Crawl Across the Ocean

Wednesday, May 30, 2012

105. The Righteous Mind - Part 2

Note: This post is the one hundred and fifth 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.

This week the topic is the book, "The Righteous Mind" by Jonathan Haidt. Having read the book, I highly recommend the NY Times review of it as an excellent summary.

Note that we have encountered the work of Jonathan Haidt before, albeit indirectly, in this earlier post which discussed an essay by Steven Pinker, which was written as a reaction to Haidt's work.

Today's post covers the first of Haidt's three main arguments, that:

1) People don't make rational decisions to decide what is moral, but instead have instinctive reactions regarding morality and then rationalize their instinctive reaction after the fact. Haidt likens the rational, conscious part of the brain to a rider sitting on an elephant (the part of the brain which makes the instinctive moral judgement) and argues that the rider has little control.

In fact, Haidt argues that the primary function of the ration part of the brain is not to conduct dispassionate analysis, but rather to come up with reasons to support whatever instinctive judgment the elephant (the intuitive part of the brain) has already come up with. Haidt recounts a number of experiments which support his thesis, including one where people were hypnotized to have negative associations with certain words, and then read passages describing moral violations some of which included the code word and some that didn't. The researchers found that passages containing negative code words lead to stronger negative reactions from the readers. To their surprise, even a story which didn't describe any moral transgression at all, and simply said either that, "Dad tries to take topics that appeal to both professors and students in order to stimulate discussion, or the same thing but worded so that "Dan often picks topics" found that in a third of respondents, inclusion of a negative code word lead them to morally condemn Dan. The researchers had asked people to explain their reaction and those who reacted negatively to Dan said things like, "Dan is a popularity seeking snob' or "I don't know, it just seems like he's up to something."

Haidt argues that the intuitive part of our brain is always active, instantly judging everything and everyone we come across as favourable or unfavourable, and then the 'rational' part of our brain steps in to provide reasonable sounding arguments to support this position. In one study, (echoed in the news recently), researches found that people who were more intelligent were able to come up with more reasons to support whatever position they held, but greater intelligence did not help at all in coming up with reasons for the opposing point of view. In other words, being smarter just makes you better able to rationalize your own intuitive reactions, not better able to understand other opinions.

Haidt figures that in evolution, it was more important for people to be able to maintain their social reputation (by explaining their actions, creating arguments to support their gut (intuitive) reactions and so on) than it was for them to come to accurate conclusions about what was true.

Haidt does allow for some capacity of the rational part of the brain to do more than just support the intuitive part. He cites a study in which if people were forced to wait 2 minutes before responding to some stimulus, then they would be less likely to just go with the gut reaction and more likely to come to a reasoned conclusion. But mostly Haidt is pessimistic about the ability of the individual to question their own biases or challenge their own intuitive reactions and beliefs - he believes that we need other people to challenge us and that society needs a back and forth between people of different viewpoints in order for people to be exposed to multiple viewpoints and have a chance to update their opinions based on competing arguments rather than just constantly searching out more supporting evidence for what they already believe.

In the last chapter of the first section of the book, Haidt has a list of bullet points summarizing the argument so far, that we care obsessively about our reputation, that conscious reasoning is like a press secretary that argues on our behalf, not a scientist searching for truth, and that reasoning can take us to almost any conclusion because we ask, 'can I believe it?' about things we want to believe and 'Must I believe it?" about things we don't.

But I wanted to focus on his last bullet point which is as follows:

"In moral and political matters we are often groupish, rather than selfish. We deploy our reasoning skills to support our team, and to demonstrate commitment to our team."

Atrios expresses this in characteristically pithy fashion, as "It's tribal." an further notes that, "Policy preferences mostly aren't about narrow personal economic considerations, even for the rich."

It's interesting that Haidt focused in on the political realm, home to the guardian syndrome, which is filled with interpersonal ethics such as 'be loyal' as compared to the commercial syndrome where the duty to other people is pretty much limited to not screwing them over (foregoing force and fraud). In this he is echoing some of the earlier works we have encountered such as Hans Ritschl, Howard Margolis and Plato.

Disappointingly, Haidt does not really delve into the question of how or why commercial activity or science might lack the groupishness or tribalness that is present in morality (as seen by Haidt) and in politics, or why politics in particular sees this tribal behaviour.

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Wednesday, May 09, 2012

104. The Righteous Mind, Part 1

Note: This post is the one hundred and fourth 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.

This week the topic is the book, "The Righteous Mind" by Jonathan Haidt. Having read the book, I highly recommend the NY Times review of it as an excellent summary.

Note that we have encountered the work of Jonathan Haidt before, albeit indirectly, in this earlier post which discussed an essay by Steven Pinker, which was written as a reaction to Haidt's work.

The Righteous Mind has three main arguments:

1) People don't make rational decisions to decide what is moral, but instead have instinctive reactions regarding morality and then rationalize their instinctive reaction after the fact. Haidt likens the rational, conscious part of the brain to a rider sitting on an elephant (the part of the brain which makes the instinctive moral judgement) and argues that the rider has little control.

2) Rather than seeing people as having no morality at all and being solely self-interested or even just having a moral system oriented solely around not doing harm or being unfair, Haidt argues that in addition to caring about care/harm and fairness/cheating, people also care about freedom/oppression, loyalty/betrayal, authority/subversion and sanctity/degradation. Haidt compares these moral senses to tastebuds, and according to his studies, people that are "WEIRD" (Western, Educated, Industrialized, Rich and Democratic) tend to to focus more on Care/Harm, Fairness/Cheating and Freedom/Oppression, while Conservatives have a wider range of moral values (note: you can take Haidt's test here (registration required) - I tried it and scored higher than both the typical American liberal and the typical American Conservative on care, fairness, loyalty and authority, and lower than both on sanctity - even though I am Western, Educated, Rich and Democratic, perhaps my lack of exposure to Industrial workplaces made the difference :)

3) That people are 90% chimp and 10% bee, meaning that people are a mix of self-interested and group-interested. I won't recount the old arguments about how on the one hand, being selfish helps individual genes reproduce while on the other hand cooperative groups can outcompete selfish ones, but Haidt offers lots of support for the notion that evolution offerred ample opportunity for humans to evolve a nature that is at least partly group-interested rather than being purely self-interested.

I do recommend Haidt's book, it is easy to read, entertaining, covers a lot of ground, and will change the way you interpret other people's (and perhaps your own) expression of opinions and moral views.

Additionally, Haidt is well read, marshals lots of empirical evidence for his arguments, doesn't seem to be following a rigid ideological agenda and seems willing to consider new information and change his views accordingly.

The next few posts will look at some of Haidt's arguments in a bit more detail and get into some of the areas where, in my opinion, there is some room for improvement in his thesis.

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Tuesday, November 08, 2011

99. Self-Interest, Hypocrisy and the Commercial Takeover

Note: This post is the ninety-ninth 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.

I don't have enough time this week to do justice to the rest of 'The Republic' so instead I just wanted to mention this post by Paul Krugman.

