Saturday, March 31, 2012

Collective Inaction

I recently read Mancur Olson's totally brilliant Power and Prosperity.  

Olson is one of the few economists I have come across who has a broad enough conception of his discipline to realize that the strictly economic is always embedded in a political and social environment which it shapes it at the same time as it is shaped by it.  While that may seem obvious enough, it is remarkably overlooked in our age of specialization, and it would be valuable enough if that were the only insight in the book.  

But Olson goes much further than this and convincingly starts to apply the most basic tool of economics -- the realization that individuals respond to incentives -- to the analysis of political machines.  With some simple reasoning he is able to generate very parsimonious explanations for a whole bunch of things that are at first quite puzzling.  For example, he explains why a subjugated people might defend a warlord or mafia don.  He explains why the Soviet Union appeared for so long to be a serious economic rival to the United States despite suffering the supposed drawbacks of a command and control organization, as well as why it so suddenly collapsed.  He explains why some societies have been able to transition from authoritarian to democratic structures with remarkable success (post-imperial Japan, post-fascist Germany) while others seem unable to make this transition.  I won't bore you with a longer synopsis.  Suffice it to say that he basically explain just about everything, so go read the book.

Because my point here was something much simpler than expounding Olson's theory.  My point was the train of thought that the first sentence of the book set off.

These days, virtually all economists (and I think also most people in other fields) would agree that societies are most likely to prosper when there are clear incentives to produce and to reap the gains from social cooperation through specialization and trade.

This seems like an innocuous enough phrase, no?  "Most" of us would apparently agree with it, which may make you suspect that it is your standard neo-liberal drivel.  Adam Smith, Invisible hand, blah blah blah.

If you look carefully at the statement though, you find something else going on.  You'll notice first that it doesn't say anything at all about free markets or limited government regulations or light taxes.  In fact, the mention of "trade" only comes right at the end, and, along with its correlate "specialization", is merely a means to an end.  The avowed end is to have incentives to produce and to cooperate in that production.  Just to confirm this reading, let me copy out the rest of the first page of the book.

If a society is to achieve its highest possible income, the incentives must not only be clear but must induce firms and individuals in the economy to interact in a socially efficient way.  That is, they must be similar to the incentives in perfectly competitive industries; those where the market, in addition to having other virtues, is so large  -- or the firms in it are so small -- that no single firm has a monopoly power or a perceptible impact on price.
When we shift 'from what is best for prosperity to what is worst, the consensus would probably be that when there is a stronger incentive to take than to make -- more gain from predation than from productive and mutually advantageous activities -- societies fall to the bottom.  In a Hobbesian anarchy, where there is no restraint on individuals' incentives to take things from one another, or in a kleptocracy, where those in power seize most of the assets for themselves, there is not much production or many gains from social cooperation through specialization and trade.

For me, that first sentence crystallized a shift in perspective that is very simple but very powerful.  Markets are not an end in themselves, they are a means to an end.  The fundamental role of markets is to promote cooperation, not to allow for competition.  Markets are (one way) of solving a collective action problem.  They need to be designed to solve this problem.  The logic for their existence does not fundamentally begin with the individual and a defense of the individual's right to try and make a profit, and then proceed, by way of the invisible hand, to just happen to coincide with a happy, cooperative greater societal good.  The logic runs in reverse.  We are searching for a mechanism to promote cooperation.  To give people an incentive to cooperate we need to solve the basic problem inherent with any form of collective action -- how will the gains be distributed and how will we prevent free riders from overwhelming the system. Competition is just there to solve this secondary, though fundamental, problem, it is just one way to reap the gains from social cooperation.  Competition is a safeguard that is there just to keep the game honest and to try to convince as many people as possible to play.  The invisible hand isn't blind providence, it is intelligent design.

I think it's very powerful to realize that the deep goal of markets is to facilitate cooperation and create a mechanism that solves a problem of collective action.  Most simply, it allows you to do away with the absurd left-right fissure that has engulfed our politics which imagines the market and the state as sworn enemies.  This division is the great ideological red herring of our age.  And more abstractly, it also allows you to see markets as a stage in the evolution of a supra-human organism.  

I could go on and enumerate the many virtues of this new gestalt, but let me just mention something that David Graeber pointed out in Debt: The First 5000 Years -- I am hardly the first to come up with this idea.  In fact, it appears that the first serious free marketeers arose during the medieval Islamic age, andNasir al-Din al-Tusi had no illusion that the market was first and foremost about cooperation, even as far back as 1242:

Let us suppose that each individual were required to busy himself with providing his own sustenance, clothing, dwelling-place and weapons, first acquiring the tools of  carpentry and the smith's trade, then readying thereby tools and implements for sowing and reaping, grinding and kneading, spinning and weaving ... Clearly he would not be capable of doing justice to any one of them.  But when men render aid to each other, each one performing one of these important tasks that are beyond the measure of his own capacity, and observing the law of justice in transactions by giving greatly and receiving in exchange the labor of others, then the means of livelihood are realized and the succession of the individual and the survival of the species are assured.