Naked Self-Interest is a Recipe for Social Dissolution (a response to Branko Milanovic)

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Dear Branko,

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.

mandeville

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.

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pseudoerasmus

“What’s very important, and something that many economists don’t appreciate, is that no amount of “good institutions” changes this fundamental result.”

Oh come on. This is now just ancient information. We live in a post-Mancur Olsson and post-Douglass North and post-Acemoglu world where the nth-order free rider problem is known and appreciated by economists who think about institutions at all. Cultural evolutionists who talk about free rider problems even reference Mancur Olson and you think economists don’t know about him ? Also, the Russian failure was 20 years ago and there’s a been a lot of thinking about that in New Institutional Economics as well as development economics. No one thinks any longer like the pseudo-Coasian Andrei Shleifer that who owns the assets is unimportant ! But I guess having “mainstream economics” as a foil for your arguments is very useful.

pseudoerasmus

Actually you should be the one naming names of those economists who think insider privatisations in Russia or Mexico went smoothly, if you think they are so widespread. Again, you speak as though Acemoglu & Robinson did not happen ! (e.g., http://scholar.harvard.edu/files/jrobinson/files/jr_fromcurrentday.pdf ) But of course they have completely hegemonised the agenda in political economy and development economics.

pseudoerasmus

Actually this is the link I meant: http://economics.mit.edu/files/10403 by Acemoglu and Robinson. Check the section “Russian privatisation”

pseudoerasmus

And the point is not that Acemoglu and Robinson say anything interesting or non-obvious about Russia — they do not — but they insist on the political and distributional consequences of ‘purely’ economic policy actions and their agenda is now the dominant paradigm in political economy and development economics.

Mike Waller

Having read the first article you cited, it strikes me that the essentially optimistic prognosis for Russia it gives may prove to be singularly misplaced. Rather than use democratic pressures to to reduce inequalities which would threaten his own power base, the available evidence is that Putin will continue to use the standard response of the (in his case, de facto) dictator of seeking to restore internal solidarity by the creation or cultivation of external threats. The Crimea, Eastern Ukraine and Syria all seem to be cases in point.

pseudoerasmus

Well, in a practical sense, Russia’s long term prospects are poor because since 2000 there has been little investment in productivity capacity in the Russian economy net of depreciation. And this does probably have something to do with the very skewed distribution of wealth (especially in combination with natural resource dependence). Ironically the relationship between asset distribution and poor growth is classic Acemoglu-Robinson but Robinson did not really use that argument in the first link. (But I meant to cite the 2nd link.)

Juan Alfonso

Peter, I strongly agree with you.

I would like to add that I have trouble understanding why rules, laws and institutions are considered by mainstream economists as something separated from the economic agents themselves.

Rules, laws and institutions are not placed there by god (as in the 10 commandments myth) neither by chance. They are created, maintained and enforced by economic agents. If economic agents are ruthlessly rational and sefish then they would not get to create or maintain prosocial rules, laws and institutions.

Individual preferences and values,coevolve culturally and biologically. Rules, laws and institutions evolve through cultural group selection and also through deep individual thinking.

Genes, individuals, cultural variants and groups are all subject to the same selective pressures. Even maistream economists should not assume that rules and institutions are entirely different from the agents that are subject to them. Otherwise they should explain where prosocial rules and institutions come from. And they should explain it using the same assumptions that lead to the Homo economicus.

pseudoerasmus

This comment completely ignores the existence of the New Institutional Economics such as Douglass North who also cites experimental literature and who has repeatedly argued, most notably in “Understanding the Process of Economic Change”, that self-interest must be tempered by norms etc. in order for a market economy to function properly.

The comment also completely ignores the existence of the extensive “culture & institutions” literature in economics which examines the origins of preferences and values and treats them as endogenous. e.g., http://pubs.aeaweb.org/doi/pdfplus/10.1257/jel.53.4.898 and http://scholar.harvard.edu/nunn/publications/culture-and-historical-process — both of the surveys even cite works by Boyd & Richerson, Henrich, and other cultural-evolutionists !