Krugman starts by referencing a Mel Gibson movie from a few years back that was entitled, 'The Patriot' but featured a protagonist who was unwilling to fight for his country until his own family was attacked, and then embarked on a campaign for personal vengeance. Krugman links to an essay by Michael Lind that explains how this is hardly an example of what is normally referred to as patriotism.

Krugman sees a similar confusion when wealthy people who support measures that will benefit the poor or middle class are attacked as hypocrites (for example) for not being selfish.

Says Krugman,

"Which brings me to the subject of this post, the apparently equally misunderstood concept of hypocrisy. I’ve been getting some personal attacks on this front, but it’s a bigger issue than that. Here’s the personal version: suppose that you’re a professor/columnist who advocates higher taxes on high incomes and a stronger social safety net — but you yourself earn enough from various sources that you will pay some of those higher taxes and are unlikely to rely on that stronger safety net. A remarkable number of people look at that combination of personal and political positions and cry 'Hypocrisy!'


If you remember the 2004 election, which unfortunately I do, there were quite a few journalists who basically accused John Kerry of being 'inauthentic' because he was a rich man advocating policies that would help the poor and the middle class. Apparently you can only be authentic if your politics reflect pure personal self-interest


So to say what should be obvious but apparently isn't: supporting policies that are to your personal financial disadvantage isn't hypocrisy — it’s civic virtue!


Lind's essay about Mel Gibson ended with concerns that we may have lost the sense of what citizenship and its duties mean. Indeed. If people can't comprehend what it means to work for larger goals than their own interest, if they actually consider any deviation from self-service somehow a sign of phoniness, we, as a nation, are lost."

Another example, that Krugman doesn’t mention is the field of 'Public Choice Theory' which is premised on the notion that neither civic virtue nor patriotism exist.

Anyway, I just wanted to highlight this post from Krugman because what he is observing is what I have observed myself, and what provides some of my motivation for pursuing this series of posts. It seems as though commercial syndrome virtues are gradually driving out guardian virtues in our discourse, to such an extent that classic guardian precepts such as patriotism and civic virtue are now seen through a commercial lens as either hypocritical or incomprehensible for a growing percentage of the population. And on that note, it's time for a vacation, see you in a few weeks...

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Tuesday, January 11, 2011

78. Capitalism and Freedom (part 1)

Note: This post is the seventy-eighth 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.

This week's post is on the book 'Capitalism and Freedom' by Milton Friedman.

The Wikipedia article provides a good summary of the book and it's main arguments so I won't go into much more detail here. In general, the theme is on why we should limit the role of government in society and let the free market reign wherever possible.

Friedman is a descendant of Veblen in many ways, strongly of a commercial syndrome mindset and naturally hostile to the guardian syndrome. But where Veblen had the better of Friedman though, was in his willingness to see how people who were nominally part of the free enterprise system could end up mired in corruption by taking on guardian roles and mindsets and activities. Veblen recognized the guardian syndrome and saw it as a threat when it mixed with the commercial one. Friedman, on the other hand, seems not to even recognize the existence of the guardian syndrome and, perhaps as a a result, exhibits an almost childlike belief in the virtues of the free market.

In this time when the U.S. is turning into a plutocracy before our eyes, it's amusing to read Friedman's explanation of how wealth inequality is a safeguard of political freedom. And while Friedman goes on at length about the hazards of monopoly, the hazards of a perfectly competitive market go unmentioned (although surely Friedman must have read many critiques of perfect competition such as the one made by Joseph Schumpeter in 'Capitalism, Socialism and Democracy'.)

I guess, much in the same way that it is hard for us to judge the ancient Greek's views on slavery, it may be hard for me to judge the writings of Milton Friedman in the 1960's, a very different era with respect to views of government and markets. To the extent that Friedman wanted to explain that the mixed economies of the West were a better approach than full-on Communism, then certainly he is on solid ground. And to the extent that he takes on special interest groups (such as the American Medical Association) that are out to serve their own interests ahead of society, then he is still on solid ground.

But Friedman goes beyond this to advocating a wide range of free market policies without really thinking through his analysis completely. The next post will be a case study of one example from this book, the case of 'Corporate Social Responsibility'.

Not to say the book isn't worth reading. Friedman is a great writer and a clear thinker and there's certainly lots of valuable points to be made. It's just that given current circumstances, it all seems a little dated, overstated and reminiscent of tiresome level 2 thinking1 at times.

Near the end of Capitalism and Freedom, Friedman comments that,
"The conversion of the intellectuals [to collectivist views] was achieved by a comparison between the existing state of affairs, with all its injustices and defects, and a hypothetical state of affairs as it might be. The actual was compared with the ideal.
At the time, not much else was possible ...

We now have several decades of experience with government intervention. It is no longer necessary to compare the market as it actually operates and government intervention as it ideally might operate. We can compare the actual with the actual.
If we do, it is clear that the difference between the actual operation of the market and its ideal operation - great though it is - is as nothing compared to the difference between the actual effects of government intervention and their intended effects."

The irony is that, at the time, Friedman himself was proposing a set of theoretical, ideal changes to the way society operated, comparing his ideal markets against how things actually worked the time. And here we are, decades later and so much of what Friedman recommended has been tried and failed. Central banks tried increasing the money supply in the manner Friedman suggested but found it unworkable and ineffective in practice. The financial meltdown of recent years disproved his theories about how the U.S. Federal Reserve (Central Bank) caused the great depression. School vouchers have been implemented in many places for many years to little noticeable effect. The Chilean pension system, modelled after Friedman's recommendations, had to be reformed (again) in 2008 because of the exact problems with coverage and cost that Friedman dismisses. The dismantling of social programs and anti-poverty measures and reductions in the level of union power has coincided with increases in inequality and poverty (since Friedman was writing in the early 60's), and recent years have made a mockery of Friedman's claims that the unhindered operation of the free market would result in the narrowing of class divisions or the advancement of popular culture by leaps and bounds or that greater reign for the free market would result in a less materialistic society.

At any rate, Friedman's book provides a good example of the commercial syndrome mindset applied to the question of the proper role of government. Friedman believed that collective action was almost always a bad thing because it forced people to go against their self-interest and thus would never work because people almost always follow their own self-interest. From this assumption of self-interest as the primary, at times sole motivator of humanity, flowed his belief in the supremacy of the market over collective action.

1 I remembered I had written a post about 'level 2 thinking' a while back, but only when I dug up the link did I realize that the quote that prompted that old post was also from Milton Friedman - I guess it's good to know I can be consistent even without the benefit of a properly functioning memory!

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Tuesday, November 02, 2010

69. Selfishness, Altruism and Rationality, Part 2

Note: This post is the sixty-ninth 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.

This week's topic is a continuation of last week's post on the book, Selfishness, Altruism and Rationality, by Howard Margolis

In the last post, we talked about how Margolis explained the failings of the traditional rational choice theory to explain human behaviour in situations where self-interest conflicted with group interest. This is a pretty common observation, generally taken for granted outside of economic circles, but Margolis goes a step further and proposes an alternative model of human motivation.

