Thank you for your comment stemming from reading Ultrasociety. It’s a very clear and coherent statement of what many (if not most) mainstream economists believe, although they don’t usually care to formulate it as well as you did. Naturally, I disagree with it—my whole book is an extended argument for the opposite view of how societies really function, and what needs to be done to make them to function better.
Let’s start by making crystal-clear what we are talking about. The main question is whether economic agents, most importantly businessmen (including both corporation officers and business owners), should be motivated solely by self-interest, or should they also be motivated by personal ethics. In your view, businessmen should act as purely selfish rational agents, whose utility functions are based solely on material benefits (to themselves). In other words, they should simply maximize how much money they get. You argue that if they act in this way, externally imposed laws and institutions that embody moral rules will ensure that their private interest will lead to greater social good. As you say, this idea goes back at least to Bernard Mandeville’s The Fable of The Bees: or, Private Vices, Public Benefits.
Now, what do you mean social good? In economics and evolution we have a well-defined concept of public goods. Production of public goods is individually costly, while benefits are shared among all. I think you see where I am going. As we all know, selfish agents will never cooperate to produce costly public goods. I think this mathematical result should have the status of “the fundamental theorem of social sciences.”
What’s very important, and something that many economists don’t appreciate, is that no amount of “good institutions” changes this fundamental result. No matter how well-designed rules are, and how good is the system of sanctions forcing people to follow the rules, if everybody is a rational agent (in the narrow sense of only maximizing their own material benefits) the system will not work. Crooks will pay the cops to look the other way, while judges would decide in favor of who pays them more.
Good institutions will only work when they are buttressed by appropriate values and preferences. You will get a cooperative society that produces public goods only when enough agents, in addition to valuing material benefits, also have prosocial values. In other words, they value virtues such as honesty and fairness, and prefer socially-optimal outcomes, such as desire that collective goods end up being produced, even at a cost to themselves.
This is actually how our large-scale societies function. A majority of people in them have prosocial values and preferences (in addition to self-interest, naturally enough), and that’s why we are capable of cooperating on very large scales. Purely self-interested people are there, but they are a minority. What good institutions do is decrease the costs for prosocial moralistic punishers, but they don’t eliminate the need for people holding prosocial values.
How such a state of things—our capacity to cooperate in huge groups—came to be is a huge question for evolutionary social science, and my book provides an answer to it.
You may say that you are not talking about cooperation, merely about how economic life should work. However, there are two reasons why cooperation is central to your question. First, economy is based in large degree on cooperation. Second, you cannot separate economy out from the society as a whole, thus leaving cooperation to the non-economic—political?—part.
Economic activities involve both cooperation and competition, which are mixed in different proportions, depending on the level at which you look. Firms internally are largely cooperative—that’s why they are constituted in the first place (otherwise one could simply buy and sell individual services on free market). You seem to accept this fact, because in your footnote you agree with me that the system of cut-throat competition that Jeff Skilling instituted internally in Enron was deeply destructive.
In national markets the primary mode of interaction between firms is competition, but it is tempered by a healthy dose of cooperation. First, not all kinds of competition are good. In particular, taking the expression “cutthroat competition” literally, CEOs are not really allowed to assassinate other CEOs, or burn warehouses of competition. This may sound silly, but that’s how market competition played out in Russia during the 1990s (I’ll get back to Russia in a minute). Good competition, which leads to socially optimal outcomes, is limited to such tactics as cutting production costs, increasing product quality, and advertising (the last one not particularly socially optimal in my view, but at least it’s legal).
Also, firms cooperate with other firms—their suppliers, for example. In real life, businessmen work hard to create trust with their partners and maintain reputations. It’s a bad long-term business strategy to be, or at least appear as, completely self-interested.
Finally, the least amount of cooperation we see in international markets, where such organizations as WTO are either fairly ineffective, or serve the interests of the powerful countries.
The second reason why cooperation is key to our debate is that economy cannot be separated from the rest of society, and how businessmen behave in economic matters has a huge bearing on what happens outside the economy.
One connection is a spillover effect. Businessmen who become accustomed to pursuing self-interest in the business sphere will become more selfish in other ways. There is now a well-established experimental result that teaching economics makes students less cooperative. Economics students are much more likely to free ride in public goods games than students from any other discipline. As a result, their inclusion in an experimental group impedes the production of public goods and increases the amount of resources used for punishing free riders—both not socially optimal results. I don’t see any reason why this effect, amply documented in experimental economics, should not operate in real life. I am sure it does.
Furthermore, self-interested businessmen who acquire great wealth will also have an incentive and the means (since wealth is power) to change the laws in ways that will suit them. They can buy, and in some cases intimidate or simply murder (as in Russia during the 1990s) regulators, judges, and politicians. In other words, they, or a substantial proportion of them, will use their power to corrupt the moral foundations of the society as a whole. There is no impenetrable, unbreakable glass wall between economy and society. We use these concepts for analytical purposes, but we should not forget that it’s just a convenience, not reality.
It is interesting that you are right now in Moscow, attending the Gaidar Forum. Yegor Gaidar, of course was one of the most important architects of the Russian economic collapse during the 1990s. Russia provides a good illustration of the general principles that we are discussing.
Russian transition to market economy was managed by some of the best and brightest Western economists. Instead of an economic miracle that the Russians were promised, the result was the fall of GDP by more than a half, immiseration of the 99 percent of the population, and huge wealth windfall for 1 percent (as well as for the Western advisers, I might add). The reasons are undoubtedly complex, but the most important one was the introduction of the dominant economic ideology. Everybody in power—former party bosses, organized criminals, new entrepreneurs (little different from mafia thugs), and the Western economists pursued their private interests. Those few who retained morals were either killed, or made completely powerless. Of course, a lot of self-interested guys got killed, too. The result was economic collapse and social dissolution—Russia was a failed state by the mid-1990s. It was an example of failure of cooperation on a large scale, and massive production of public “ills.”
Now this is just an illustration. My main argument is logical, not empirical. You cannot have a well-functioning society in which everybody, or even a majority, are pursuing solely self-interest. This applies to the whole society, and to its parts, including the economy. Good institutions are not going to work in the absence of internalized prosocial values held by a sufficient number of people. Telling anybody to pursue their naked self-interest is not a recipe for greater social good. It’s a recipe for social dissolution.