56. Keystone Economics

Note: This post is the fifty-sixth in a series. Click here for the full listing of the series. The first post in the series has more detail on the book 'Systems of Survival' by Jane Jacobs.

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

Proverb


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

Wikipedia notes that,

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

while also noting that the actual meaning of keystone is

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

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

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

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

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

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

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

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

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

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

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

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

52. Leviathan

Note: This post is the fifty-second 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.

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The problem with reading Leviathan, by Thomas Hobbes is that, unlike say the works of say, Weber or Nietzsche, its impossible to find an English translation. Nevertheless, I persevered so that I could write this post.

In Leviathan, Hobbes attempts to build a model of how society should be governed from first principles, in the same way that the newly developing (at the time) field of geometry was able to generate interesting conclusions starting from a seemingly self-evident set of axioms and building from there using logical reasoning.

Hobbes starts with the individual human as his basis and then builds from there based on the characteristics shared by all individuals.

Typically, when reading a book adorned by a cute black and white bird from the southern hemisphere, I make a point of skipping any preamble/introduction and going straight to the text. However, it's worth making an exception in this case for the excellent introduction by C.B. Macpherson who has done a fair bit of interesting work in his own right on ethics and economics. Macpherson makes the point that Hobbes defines power such that power consists of power over other people, each person's power offsets the powers of other people, and there are people who desire more power than others would like them to have¹. It is this dynamic which forces a competition for power and which makes that pursuit of power harmful, in a manner that the pursuit of other things (e.g. food and shelter) is not.

We can see that, in modern terms, what Hobbes was getting at is that power is a positional good, and that, given the internalities and externalities imposed by the search for this positional good, the net result of a competitive pursuit of power is negative. He characterized this eloquently in his description of the state of nature (where there is no 'Leviathan' to prevent people from using force on one another) as a state in which life is 'nasty, brutish and short.'

Given the trouble caused by the pursuit of power in a state of nature, this pursuit must be curtailed by placing all the power in a single source that is so strong, nobody will dare to challenge it (the Leviathan of the title). Hobbes sees civil war as the greatest evil, even more so than tyranny or dictatorship.

It seems to me that Hobbes' argument is really an argument for a single world government. After all, as Hobbes acknowledges, the conflicts between states have the same negative sum character that conflict within a state has. However, with his overriding concern for avoiding civil war and less concern for was between states, Hobbes seems to implicitly accept that government must govern a particular territory. It is one thing, for Hobbes, to have two different governments occupying different territory, but a far worse thing to have two (potential) governments competing within a particular territory. As far as I could tell, he never really delves into why there is such a distinction.

Hobbes imagined that a person (who Hobbes refers to as 'the foole') might see their best course of action to be in agreeing to set up Leviathan if that's what everyone wants, but then still using force when it suits them and they feel the risks of being caught or punished by the state are outweighed by the potential gain. This is similar to David Gauthier's concerns that it made sense for people to make promises, but not necessarily to keep them.

Hobbes counter-argument is as follows,

"He therefore that breaketh his Covenant, and consequently declareth that he thinks he may with reason do so, cannot be received into any Society, that unite themselves for Peace and defence, but by the errour of them that receive him; nor when he is received, be retayned in it, without seeing the danger of their errour; which errours a man cannot reasonably reckon upon as the means of his security; and therefore if he be left, or cast out of Society, he perisheth; and if he live in Society, it is by the errours of other men, which he could not foresee, nor reckon upon; and consequently against the reason of his preservation; and so, as all men that contribute not to his destruction, forbear him onely out of ignorance of what is good for themselves."

Basically, Hobbes is invoking the 'shadow of the future' suggesting that anyone who violates the rules will be expelled from society and therefore suffer more than they might gain from their covenant-breaking. This of course, relies on some assumptions about the government's power to catch and punish covenant-breakers, as well as assumptions about the rationality of potential covenant-breakers.

Another potential puzzle for Hobbes view is how the same people can on the one hand have the foresight to institute a sovereign power to have a monopoly on violence, but on the other hand, have the lack of foresight to get stuck into a violent state of nature if that sovereign power is lacking.

There are at least a couple of answers to this problem:

1) Instituting leviathan doesn't require everyone to go along, it just needs a large enough group, whereas in the state of nature, even a few people who prefer power to peace will cause a chain reaction of violence and vengeance.

