Crawl Across the Ocean

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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