Juan Alfonso

Thank you, Pseudoerasmus.I don´t know about Douglas North. I will look into it.

I have read “Why nations fail” from beginning to end, though, and Acemoglu & Robinson say little about where institutions come from and how they evolve. In my opinión they were too focused on presenting an antithesis to Jared Diamond´s thesis on the geographical explanation for the unequal wealth of nations. Unfortunately that should have been their key point because: what if institutions were the result of cultural adaptations to different environments and ecological challenges, as Marvin Harris presented in his work (partly inspired in Wittfogel´s concept of hidraulic despotisms and in Chagnon´s field work)? That way Jared Diamond would be right again!

I was commenting Branko Milanovic´s post. I assumed that Milanovic´s view is that of the mainstream economists whereas Gintis and Bowles represent an alternative view. Is this the case or is it the oppossite?

My point still stands. Milanovic´s comment seem to reflect that he has internalised a(mainstream) economic model as if it faithfully represented the reality; As if Homo sapiens = Homo economicus. Did I get it wrong?

We are critizicing the theoretical model here, not the experimental evidence. A model can be extremely useful as long as it is simpler than real life, but we have to keep in mind that it is only a model, and that it will fail when trying to explain things at higher degrees of complexity. Cultural evolutionists and alternative economists try to fill the gap and provide us with slightly more complex models. They still won´t represent the reality. I think “Ultrasociety” tries to do precisely this (though I am ashamed to admit I haven´t read it yet).

May I return the favor and tell you that your comments SEEM to ignore costly signaling theory (which could solve de nth punishment problem) defended by such as Amotz Zahavi and Geoffery Miller?

Your comments also seem to ignore Martin Nowac´s work on agent-based models and the evolution of cooperative strategies in certain environments of noise and uncertainty, as long as there is some degree of populational spatial viscosity.

You are probably aware of Hogdson and Knudsen work on social and economic evolution. And what about Skyrms´s work on the evolution of the social contract? Are they mainstream economists or alternative thinkers?… They do address the origin and evolution of habits, routines and institutions.

Anyway, I prefer reasoned arguments than citing authors and bibliography to support my points. By the way this is all the bibliography I know… 😉

Sergey Tsirel

В рамках лично моего главного правила “Жизнь – это компромисс между равнообязательными, но не совместимыми между собою правилами”, мне этот спор представляется попытками ворваться с разных сторон в настежь распахнутые ворота.
(не берусь литературно перевести свою максиму)

ЗЫ. Извини за резкость замечания.

Steven B Kurtz

First encounter with your blog. I suggest that the focus on distribution of an insufficient ‘natural pie,’ from which all material well being is derived, should be directed towards the shrinking and toxification of said pie. Plus consider the fact that 400% additional slices are needed now compared to 100 years ago. Humans will compete more and more as this overshoot continues. I will wager for charity on this at longbets.org Shrinkage of throughput, and eventually the numbers of our plague phase species is in the cards.

pseudoerasmus

I said, quite specifically, that “the nth-order free rider problem is known and appreciated by economists who think about institutions at all”. I did NOT say that economists subscribe to the Turchin view of the world. Acemoglu and Robinson do NOT talk about values, for the most part; but the “commitment problem” in institutional analysis is a big part of their analysis (cf http://economics.mit.edu/files/4461 ) That indicates awareness of the problems of what you’re talking about, even if they have a different solution. And, yes, Douglass North was not all that successful about where institutions come from — but again, he shows awareness of the issue, which is that it is not possible to have a world filled only with narowly self-regarding agents.

Besides (as I’ve said elsewhere in the past) cultural evolutionists barely address the topic that interests Acemoglu-Robinson or Douglass North — the extraordinary cross-country variation in institutional quality in the world today. Cultural evolutionists stick to the general issue of the evolution of cooperation in the human species in general, or prosociality in small-scale societies. But the differences between (for example) the UK and Mexico and Afghanistan ? So far the cultural evolution output on that kind of institutional question is very slim.