Margolis calls his model the Fair Share model and it is based on the notion that people feel a desire to 'contribute their fair share' to the public welfare. He describes the underlying motivation of people in this model as follows:

"The larger the share of my resources that I have spent unselfishly, the more weight I give to my selfish interests in allocating marginal resources. On the other hand, the larger the benefit I can confer on the group compared with the benefit from spending marginal resources on myself, the more I will tend to act unselfishly."

Margolis imagines that a person (who he calls 'Smith') contains two separate components, 'G-Smith' who values (Smith's perception of) the general welfare, and 'S-Smith' who values only Smith's personal welfare. Smith stays in equilibrium by adjusting the level of his spending on the public interest so that the marginal value of more public spending by Smith (to G-smith) equals the marginal value of more selfish spending (to S-Smith).

Margolis argues that, from an evolutionary point of view, it would be easier for this sort of limited, 'fair share' altruism to be maintained over time, because it would be less vulnerable to being exploited by selfish people than an unlimited altruism that didn't keep track of how much a person had already sacrificed their personal interests for the public good.

Margolis further notes that,
"The notion that human beings might have the kind of dual preference structure posited by this study is very old, going back at least to Plato's distinction between man as a private individual and man as citizen."

In chapter 6, Margolis goes into more detail on how his model differs from the classical rational choice model, and helpfully unpacks some of the assumptions which are embedded within the rational choice model (but often go unstated or unnoticed):

1. Smith can be treated as narrowly self-interested
2. Smith's utility function is a goods function (i.e. he only cares about what goods people possess, not how they got them or what role he played in determining the allocation)
3. Smith chooses in conformity with the principle of consumer sovereignty (i.e. Smith thinks what's best for society is that everybody get what they wants, as opposed to Smith having a vision of what's best for society which might conflict with what other people want).
4. Smith has only one utility function (as opposed to having one for his own interests and one for the social interest).

As Margolis explains, economists, if confronted with these assumptions might deny that they are a necessary part of the model, but after their denial, they will then go right back to building models and making predictions that only make sense if those assumptions are there.

He also explains how, in the marketplace, where the public interest and private interest are in alignment (subject to all the caveats he have discussed in this series), the difference between the predictions of his 'fair share' model and a traditional rational choice model that posits self-interested behaviour by all participants is not that big. It is primarily in political situations where the differences will be clearer, because here the contrast between private and social objectives is sharper.

If you've had the same struggles as I have over the years trying to pin down how economists come to the (often wrong-headed) conclusions they do, this chapter is a must read. Margolis is that rare bird who knows enough economics to be able to explain things clearly using the language of economics but has still retained enough common sense to be interested in models of people as they actually are as opposed to making unrealistic assumptions so as to have a model that is easier to work with mathematically.

Later on, Margolis talks about how his fair share model explains why people might act differently in different circumstances, pursuing their own interest in one and the public interest in another,
"If I am a producer facing reasonably competitive markets (even the experience of Ford in trying to promote safety features in automobiles in the mid 1950-s is instructive here), then I will scarcely be in a position to do anything very different than produce what the market seems to want. Even if my choices affect only me and my customers, I will not have any customers to benefit unless I offer them things they want at a price they are willing to pay. If there are external effects (environmental side-effects), the dilemma is even worse.

However, if I am in a senior position in my government, my decisions on public matters often affect society in a large way. This being so, there will be no necessary inconsistency between my behaving as a narrow profit maximizer (to a good approximation) as a private businessman; as a rather casual decision maker, as a voter, and as a very serious decision maker, working very hard and feeling great personal responsibility for the social effects of my decisions as a high public official.

...I wish to say enough here to indicate why [James] Buchanan's and [Gord] Tullock's 'paradox of bifurcated man' seems, from the [Fair Share model] view, to reflect a mistaken assumption that an internally consistent model could not account for a disposition for the same individual to behave in a very public spirited way in some circumstances and as a profit-maximizing economic man in other contexts."

Now this just seems like common sense to me, but then consider the surprise in the reactions of experimenters when they found, exactly as Margolis and his model would have predicted, that when they ran the exact same Prisoner's Dilemma experiment on the same people and only changed the name (in one case 'Wall Street Game' in the other 'Community Game') that people behaved very differently. As the abstract states,
"The results of these studies showed that the relevant labeling manipulations exerted far greater impact on the players’ choice to cooperate versus defect—both in the first round and overall—than anticipated by the individuals who had predicted their behavior." (emphasis added).

My one disagreement with Margolis in the passage above is that after stressing the role played by competition in preventing public interested behaviour in the marketplace, he then fails to note how the lack of competition in the public sector is an essential component of allowing the pursuit of the public interest there (although to be fair, it is somewhat implied in the text).

Finally, Margolis offers some interesting speculation on how caste might be partially explained by the fair share model. In the early stages of society, people who are more disposed towards public action would be more willing to undertake key tasks such as organizing irrigation schemes or a defensive army. In successful societies, these actions lead to large gains for the whole society, and those who were among the early organizers of the action would claim some of that gain for themselves, leading to greater wealth and influence. But under the fair share model, the more wealth you have, the more resources you will donate to the public interest. Richer people have more resources to donate in the first place, plus they donate a higher proportion of their resources, so there is a positive feedback whereby people with more power put more effort into the public realm which gets them more power in return and so on.

As Margolis says,
"As generations pass, the resulting division between those who manage and defend the state (often enough at real personal cost and risk) and those who labor comes to seem to accord with the natural order. What gives that presumption special potency is that there is some substance - something more than a self-serving myth - in the presumption that the noble and commoner are motivated in different ways. In terms of [the Fair Share model], that presumption is false at its root [because all people have an interest in their own welfare and the public welfare] but nevertheless consistent with observed behaviour. Our modern colloquial usage of words like 'noble' and 'peasant' is an anachronism but not necessarily a libel."

If you like economics but generally find economists irritating, and you are interested in the public welfare and the interaction between the two topics, this is a great book.

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Tuesday, October 26, 2010

68. Selfishness, Altruism and Rationality, Part 1

Note: This post is the sixty-eighth 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.

This week's topic is the book, Selfishness, Altruism and Rationality, by Howard Margolis

Margolis' goal in this book is to extend the Economic Theory of Rational Choice so that it covers political situations as well as Economic ones.

He opens the book with a quote from James Coleman which eloquently outlines the problem, while also covering our now familiar choice between two versions of self-interest,
"Classical economic theory always assumes that the individual will 'act in his interest'; but it never examined carefully the entity to which 'his' refers. Often, as when households are taken as the unit for income and consumption, it is implicitly assumed that 'the family' or 'the household' is the entity whose interest is being maximized. Yet this is without theoretical foundation, merely a convenient but slipshod device. In this case, as in many others (e.g. when a man is willing to contribute much, even his life, to national defense, rather than use a strategy that will push the cost onto others), men act as if the 'his' referred to some entity larger than themselves. That is, they appear to act in terms, not of their own interest, but of the interest of a collectivity or even of another person. Indeed, if they did not do so, the basis for society could hardly exist.

