rate, the only form of partiality he detects in the market is (economic) rent. Says Gauthier,

"to the extent to which certain factors are in fixed supply - to the extent to which certain abilities or materials are not freely substitutable in the market - there is the possibility that demand for the goods produced with the use of these abilities or materials will bring about a market price for their use that includes rent.

...

We shall return to the subject of rent, in considering the establishment of the perfectly competitive market as one of the terms of agreement among rational persons. For the present, we should note that our argument in support of the claim that the perfect market would create a morally free zone has not been shown to apply to those parts of market transactions that involve rent."

The next section, which I literally read 10 times but still don't quite follow, explains why there is the assumption of mutual unconcern or 'non-tuism' or that people take no interest themselves in other peoples interests. In Gauthier's words,

"It is neither unrealistic nor pessimistic to suppose that beyond the ties of blood and friendship, which are necessarily limited in their scope, human beings exhibit little positive fellow-feeling

...

The fundamental distinction between 'us' and 'them', between blood-brothers and strangers, has limited the scope of co-operation ... among much of humankind. We invoke the assumption of mutual unconcern to determine if that limitation is an inescapable evil of the human condition."

But if Gauthier is assuming that mutual unconcern exists (it seems he has never gone to the movies, where large groups of people squirm and laugh and cry and get angry on behalf of characters they have never met before and that they know are fictional, but I digress), then why the need to further make it an assumption of the competitive market? Why not just remain silent on the topic unless mutual concern would somehow interfere with the operation of the market. And if mutual concern interferes with the operation of the market (as we noted that Joseph Heath argued back in post 9 of this series, as I'm sure you recall :), then wouldn't the need to refrain from exhibiting mutual concern itself be an impartial constraint on people's behaviour and thus qualify as a moral rule by Gauthier's standards?

Anyway, Gauthier then goes on to note that the scope of this mutual unconcern is properly limited to the market,

"In real quasi-market societies there is a temptation, manifest both in thought and practice, to see the social world as falling within the scope of the market, and thus free from all forms of constraint. On the one hand the ideal of a morally free zone is extended to embrace all social interaction, and on the other hand all human relationships are interpreted as self-interestedly contractual, lacking in interpersonal concern. Thus neither the need for moral and political constraints nor the possibility of genuinely affective human ties is sufficiently recognized.

As we have already insisted, one of our fundamental themes is that the morally free zone created by the market can arise only within a deeper moral framework. We shall show that moral constraint is not only compatible with mutual unconcern, but indeed rationally required given this unconcern and the typical structures of interaction."

---
* economists typically just use the term 'monopoly' or 'pure monopoly' rather than 'perfect monopoly' but I felt the language used for the two concepts should be parallel in order to reflect the nature of monopoly and competition as opposite ends of a single scale.