“I haven’t run the poll that would ask economists on whether they agree with Branko. Do you know of such a poll? But I can infer what they teach in economics classes, by the fact that economics students are much less cooperative than students in other social disciplines. So economists en masse are teaching a version of the view so clearly formulated by Branko.

But the vast majority of economists deal with very narrow and practical issues — like measuring inequality, or forecasting exchange rates, or how much carbon emissions you get from a unit of GDP. Theoretical and historical inquiry into the origins and evolution of cooperative behaviour are not relevant. But those economists who DO study institutions and culture are aware of the nth order free rider problem. It’s not that difficult to understand. And I am speaking exclusively of perfectly mainstream neoclassical economists.

Roger

“Good institutions are not going to work in the absence of internalized prosocial values held by a sufficient number of people.”

I am a businessman, not an economist or social scientist, but I agree more with Peter than Branko. I believe that values and norms are the essential foundation from which rules and institutions emerge (granted the effects are circular, not linear). I think the late North and the always timely McCloskey would both strongly agree, though more with me than with each other.

I agree however with Branko that the institutions should be set up in such a way so that each person could pursue their own interests and in so doing is guided as if by an invisible hand to serve the interests of others. This isn’t an argument for greed (defined as EXCESSIVE self interest) or for ignoring that if the rules lead to destructive social outcomes that we should beware and think long and hard about the rules.

“Telling anybody to pursue their naked self-interest is not a recipe for greater social good. It’s a recipe for social dissolution.”

Well, sort of…. Again, I am assuming we share prosocial values and that we are pursuing prosocial outcomes within properly functioning institutions. Scientists — if the system is working properly — seek the fame of discovery or explanations, knowing that they lead to human enlightenment. Politicians — if the system is established correctly — seek re-election by serving the electorate. Same for athletes. Similarly, in markets — if the institutions are set properly –voluntary exchanges will tend to optimize human welfare.

Granted, the IF is carrying a lot of Weight in every case.

Where I disagree most strongly with Balko is where he promotes cheating if we can get away with it or manipulation of the rules to create privilege. Here is where I see we are dealing with flat out greed and naked self interest. On Balko’s opinion piece, several commenters suggested this was borderline psychopathic. I do not disagree. If this is what is being taught in economics classes, then I understand where the students are going astray.

Do note that I do not in any way believe that politicians or scientists or athletes are more or less greedy than those in markets. In all cases, we need strong prosocial values and good institutions which build upon the values and provide constraints which align self interest with other interest.

Juan Alfonso

I agree with you, Roger. Institutions and self-interest could interact conforming what economists call “Incentives”. Rules act as constraints that channel competition in aceptable ways for the competitors, for example, in pro-social ways.

Rules in a sport are designed for two main things: first to make the game more fun and second to make the competition more efficient as a means to sort out the best players (or teams) from the worst. The point is that players themselves are the ones that design the rules of the sport. They are the most interested in demanding rules that force everyone to wear helmets (hockey) or forbid doping.

As you say interests at different levels of organization can be alligned as long as the rules constraints set the “right” incentives.

Ross Hartshorn

“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.”

Hear, hear.

The missing ingredient in all the economics I’ve seen so far, is an analysis of how the wealth distribution skews government decision-making. Given that some people are (for whatever reason) more productive than others, we may want to allow them to accumulate more wealth so that they can utilize it more productively.

However, and this is the other side of the scale, the more an elite has a larger share of the wealth, the more likely they are to warp government policy in a way that will “lock in” their advantageous position.

It occurs to me that if we could find any way, even approximate, of measuring these two affects, we could find the optimum amount of inequality, which more or less balances these two affects.

I’m not sure if Seshat could help us with that, but I mention it here for Dr. Turchin to consider?