Yet how can this be reconciled with the narrow premise of individual interest ... we could simply solve the problem by fiat, letting 'his' refer to whatever entity the individual appeared to act in the interest of. This would obviously make the theory trivially true, and never disconfirmable. A more adequate solution is one which states the conditions under which the entity in whose interests he acts will be something other than himself."

We saw in the last post that James Buchanan was willing to settle for a theory that based human motivation solely on the desire for material gain, arguing that the desire for material gain is always present to some degree in people.

But Margolis isn't willing to settle so easily,
"A satisfactory theory of social choice requires a model of individual choice that is consistent with the way human beings are observed to behave. Yet, even after a generation of work on the problem of applying the economic 'rational choice' perspective to social choice, often leading to striking results, this fundamental problem remains unresolved. We still lack a model that accommodates (without fudging) such obvious observations as that citizens bother to vote and do not always cheat when no one is looking. A resolution of this difficulty can be expected to require some departure from conventional assumptions."

Margolis goes on to indicate that, in his opinion, the main difference between situations which can modelled fruitfully using the traditional model and situations requiring a new model is that situations where the old model works are economic in nature whereas situations where a new model is required are political in nature (echoes of Mancur Olson specifically indicating that this theories on collective action only applied to economic groups, not groups formed for no-economic reasons.

Says Margolis,
"This classical model is profoundly shaped by its root concern with the problems of the marketplace. But in politics we are dealing with goods allocated largely through some coercive process, not through voluntary market transactions; and political 'goods' (such as justice) are often inherently unmarketable. Nonmarket effects (externalities) which are aberrations - market failures, which one seeks to correct - for most economists are the central feature of political life for political scientists.

We can expect that Samuelson's notion of public goods (which can best be understood as a generalization of the notion of externalities) would play a central role in any viable formal theory of politics, and indeed that is the case. It is not too strong a statement to say that societies, and hence politics exist because public goods exist."

Margolis spends a chapter illustrating his argument that the classical rational choice models fails to handle political situations via a series of 3 examples:

* Voting
* Repeated Prisoner's Dilemmas
* Public Goods

In the case of voting, the rational choice model fails to explain why people might go the trouble of voting even when they know their vote won't affect the outcome.

In the case of the repeated Prisoner's Dilemma, the model fails to explain why people will generally cooperate even though on any given iteration they could gain by defecting against the other player in the dilemma.

In the case of public goods, the model fails to explain why people will make contributions to things that are publicly available to everyone. Margolis asks us to imagine a hypothetical man named Smith who is planning a $10 donation to his favourite charity. The classical economic model says that Smith would do this because he wants the charity to have $10 more available to it than it does currently.

But now imagine Smith finds out that someone else has just donated $10 to the charity. Under the classical model, Smith, realizing that his favourite charity is now $10 richer just as he wanted it to be, no longer feels a need to make a donation.

Of course in reality there may be some relationship between how much money a charity has raised and how much people contribute, but it is nowhere near this strong a relationship. Clearly there must be something more to Smith's motivation than simply wanting the charity to be $10 richer, but the classical model has no answer to what that might be.

Margolis argues that there are two altruistic motivations that need to be taken into consideration. We have an altruistic motivation based on wanting other people to have more, and an altruistic motivation based on wanting to contribute our fair share (what Margolis calls 'participation').

Margolis also notes that all of his examples are prisoner's dilemma type situations, which is not surprising since the Prisoner's Dilemma is the formalization of situations where what is in the self-interest of participants is opposed to the group interest.

In the next post we will look at the solution that Margolis proposes in order to create a model of rational choice that can model human behaviour accurately in the case of prisoner's dilemma / public goods type situations.

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Tuesday, October 19, 2010

67. Public Choice Theory

Note: This post is the sixty-seventh 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.

Here's Wikipedia on Public Choice Theory,
'In economics, public choice theory is the use of modern economic tools to study problems that are traditionally in the province of political science. From the perspective of political science, it may be seen as the subset of positive political theory which deals with subjects in which material interests are assumed to predominate.

In particular, it studies the behavior of politicians and government officials as mostly self-interested agents and their interactions in the social system either as such or under alternative constitutional rules. These can be represented a number of ways, including standard constrained utility maximization, game theory, or decision theory. Public choice analysis has roots in positive analysis ("what is") but is often used for normative purposes ("what ought to be"), to identify a problem or suggest how a system could be improved by changes in constitutional rules.'

In discussing Public Choice Theory, we need to be careful to remember the two different self-interests that we discussed a while back:

1) Self-interest in the sense that people just want to accumulate more money and more stuff for themselves and,
2) Self-interest in the sense that when people decide to do something, they choose to do whatever it is they prefer to do.

Now, the first definition of self-interest clearly is not accurate as a description of human behaviour, especially in political contexts, and the second definition is a fairly useless tautology, so the question is then how this concept of self-interest can be made useful.

James Buchanan, one of the founders and most famous advocates of social choice theory takes on the tricky question of self-interest in this summary of public choice theory, stating,
"The source of this charge lies in the transfer of the two hard-core elements, methodological individualism and rational choice, directly from economic theory to the analysis of politics. At one level of abstraction, these two elements are themselves relatively empty of empirical content. To model the behavior of persons, whether in markets or in politics, as maximizing utilities, and as behaving rationally in so doing, does not require specification of the arguments in utility functions. Economists go further than this initial step, however, when they identify and place arguments into the categories of 'goods' and 'bads.' Persons are then modeled as acting so as to maximize some index of 'goods' and to minimize some index of 'bads.'

More specifically, economic models of behavior include net wealth, an externally measurable variable, as an important 'good' that persons seek to maximize.
The moral condemnation-criticism of public choice is centered on the presumed transference of this element of economic theory over to political analysis. Those who find themselves in roles as public choosers, whether as voters, as legislators, as political agents of any sort, do not, it is suggested, behave in accordance with norms that are appropriate to behavior in markets. Persons are differently
motivated when they are choosing 'for the public' rather than for themselves in private choice capacities. And it is both descriptively inaccurate and morally questionable to assign self-interest motives to political actors. Or so the criticism runs.

At base, this criticism stems from a misunderstanding of what the whole explanatory exercise is all about — a misunderstanding that may have been fostered by the failure of economists to acknowledge the limits of their efforts. The economic model of behavior, even if restricted to market activity, should never be taken to provide
the be-all and end-all of scientific explanation. Persons act from many motives, and the economic model concentrates attention only on one of the many possible forces behind actions. To employ the model for prediction does, of course, require the initial presumption that the identified 'goods' that are maximized are relatively important in the mix. Hypotheses that imply that promised shifts in net wealth modify behavior in predictable ways have not been readily falsifiable empirically.

At issue here is the degree to which net wealth, and promised shifts in net wealth, may be used as explanatory incentives for the behavior of persons in public choice roles. Public choice, as an inclusive research program, incorporates the presumption that persons do not readily become economic eunuchs as they shift from market to political participation. The person who responds predictably to ordinary incentives in the marketplace does not fail to respond at all when his role is shifted to collective choice. The public choice theorist should, of course, acknowledge that the strength, and predictive power, of the strict economic model of behavior is somewhat mitigated as the shift is made from private market to collective choice. Persons in political roles may, indeed, act to a degree in terms of what they consider to be the general interest. Such acknowledgment does not, however, in any way imply that the basic explanatory model loses all of its predictive potential or that ordinary incentives no longer matter."