2) Hyperbolic discounting means that people can see, from the vantage point when they are setting up leviathan, that peace is preferable to the state of nature, even though when they are in the heat of a conflict they may prefer attack or vengeance for an attack to peace.

For the most part, Hobbes' viewpoint reflects the movement in his time away from older hierarchical notions of status towards a commercial syndrome minded, 'all humans are created equal' view, with Hobbes justifying this on the basis that every human has the capability to kill another, and thus inflict 'infinite' harm upon them, so based on the fact that infinity is the same in all cases, all people are equal on this basis. Macpherson makes the same point in his introduction although he says that Hobbes employs a 'bourgeois mentality' rather than a commercial mindset, but he means the same thing. The commercial mindset is well reflected in Hobbes' rules for how men should behave with respect to one another (a long list of rules that Hobbes says basically amounts to 'do unto others as you would have them do onto you,' - a good commercial syndrome sentiment).

But even with a commercial mindset, Hobbes still saw the need for a single, all-powerful sovereign power that would take on the role of society's guardian. Once instituted, the sovereign could never be replaced (respect for tradition), it could not be usurped (respect for hierarchy), it must be obeyed, it was just for the sovereign to take vengeance (but unjust for anyone else to take vengeance), the sovereign was expected to exert prowess and it was just for it to employ deceit, force or whatever means were necessary to maintain order. Under Hobbes, the (guardian) rules that apply to the sovereign are completely different than the (commercial) rules that apply to everyone else.

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¹ It's interesting that Hobbes has a section of the book tiled 'On Man' which is generally written as if all people are the same, but in his discussion of the pursuit of power he allows that there may be variation in that it is only some people who desire so much power that there is inevitably conflict.

T(r)olls

I remember while on vacation in Nepal, at various points around the country you would encounter (often makeshift) roadblocks, at which a toll would be demanded, sometimes by the government, sometimes not.

I was reminded of those tolls by this story in the Globe and Mail about the Government considering a purchase of the privately owned Ambassador Bridge (one of the busiest border crossings in the world). In Nepal, the tolls were demanded basically at gunpoint, although the guns were usually implicit (often only a 'voluntary donation' was asked for), albeit not quite as implicit as they are here at home.

Back Home

So I'm back from vacation in Tibet/Nepal and just about ready to re-engage with the series on ethics. One encouraging sign while I was gone was the shared Nobel Award for Economics awarded to Elinor Ostrom and Oliver Williamson - encouraging because they are two of the people whose theories I was already planning to cover as part of my blog series.

One thing I haven't noticed in any of the commentaries I've read so far, beyond the general comments from the Nobel committee itself that, "Both scholars have greatly enhanced our understanding of non-market institutions," is people commenting on the similarity between their work. Williamson is primarily known for his work on explaining how corporations (firms) exist in part to help overcome market failure due to monopolies caused by the specific nature of many production processes (i.e. people who make engines that only work in Ford cars can only sell them to the Ford company and vice-versa), while Ostrom is known for her work on how local groups of people can overcome market failure due to shared ownership of limited local resources.

In my Sytems of Survival-coloured view, both Ostrom and Williamson's work represent efforts to understand how people have developed innovative ways of coping with situations where guardian ethics (that deal with monopoly and limited resources) come into conflict with commercial ethics (that deal with trade of goods and resources).

More on both of these folks at some point in the future...

The Name of the Game is Right There on the Box

Before I take on the bleak prospect of considering the outlook for 2009, first a quote from perhaps the last person in the world you would want to play monopoly with,

Benjamin Powell, of the Von Mises Institute, writes, "What's Wrong with Monopoly (the game)?"

"The pervasiveness of monopolies in the game does not represent the situation in the real world. Every piece of property on the game board is essentially a monopoly; once the dice roll determines where a player lands, there is only one seller who the consumer must purchase from. The monopolies are easily obtained by purchasing land from the bank or another player. In the real world, however, consumers are rarely compelled to purchase goods from a seller—or if one seller exists it is because it has out-competed others over time. Even with one seller, consumers can always switch to substitutes or abstain from purchasing completely. That is not the case in Monopoly. Again, this is not a small matter. The game is wrong on the central point of economic decision making: who is in control of what is produced and how?"

I think any further comment on my part would be superfluous.