O.Voron

“The result was economic collapse and social dissolution—Russia was a failed state by the mid-1990s”
Indeed. Russia is a perfect real life illustration of neoliberal economics theory at work. Gaidar and the Harvard team of economic advisers did everything by the book. The results were disastrous for economy and society. I had a glimpse of it and it was a sheer horror.
I never heard as much as an ‘oops’ from Harvard people. Perhaps Pseudoerasmus will promptly point to some professional publications,but nevertheless, the ‘Russia case’ was never publicly recognized as an abysmal failure of neoliberal economics theory. They did everything right, it was just this and that that was wrong with Russia why it didn’t work…
The mere existence of Gaidar Forum and Gaidar Institute which celebrate Yegor Gaidar’s legacy and, BTW, at the expense of Russian taxpayers, means that Russian elites never learned their lesson either.
We will wait and see what will become of Greece after all prescribed economic policies are implemented…

concomdynamics

After all, I can suggest a simple solution for this cooperation – competition dilemma, which may satisfy both sides. Shortly, it is a full appreciation of dimensionality of the problem. In nature, there is no such thing as cooperation per se; the cooperation/competition is going for something vital (survival, reproduction, domination). By the way, it is a reason why we do not take too seriously the results of toy experiments.

There are “good” and “bad” cooperation (“bad” and “good” competition accordingly).
Cooperation for survival (defence, collective hunting/production, mutual help in life threatening situations, etc.) is good one. On the other hand, the cooperation for domination (nepotism, oligarchic syndicate, monopolization of wealth and power, etc.) is bad for society.
Evolutionary, humans are predisposed to both, cooperation for survival and to a breaking of cooperation for dominance by competition.

Therefore, Peter’s and Branko’s views are not actually opposite, they are both right within each own dimension.

concomdynamics

Nevertheless, you may probably agree that not all kinds of cooperation are good.
Moreover, significant part of many institutions is specifically designed for breaking harmful cooperation: the principle of separation of powers (in the Constitution), multi party system of government (in politics), antitrust laws (in economic), the adversarial principle (in justice), anti-corruption, anti-organized crime laws and so on.

It seems that complex society cannot exist without constant suppressing of some forms of cooperation.

pseudoerasmus

Peter Turchin said:

{{{ [Acemoglu and Robinson] talk about politics, not values or preferences. }}}

But I already said A & R do NOT talk about values !!! I repeat — again, the point is that economists who study institutions are aware of the nth order collective action problem.

Let me repeat that. Economists who study institutions are aware of the nth order collective action problem — after all, it is economists who first formulated that “puzzle”.

If you have a society filled only with purely self-regarding agents, then you have free riders at ever higher levels of analysis. Institutional economists know this problem. Turchin, Bowles, Gintis, Wilson et al. are NOT the only people who know this !!!

But this paragraph by Peter makes it sound as though economists don’t know about the nth order collective action problem !!!

{{{ 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. }}}

Acemoglu and Robinson have different solutions from Turchin et al. That’s all. A&R would argue Branko’s world DOES work, as long as there is an ultimate enforcer of rules with a strong self-interest in the maintenance of the system. That was, after all, Mancur Olson’s own solution to the nth order collective action problem with the “stationary bandit”. Acemoglu & Robinson go beyond the “stationary bandit” framework in their theoretical paper on the Political Coase Theorem: http://economics.mit.edu/files/4461

As you surely know, in repeated prisoners’ dilemmas, the discount factor is important to the payoffs from cooperation. The more patient the players are, the more likely they are to cooperate out of self-interest.

{{{ 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. }}}

What DIRECT empirical evidence is there that businessmen behave cooperatively and/or ethically because of pro-social values, rather than out of self-interest ??? You didn’t present any evidence in your Ultrasociality book, as far as I can remember. Most of the evidence for pro-social values comes from experiments suggesting pro-sociality at an abstract level, and involving students and “ordinary people”. But you would expect businessmen and financiers (as well as politicians) to be a highly self-selected group of people more likely to be self-regarding than the average.