You can see the dilemma Buchanan faces. On the one hand, he acknowledges that people are less inclined to be self-interested in a public setting than they are in a private marketplace, but he can't concede too much on this front or the theory won't really be able to predict anything because it is too unsophisticated to be able to account for the non-monetary motivations people might have (whether for the public interest, or even for self-interest in non-monetary form (e.g. glory or praise).

One element that sometimes gets mentioned and sometimes seems to get lost in public choice work is the very different role played by self-interest in the political realm vs. the private realm.

Within the economic realm, assuming it is contained within the sort of bounds we discussed earlier in our recounting of the work of David Gauthier and Walter Schultz (be honest, shun force, come to voluntary agreement, invest for productive purposes, excluding interactions within a corporation etc.) the pursuit of self-interest can be seen to lead to a socially optimal outcome.

But within the political realm, the pursuit of self-interest is almost always a bad thing. Any attempt to personally make a material gain via politics is almost by definition trading and thus a violation of the 'shun trading' precept which is one of the most critical in the guardian syndrome.

One of the weaknesses of public choice theorists (visible in the quote above from Buchanan) in my opinion, is that they bring over an idea about how commonplace the pursuit of self-interest is from their work in economics without recognizing just how different the political world is.

You can see this in the quote above, where Buchanan says,
"The public choice theorist should, of course, acknowledge that the strength, and predictive power, of the strict economic model of behavior is somewhat mitigated as the shift is made from private market to collective choice."

Buchanan is sophisticated enough to pay lip service to the difference between politics and the marketplace, but he is unable to admit more than that the pursuit of self-interest might be 'somewhat mitigated' by the move to a political world. He himself realizes the moral difference between self-interest in the marketplace and self-interest in politics, and I suspect that he believes that he would not take advantage of political office to enrich himself, yet he theorizes on the basis that most people make little distinction between serving the public and serving themselves. He comments that critics of 'public choice theory' think "We should, therefore, proceed with analysis of politics under the illusion that persons do indeed become 'saints' as they shift to collective choice roles."

At it's best, work in public choice theory resembles the sort taken on by Elinor Ostrom - empirical work that attempts to model how people accomplish collective action and what works and what doesn't, neither neglecting the role played by the pursuit of monetary gain by individuals, nor treating it as the only factor at work.

At it's worst, work in public choice theory resembles wingnut internet diatribes about how all government is evil and every government employee cares for nothing about scamming the system for their own gain, and if we only lived in an anarchist society, all would be well.

Near the end of 'Systems of Survival', Jane Jacobs recounts a poem by Lao Tzu,
"When people lost sight of the way to live
Came codes of love and honesty
Learning came, charity came
Hypocrisy took charge;
When difference weakened family ties
Came benevolent fathers and dutiful sons
And when lands were disrupted and misgoverned
Came ministers commended as loyal"

Jacobs was worried that her own analysis was just a symptom of moral decay, with what was once too obvious to be worth analyzing, now becoming clearer in its absence. Sometimes I think Public Choice Theory is another step down the same road, a study of corruption in politics that treats the corruption as 'reality' with moral behaviour just a fantasy world inhabited by 'saints'.

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Tuesday, October 12, 2010

66. Dimensions of Morality

Note: This post is the sixty-sixth 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.

In his book, Morals by Agreement' David Gauthier defined a 'moral' as an 'impartial constraint' but it wasn't always clear what it was a restraint on

Asked this question, some might say that morals are a constraint on self-interest, a requirement to, say (for example) 'do unto others as you would have done onto you.'

There's no doubt that behaviour towards other people is a part of morality, but it can't be the only part.

Recall, from many posts back, Francis Fukuyama describing Max Weber's Protestant Ethic,
"The capacity for hard work, frugality, rationality, innovativeness, and openness to risk are all entrepreneurial virtues that apply to individuals and could be exercised by Robinson Crusoe on his proverbial desert island. But there is also a set of social virtues, like honesty, reliability, cooperativeness and a sense of duty to others, that are essentially social in nature."

This distinction of the morals making up the 'protestant work ethic' coincides fairly well with the division of the commercial syndrome ethics described by Jane Jacobs into two blocks, as described in an earlier post: A block containing virtues such as honesty and non-violence which is social in nature and which ensures that transactions are win-win, and a block containing virtues such as innovativeness, efficiency and industriousness that can mostly be practiced on one's own.

The first block is indeed constraints on the pursuit of self-interest while the second block is clearly a constraint on something else - in my view the primary constraint there is the constraint imposed on our tendency to place too much weight on the present and not enough on the future.

What about the guardian syndrome?

Many of the guardian syndrome ethics relate to other people, but they diverge depending on whether those 'other people' are part of a person's group or not.

Virtues such as 'exert prowess' and 'deceit for the sake of the task' and 'take vengeance' are generally directed at those who are not considered part of the group, while virtues such as ' be loyal' 'be obedient' and 'dispense largesse' are clearly directed at those who are considered part of the group.

There are a few guardian virtues that don't directly involve other people, and these 'make rich use of leisure' 'adhere to tradition' and 'be fatalistic' These seem generally designed, as far as I can tell, to counteract a desire of one person to get ahead of others via working extra hard, or innovating or imagining a better way of doing things, so perhaps there is an indirect relationship with other people there as well.

So what's my point?

My point is that what I feel we need in our quest to get to the bottom of the systems of survival is a middle ground between, on the one hand, the sort of attitude expressed by Dierdre McCloskey in 'The Bourgeois Virtues' (as covered earlier) - an attitude that says that all the different virtues are a dimension onto themselves that can't be compared to other virtues or made commensurate with them in any way, and on the other hand, an attitude that everything can be reduced to a single axis, for example, that ethics is solely about the denial (or proper role) of self-interest.

The two primary dimensions that are represented in the ethics listed by Jane Jacobs in Systems of Survival, are self vs. others and current self. vs. later self.

Within the guardian system, the dimension of self vs. others in turn seems to be further divided depending on whether the others are part of our group or part of an enemy group.

Within the commercial system, groups don't seem to play a role, and others are just others, with neither a need to treat them as hostile (with deceit and force) but neither a need to treat them with sympathy (via loyalty, obedience and generosity).

No, I didn't really cover any new ground here, just trying to organize my thoughts a little before continuing onwards.

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Tuesday, May 25, 2010

54. Types of Interpersonal Preferences

Note: This post is the fifty-fourth 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.


Many models of human behaviour start with a notion that people care only for themselves and have no interest in what happens to other people. i.e. That people have independent preferences. This notion is generally a part of the economic model of humanity known as Homo Economicus.

As David Hume noted back in 1777, the primary reason for making this assumption is that it is the simplest approach.

We can call this personality type, Mr. Selfish. Note that Mr. Selfish would kill you for a $5 bill in your pocket if he felt that there was no risk of getting caught.

Compared to Mr. Selfish, every other behaviour type places more weight on the interests of others and less on their own interests. The alternatives vary based on why and how they take into account the interests of others.

The opposite to Mr. Selfish would be Mr. Selfless, who places 0 weight on his own interests, with 100% weight on the interests of others.

Another possibility would be Mr. Equal who treats all people's interests equally.

Then there is Mr. Fair. Mr. Fair weights people equally if they are equally deserving, but will weight them differently where circumstances dictate it.

Mr. Reciprocate is a special case of Mr. Fair that places a positive weighting on those who cooperate and a negative weighting on those who don't.

Mr. Referee is a special, impartial case of Mr. Reciprocate who will go out of his way to punish people who deserve it (because they aren't playing by the rules) regardless of whether the breach of the rules affected Mr. Referee personally or not.

Another possibility we can call Mr. Hume, since it was Hume who posited the possibility that our sense of empathy works a bit like our sense of perspective, in that we place more weight on the interests of those we know best (i.e. the objects that are closer appear larger in our calculations) while we place little weight on the interests of those we don’t know as well.

Then there is Mr. Spite. Mr. Spite places a reverse weighting on the preferences of those he dislikes, or considers enemies, taking pleasure in their misfortune, and being pained by their success.

Mr. Team Player places an equal weighting on all members of his team, including himself (or alternatively, places a 100% weighting on the team's interests), but places 0 weighting on people who are not part of the team (or on any non-team interests).

Mr. Obedient places 100% weight on whatever he is told to do by someone in authority, only reverting to his own pattern of behaviour in the case where there is no authority figure to follow.

Mr. Leader places 100% weight on the interests of those he leads, with 0% weighting on his own interests.

Mr. Fiduciary places 100% weight on the particular person he is acting on behalf of, in the particular context that he has a fiduciary duty, and places 0% on his own interests in this context.

Mr. Patriot places 100% weighting on the interests of his country and either a 0% weighting on the interests of other countries, or perhaps a positive weighting on the interests of allies and a negative weighting on the interests of enemies.

Mr. Imitate simply does what the people around him do. If they weight people’s preferences equally, he will do the same, if they weight their own preferences 100%, he will do the same, and so on.

Finally, Mr. Pareto places 100% weighting on his own interests and 0% weighting on other people’s interests, just like Mr. Selfish, but places an additional restraint on his actions to avoid any action that would have a negative impact on other people's interests. Note that this approach requires a benchmark to differentiate between a positive impact and a negative impact, where the logical benchmark would be the state of the other person if they never encountered Mr. Trade at all.

Considering the bewildering array of potential behaviour types, it is understandable that people attempting to construct models of human behaviour have sometimes taken the easy way out and assumed the simple case of Mr. Selfish applies to everyone, much like Hobbes did in Leviathan.

However, as I mentioned back here, both common sense and empirical research tell us that different people operate using different approaches and that even the same people use different approaches in different contexts. Just looking at your own behaviour and motivations, I imagine that, like me, you can recall situations where you were driven by concern for others interests, situations where you were trying to help your team, situations where you felt you should retaliate against someone who did you wrong, situations where you felt you should punish someone for breaking the rules, even if they didn't harm you personally, situations where you placed more weight on the interests of those you know better, situations where you were annoyed by someone else's success or pleased by their failure, situations where you simply went with the flow and behaved like everyone else, situations where you refrained from using fraud or force even though it would have been to your benefit to do so, and so on.

Briefly cross-referencing this (no doubt incomplete) list of behaviour types with the two syndromes from systems of survival, my initial guess would be that the commercial syndrome is based primarily, if not solely, on Mr. Pareto type behaviour while the guardian syndrome is a more complicated mix of Mr. Team Player / Mr. Patriot (be loyal, be exclusive), Mr. Obedient (be obedient, respect hierarchy), Mr. Leader (dispense largesse, respect hierarchy) and Mr. Spite / Mr. Referee / Mr. Reciprocator / Mr. Fair (deceive for the sake of the task, exert prowess, take vengeance).

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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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Tuesday, December 08, 2009

30. The Moral Conditions of Economic Efficiency

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

The next few posts will discuss the book, 'The Moral Conditions of Economic Efficiency', by Walter Schultz. It is a similar book to 'Morals by Agreement' by David Gauthier in that it looks into what morals would be needed to achieve economic efficiency under conditions of perfect competition (recall that Gauthier argued that a market under perfect competition was a 'moral-free zone').

In, The Moral Conditions of Economic Efficiency, Walter Schultz sets out to show that the 'invisible hand' (as encoded mathematically in the First Theorem of Welfare Economics) won't function without the participants in the market having some moral constraints on their behaviour. It does this by constructing an abstract representation of the world containing what Schultz refers to as 'Strict Rational Egoists' (i.e. people who follow the narrow version of self-interest as discussed back in this post) and showing that market interaction of these 'strict rational egoists' would not lead to (pareto) efficient outcomes.

It's an academic book, and the material is pretty abstract, so I thought I'd offer a more concrete example before launching in to a summary of the argument in the next couple of posts.


The pilot to Joss Whedon's short-lived cowboys in space TV series Firefly opens with Mal, captain of an outlaw trading vessel, and his crew 'salvaging' some valuable cargo (condensed food) from a wrecked ship.

Later on in the show we find out that the food has been stamped with a government sign so the original buyer backs out and now Mal needs to find a new buyer. Given that the cargo was obtained illegally and is marked as such, both sides to the transaction will have to be outlaws, or in other words, the exchange will take place without any formal constraints in the form of government oversight or legal penalties for rule breaking. And since both sides to the transaction are outlaws and rule-breakers so they can't be expected to hold to any particular moral code themselves.

A process of elimination leads Mal and his crew to the conclusion that the only person 1who might buy their goods is Patience, the local ruler of an out of the way moon, notwithstanding the fact that the last time they met, she shot Mal.

Arriving on the moon, Mal and his crew first bury their cargo so that it can't simply be taken from them by force. Then Mal tells his henchman to take out the snipers Patience will have waiting for them in ambush, warning him, "Don't kill anyone you don't have to, we're here to make a deal2"

When Mal and his second in command come face to face with Patience, who has brought a number of men with her, Patience suggests that she brought the extra men because she was concerned that Mal might be motivated by vengeance, but he replies that he is 'just doing the job, not looking for surprises'.

Mal tosses Patience one piece of their cargo (food) to prove they have a real cargo, and then Patience tosses Mal the money (the tossing helps keep a safe distance between them). Mal tells Patience the location of the cargo and then suggests he'd prefer it if Patience left first (not wanting to turn his back and get shot).

Patience tells him there's a hitch, and Mal replies, 'we both made out on this deal, don't complicate things' (i.e. the deal was pareto-efficient, so there's no cause for greediness)

Patience tells him she has a rule that she never lets go of money she doesn't have to. In reply, Mal tosses the money back to Patience, meaning they could just part without making a deal at all.