In Ultrasociality you talk about the shift in values between 1950 to 1980 with references to Reagan, Rand, Gekko, Skilling, etc. But this is a non-explanation explanation which just points to ‘culture’. How do we know this change in values was not the result of some other process? Here I think Acemoglu-Robinson-style or even a Marxist-lite framework fits the facts better. The 1945-73 productivity growth in the US economy (and the world in general) was abnormally high by historical standards. But after 1973, it reverted to the long-term norm. So what to do in the face of the declining profit rate? Capture the political system to permit greater oligopoly power, expansion of markets, weaken unions, etc.

pseudoerasmus

( That also seems more consistent with the POV in Secular Cycles — the distributional conflict drives the results. )

pseudoerasmus

And for the record, I personally do agree that you need pro-social values in at least part of the population in order for society to work. And I think that’s especially true in the richest, highest-functioning societies of the OECD. It’s difficult to believe that Germany, Denmark, Japan, and even the United States ‘work’ only because completely self-regarding people fear punishment. I do not believe that.

BUT I don’t think the evidence is strong enough to exclude the Acemoglu-Robinson-style view that self-interest and distributional politics determine elite commitment to an institutional regime.

pseudoerasmus

A summary of what I’ve been saying:

(1) Institutional economists are keenly aware of the nth order collection action problem. They know there is a ‘problem’ with proposing a society filled with purely self-regarding agents. They realise this. They don’t need to be told this.

(2) The institutional economists with a libertarian bent — from Hayek to Douglass North — have always proposed values, norms, and morals, as the solution to this problem. They didn’t get too far, because they didn’t have too much experimental evidence, but they did believe in the importance of values and norms and morals.

(3) Other institutional economists — such as Acemoglu — would argue the problem is soluble rational-choice-theoretically — as long as the elites (or a coalition of interests) are farsighted enough to commit to an ultimate enforcer of the rules of the game.

(4) There is a sizeable ‘culture’ movement filled with impeccably mainstream economists (names like Nunn, Alesina, Zingales, Greif, etc.) who believe in the crucial importance of norms, values, and culture.

(5) Nonetheless, I think the world as described by Branko Milanovic is perfectly defensible in an Acemoglu-style rational actor framework. (This is ironic because Branko does not like Acemoglu.) And I don’t think the evidence for the Turchin worldview is strong enough to exclude the possibility that norms and values may simply be reflecting the credible threat of the enforcement of the rules of the game.

I think an unexpected source of evidence for #5 is https://ideas.repec.org/p/iza/izadps/dp8499.html — more intelligent groups are more cooperative than less intelligent groups. The likely explanation for this is that intelligent people are more likely to understand the counterintuitive long-term benefits of cooperation and are patient enough to wait for them. That supports the rational actor view. And the added element is a psychological trait (intelligence and impulse control), not culture.

Yudi

This post seems to set up a false dichotomy. PE does agree with both contentions you make here, but he is not contradictory due to this fact.

PE has already said that he supports contention 2. “It’s difficult to believe that Germany, Denmark, Japan, and even the United States ‘work’ only because completely self-regarding people fear punishment. I do not believe that.” But that was not the question in your original post, which was about whether a specific business subculture, embedded within a larger society, could function that way.

PE also supports the first contention: “Nonetheless, I think the world as described by Branko Milanovic is perfectly defensible in an Acemoglu-style rational actor framework.” These positions do not contradict themselves because PE believes that highly intelligent self-interested people could cooperate in situations that others might not–rational choice theory could work better for them. He also seems to believe that business cultures are likely to attract self-interested people who want to get ahead, while those with less ambition or more prosocial attitudes would probably take up another role in society, in less stressful or more altruistic work. Therefore the actual situation will end up being closer to the self-interested business subculture scenario.

Keep in mind that the situation you described is unlikely to be fully true anyway: while complete sociopaths are probably more prevalent in business than in the wider society (the hedge fund manager who jacked up the price of a drug he bought comes to mind), even quite ruthless businessmen like Andrew Carnegie were heavily involved in philanthropy. If you were to go back in time and ask him, he would most likely call himself a prosocial man! Who am I supposed to believe, him or you, and why? To me, this was the weakest part of your book: you didn’t satisfactorily address the immense relativity of concepts like inequality, fairness, and prosociality. In lieu of carefully considered discussions of them, you used your own values and expected the reader to agree.