Despite his offer, violence erupts, Mal's side is victorious and he ends up standing over Patience with a gun pointed at her. But instead of shooting her, he simply takes back his money, commenting that, "I do the job, and then I get paid".

So the transaction ends up being entertaining, but it is not very efficient in the sense that a lot of resources were used on both sides (burying the cargo, bringing accomplices, shooting people and horses, etc.)that wouldn't have needed to be used if they could have just trusted each other.

Its the sort of inefficiency that led Hobbes to conclude that life in a state of nature would be 'nasty, brutish and short' but note that the transaction does end up meeting Schultz's definition of efficiency, since both sides benefit from the exchange - Patience gets the food and Mal gets the money (since both parties are better off after the exchange, it is Pareto efficient).

But note that the only reason the outcome turns out this way is due to the moral code followed by Mal, wherein even though he had the opportunity to take his money and keep his cargo as well, he chose to make the exchange as if it had been made honestly and without resort to force by either side. So although both sides apply force and fraud in their dealings with each other, Mal and company are applying those in the service of achieving an efficient exchange which benefits both parties, whereas Patience and her henchmen are employing force and fraud in an attempt to achieve a Pareto-inefficient exchange that benefits them at the expense of Mal and his team.

In a nutshell, what Schultz ends up arguing in The Moral Conditions of Economic Efficiency is that an economy composed only of people like Patience, who 'never give up money when they don't have to' will lead to economic inefficiency and only by adding in people like Mal who restrain themselves from 'strict rational egoism' (taking what they can get) based on normative constraints (i.e. moral rules) can the 'invisible hand' work to achieve a pareto efficient distribution of goods.

Schultz does this by first establishing precisely what it means for someone to be a 'strict rational egoist' and then showing how the proof of the first welfare theorem fails to hold if participants in a market are strict rational egoists.

Having done that, he then goes on determine just what sorts of normative constraints are required to make a market work (Pareto) efficiently. But those are topics for subsequent posts.

1This is a violation of one of the conditions of the first welfare theorem and perfect competition - that there are multiple buyers and sellers, but even if there were more options, it's hard to see how that really changes the point much in this particular instance.

2The comment reminds me of Jane Jacobs, describing how Moses distinguished between when the Israelites have been a military force, 'killing and pillaging their way through territories' and when they instead bought passage through other people's territory and that in these cases they should stick to the highway, 'invading neither left nor right, taking heed to their good conduct'.

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Saturday, August 01, 2009

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.

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Thursday, June 18, 2009

16. Free-Riders

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

In economic terms, a 'free rider' is a person who gets receives a benefit without contributing to the cost of generating of that benefit. The term derives from the notion of someone riding public transit without paying a fare. They are 'riding for free'.

In Mancur Olson's 'The Logic of Collective Action' which I covered in the last post, his idea was that as any group trying to generate a benefit grows larger, the temptation to free ride grows, and that rational self-interested people would not choose to cooperate in a group of this nature unless they were able to get some specific benefit from their cooperation (beyond the public good that their cooperation creates).

The Wikipedia entry offers the following example and possible solution,

"Suppose there is a street, on which 25 people live, and which suffers from a litter problem. A weekly street-cleaning service would cost $2,500 annually. Suppose that each person is prepared (i.e., able and willing) to pay $100 or more for the benefit of a cleaner street.

If the service is engaged, everyone will benefit. However, it is possible that some people on the street will refuse to pay, anticipating that the service will be undertaken in any event. Despite the fact they may be prepared to contribute $100, they will claim that they are not prepared to pay, and instead hope that others in the street will pay for the system anyway, and they receive the benefit for no personal expense.

As a result, it may happen that no system will be installed, an example of market failure. This is despite the fact that allocative efficiency would be improved.


One common solution to the problem is to gather the 25 participants and make them behave like one customer, so the decision is reduced from 25 independent decisions to one. A vote can be taken, but if the answer is yes, everyone will be forced to pay regardless of their individual support. This is why public services such as military defence and police service are almost exclusively provided by governments."

Note that the failure of a collective activity due to free rider incentives is a form of Prisoner's Dilemma, where people have an incentive to defect (free-ride) regardless of whether the other group members are cooperating or free-riding.

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Thursday, June 11, 2009

15. The Logic of Collective Action

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

The Logic of Collective Action, by Mancur Olson, is a pretty straightforward book, at heart. There is one primary argument which is at once profound and straightforward:

Almost all group activity has a prisoner's dilemma type structure.

The argument is as follows:
1) People form groups to further their interests
2) The interests that the group is intended to further are non-excludable* in the sense that the benefits will accrue to all group members, regardless of their contribution towards achieving them.
3) People have an incentive to 'free ride' by getting the benefits of group membership while not contributing personally towards the achievement of group goals.

* Olson calls these public goods but acknowledges that the 'non-rival' component of the standard definition of public goods is not all that relevant to his argument

For example:

1) a labour union is formed to further its member's (the workers) interests.
2) the goals that the union pursues higher wages, better working conditions, etc. will go to all union members
3) Maintaining an effective union takes work (dues need to be paid to support it financially, people have to be willing to go on strike and forego their paycheck if necessary, etc.) and workers have an incentive to try and gain the benefits from the union without contributing towards achieving its objectives.

The notion is that if other people are going to cooperate (i.e. contribute towards group goals), then the best approach for a person is to defect or free-ride (i.e. not contribute towards group goals). And if other people aren't going to contribute towards group goals then you are still best off to also not contribute.

This is equivalent to the original Prisoner's Dilemma scenario where regardless of what your fellow prisoner does, the best option is to rat them out and confess.

Olson is primarily arguing against those who assume that group members always have individual interests that are aligned with the group interest.

Olson figures that in small enough groups, the members may each get enough benefit for it to be worth it to contribute (although contribution levels will still be less than the optimal or efficient level) but for larger groups there is unlikely to be any contributions (or any group) at all.

Taking the example of labour unions, Olson notes that historically unions started from small groups and only later merged into bigger organizations.

For large or 'latent' groups, as Olson calls them, to maintain themselves, they either need to make membership in the group mandatory to prevent free riding, or they need to provide a specific benefit to group members that justifies their membership beyond the public benefit. This is why unions want a closed shop and why professional associations (e.g. bar associations) want the same thing.

It is also why small groups of people with a common interest are often more powerful than large groups with a common interest. Olson notes that business lobbyists are effective within a particular industry, where there are typically only a handful of players, but lobby groups that represent business as a whole are weak because the individual members have little incentive to support the general business lobby group.

One way around this dilemma, Olson notes, is for large groups to use a federated structure, much in the way that most large unions are organized with locals and umbrella groups. Another similar option, that Olson doesn't mention, but I want to throw in so I don't forget about it later, is to use a hierarchical structure, where there are small groups that report to a single superior, and then a small group of superiors who report up to another higher superior, and so on.

Naturally, the larger the group, the less likely it is that you can count on everyone else to contribute, which in turn means the less likely you are to contribute so the harder it gets to achieve the group goals as the group gets larger.

On the topic of large groups, Olson notes that even the state, which can appeal to patriotism and which provides large economic benefits to the citizens by virtue of its existence, can not rely on voluntary contributions and instead must compel people to pay taxes.

Unfortunately, Olson does not pursue this further to inquire why, under a democracy where voters could presumably elect those politicians promising to eliminate taxes, taxes still remain, or to consider the possibility that a significant number of people are happy to pay taxes as long as they know that everybody else is paying a fair share as well - meaning that the compulsory nature of taxation might only be down to a small group of anti-social people who would try to free-ride. Or, in other words, the ironic prospect that it might only be due to the presence of libertarians that we need a coercive state.

We can see the limitations of Olson's concerns about the impossibility of collective action in large groups more clearly from a passage on page 64,
"Some critics may protest that even if social pressure does not exist in the large or latent group, it does not follow that the completely selfish or profit maximizing behaviour, which the concept of latent groups apparently assumes, is necessarily significant either; people might even in the absence of social pressure act in a selfless way. But this criticism of the concept of the latent group is not relevant, for that concept does not necessarily assume the selfish, profit-maximizing behaviour that economists usually find in the marketplace. The concept of the large or latent group offered here holds true whether behaviour is selfish or unselfish, so long as it is strictly speaking "rational".


"A man who tried to hold back a flood with a pail would probably be considered more of a crank than a saint, even by those he was trying to help. It is no doubt possible infinitesimally to lower the level of a river in a flood with a pail ... but the effect is imperceptible, and those who sacrifice themselves in the interest of imperceptible improvement may not even receive the praise normally due selfless behaviour."

It's hard to imagine a poorer choice of analogy. Anyone who's ever lived near a river, and even most who haven't, probably appreciates that you don't hold back a flood with a pail (what would you do with the water in your pail?), you hold back a flood with sandbags. I mention the word 'sandbag' and what mental image comes into your head? If you're like me it's the image of a large group of people working day and night often with the help of many selfless volunteers to build walls of sandbags to prevent a river from flooding a community - exactly what Olson is arguing will not happen.

Moving on, there's a very interesting passage on page 100 where Olson quotes at length from Hans Ritschl in 'Community Economy and Market Economy',
"The fatherland and mother tongue make us all brethren together. Anyone is welcome to the exchange society who obeys its regulations. But to the national community belong only the men and women of the same speech, of the same ilk, the same mind ... Through the veins of society streams the one, same money; through those of the community, the same blood...

Any individualist conception of "the State" is a gross aberration ... [and] nothing but a blind ideology of shopkeepers and hawkers.

The State economy serves the satisfaction of communal needs ... If the State satisfies needs which are purely individual, or groups of individual needs which can technically be met otherwise than jointly, it does so for the sake of revenue only.

In the free market economy the economic self-interest of the individual reigns supreme and the almost sole factor governing relations is the profit motive, in which the classical theory of the free market economy was appropriately and securely anchored. This is not changed by the fact that more economic units, such as those of associations, cooperatives or charities, may have inner structures where we find motivations other than self-interest. Internally, love or sacrifice, solidarity or generosity may be determining: but irrespective of their inner structures and the motives embodied therein, the market relations of economic units with each other are always governed by self-interest.

In the exchange society, then, self-interest alone regulates the relations of the members; by contrast, the state economy is characterized by communal spirit within the community. Egotism is replaced by the spirit of sacrifice, loyalty and communal spirit ... 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.

The objective collective needs tend to prevail. Even the party stalwart who moves into responsible government office undergoes factual compulsion and spiritual change which makes a statesman out of a party leader ... There is not a single German statesman of the last 12 years .. who escaped compliance with this law."

To which Olson comments,

"Ritschl's argument is exactly the opposite of the approach in this book. He assumes a curious dichotomy in the human psyche such that self-interest rules supreme in all transactions among individuals, whereas self-sacrifice knows no bounds in the individual's relationship to the state and to the many types of private organizations."

Personally, I was instantly struck by the echoes of Jane Jacobs 'Systems of Survival' in Ritschl's passage, with his references to an exclusive state sector with a spirit of loyalty, sacrifice, coercion and communal spirit in contrast with a cosmopolitan commercial sector open to all and characterized by pursuit of self-interest. Not to mention Olson's response describing Ritschl's 'curious dichotomy'!

Thinking of Jacobs helps us find the passage in Olson's work that reconciles his views with the 'exactly opposite' views of Ritschl - footnote 17 on page 61, which says,

"In addition to monetary and social incentives, there are also erotic incentives, psychological incentives, moral incentives and so on. To the extent that any of these types of incentives leads a latent [large] group to obtain a collective good, it could only be because they are or can be used as 'selective incentives," i.e., because they distinguish between those individuals who support action in the common interest and those who do not. Even in the case where moral attitudes determine whether or not people will act in a group-oriented way, the crucial factor is that the moral reaction serves as a "selective incentive." If the sense of guilt, or the destruction of self-esteem, that occurs when a person feels he has forsaken his moral code, affected those who had contributed toward the achievement of a group good, as well as those who had not, the moral code could not help to mobilize a latent group.

To repeat: the point is that moral attitudes could mobilize a latent group only to the extent they provided selective incentives. The adherence to a moral code that demands the sacrifices needed to obtain a collective good therefore need not contradict any of the analysis in this study; indeed this analysis shows the need for such a moral code or for some other selective incentive." (my italics)

So on page 100, Olson is baffled by Ritschl's argument that people will abide by a collectivist moral code when working in collective activities and a self-interested moral code when working in market activities, suggesting that this was the opposite of his argument.

But back on page 61, Olson came out and said that one way to overcome the problems of collective action was to employ a special moral code for collective activities which puts the group interest ahead of the selfish interest - something that his theory demonstrates the need for!

I'll close this post with a passage from David Hume's 'A Treatise of Human Nature' that Olson, in footnote 53 (many of the most important parts of the book are in the footnotes), says was pointed out to him by John Rawls,

"There is no quality in human nature which causes more fatal errors in our conduct, than that which leads us to prefer whatever is present to the distant and remote, and makes us desire objects more according to their situation than their intrinsic value. Two neighbours may agree to drain a meadow, which they possess in common; because it is easy for them to know each others mind; and each must perceive, that the immediate consequence of his failing in his part, is, the abandoning the whole
project. But it is very difficult, and indeed impossible, that a thousand persons should agree in any such action; it being difficult for them to concert so complicated a design, and still more difficult for them to execute it; while each seeks a pretext to free himself of the trouble and expence, and would lay the whole burden on others. Political society easily remedies both these inconveniences. Magistrates find an immediate interest in the interest of any considerable part of their subjects. They need consult no body but themselves to form any scheme for the promoting of that interest. And as the failure of any one piece in the execution is
connected, though not immediately, with the failure of the whole, they prevent that failure, because they find no interest in it, either immediate or remote. Thus bridges are built; harbours opened; ramparts raised; canals formed; fleets equiped; and armies disciplined every where, by the care of government, which, though composed of men subject to all human infirmities, becomes, by one of the finest and most subtle inventions imaginable, a composition, which is, in some measure, exempted
from all these infirmities."

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