(Aside from this I liked several parts of the book, since they contained many interesting arguments.)

pseudoerasmus

{{{ you need to decide which of the two positions you are with }}}

I need not decide, because the evidence is ambiguous.

Also, I do not consider it a matter of either/or, but a matter of degree. For example, I suspect Germany and Japan have more pro-social populations, whilst the USA and the UK have less pro-social populations. That would explain the differences in their political economy. Then there are those societies having agents who punish cooperative behaviour ! (Cf Hermann, Thöni, Gächter 2008)

{{{ It’s a logical impossibility to construct a functional society that produces costly public goods with rational agents who maximize solely their own material benefits }}}

No, it’s not logically impossible. Cf the folk theorem(s). If agents are far-sighted and patient enough, then they know the long-term payoffs are higher with cooperation. If you add intelligence to the mix, it’s even more possible (logically).

( It also depends on the technology of the society. If your technology is stagnant, the payoffs are different. In that case, it may be better to loot than to cooperate in production. )

In practise, you only need a part of the population to be farsighted, patient, and intelligent. Such people create, support, and maintain the rules of the game with enforcement mechanisms — out of their own self-interest. The rest of the population can be potential free riders (your “knaves”) who are only kept in line through a credible fear of punishment.

Do bankers, lawyers, bureaucrats, etc. comply with insider trading laws because they have pro-social values ? Or do they have a well-founded fear of being caught and punished ? Yet those kinds of elites in well-functioning societies support such impartial rules of the game, because they realise their long-term self-interest is served by them.

So there’s no “infinite regress” of collective action problems — as long as there is a class of people in power who have a vested interest in the rules of the game and who keep the rest of the population in line.

Again, the above is only as a matter of logic, not of fact. For the empirics, the within-population distribution of psychological traits like intelligence, time preference, etc. matters.

And I think this view actually fits the institutional history and political economy of successful countries better than your view.

jsn

I have run small businesses now for 25 years and have actually read some of the stuff Pseudoerasmus refers to. Bracketed by experience of business reality, it is so far into the realm of “religion” that mathematical economics has constructed for itself, and so at odds with what one actually experiences in our actual marketplaces amongst actual people trying to do actual things that it strikes me as a kind of subcultural scholasticism of Economists (capitals denote members of the true faith).

There is a commitment in the repetitive comments that if only we all knew as much math and theory as Pseudo we could all understand that economic production can and should be a morals free realm where life amongst people can be brought into the purity of the theory for our mutual benefit. It’s a utopianism that confuses its complexity for a reality hidden behind layers and layers of assumptions necessary to make the math all work beautifully, or at least support the ordained position.

People don’t behave this way, haven’t and aren’t likely to. All the referents with which I’m familiar have assumptions or data sets or structures that can be challenged and have. That doesn’t make them wrong, but it does make the incredibly strong claim that capitalism can benefit humanity by being submitted to despite our moral impulses highly improbable.

pseudoerasmus

What are you talking about ? (1) I did NOT say anything should be “morals-free”. (2) Peter Turchin’s argument is the one that’s “mathematical” and purely “logical”. He himself says that. I’m the one asking for evidence. (3) It’s an open question, how much “good” behaviour in society is driven by morals/values and how much by rules and the fear of being punished by them. Do you really believe (for example) insider trading is curbed by morals, pro-social values, and the good offices of insiders?

Edward

A small note: it is not uncommon that someone A says “economics has missed the important point X” and someone else B says “that statement is outdated, after the work of theorist C economists are now aware of X and factor it into their work”.

It would be very useful, and interesting, to have methods to empirically investigate in what way and to what degree point X in fact influences economists (specified as a set of people that can be studied empirically).

There are experiments on economics students and other such sources of evidence. But something more systematic would be better.

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