56. Keystone Economics

"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.

29. Community and Market Economy

A while back, in reviewing Mancur Olson's 'Logic of Collective Action', I included a long passage that Olson quoted from 'Community and Market Economy' by Hans Ritschl and I noted that Ritschl sounded a lot like Jane Jacobs in Systems of Survival.

So I eventually got around to tracking down a copy of 'Community and Market Economy' for myself. It's a relatively short essay, and Ritschl devotes most of it to differentiating the 'Community' economy from the 'Market' economy. He starts by describing the State economy, which he considers as an actually existing type of economy, and then, by contrasting the State economy with the free market economy, attempts to determine the characteristics of a pure 'communal' economy (which the State economy resembles in some ways).

"Both the state economy and the free market economy presuppose a group of persons whom the economy encompasses and by whom it is carried. But there is a great difference in the form of social cohesion within these groups. The free market rests on an exchange society...

The elements of this exchange society include economic units of the most diverse social structure: family associations ... co-operatives, foundations and clubs ... and associations formed to secure profits. Whatever the principle of cohesion in the internal structure of these units, the social relation among them is that of the market: they trade with each other and against each other.

...

The principle of social cohesion in the State is not that of society, but that of community.

...

Anyone is welcome to the exchange society who obeys its regulations. But to the national community belong only the men and women of the same speech, of the same ilk, the same mind. They have in common love of their homeland, of its mountains, woods and rivers, its villages and cities; they have in common the great figures of its past, the same hatred and suspicion of the 'hereditary' enemy; they have in common joy of victory, the sacrifice of their sons, maternal sorrow, the grief of defeat and the bitterness of bondage. 'All for each and each for all' is the motto of community. But the exchange society's motto is 'Chacun pour soi, Dieu pour nous tous' Through the veins of society streams the one, same money; through those of the community the same blood.

Is it necessary to demonstrate once again that any individualistic conception of 'the State' is a gross aberration? It is nothing but a blind ideology of shopkeepers and hawkers, a universalization of exchange thinking...

These quotes all go to Ritschl's point that the fundamental difference between the market economy and the communal, or State economy is the bonds between members of the society and the corresponding motivations of the members. (Note: the bolding is added by me to reflect where Ritschl is commenting on one of the ethics identified by Jane Jacobs in Systems of Survival).


Like Jacobs, and in contrast to Plato, Ritschl believes that people should be members of both the communal and market economies at the same time:

It is of the essence that the member of an exchange society is at the same time a member of the community, that the member of a community is also a member of an exchange society.

Ritschl disagrees with the idea that communal needs are just individual needs that can't be provided for individually for technical reasons:

In essence and substance the economy of the State is a matter of satisfying pure or partaking communal needs. These are not in any way to be considered as needs of the individual which for some reason must be provided for 'collectively'

In the next section Ritschl differentiates between the two types of self-interest that I discussed previously here noting that the narrower meaning of self-interest is what applies in the market economy whereas the wider meaning of self-interest as synonymous with 'rational' applies in both the market economy and the communal economy:

"In the free market economy the economic self-interest of the individual reigns supreme and the almost sole factor governing relations is the profit motive, in which the classical theory of the free market was appropriately and securely anchored."

...

The classical theory was right in observing on the market none but the home oeconomicus, but this is only a partial view of the economy and the classical theory's association of he concept of the economic process with self-interest has remained disastrous to this day. In it's second formulation, to achieve the greatest utility with given means, the economic principle has frequently become quite independent of self-interest operating as between one person and another.

...

In the exchange society, then, self-interest alone regulates the relations of the members; by contrast, the state economy is characterized by communal spirit within the community. Egotism is replaced by the spirit of sacrifice, loyalty and the communal spirit. In the exchange society, the individual is guided only by personal advantage; here, he thinks, feels and acts as a member of the community. His own interests take second place.

Ritschl explains how this understanding leads to the justification of coercion by the State, the last quote in this section in particular shows how he understood the situation as being represented by a Prisoner's Dilemma, even though he doesn't use that term since it hadn't been coined yet.

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.

...

..."unity is shown by the willing subordination to the will of the community and State. Obedience, submission and submission are held in honour as manly virtues. Willing subordination remains an indispensable virtue also in the democratic State. The minority complies."

...

Given the unequal measure of people's communal spirit and given the need to ensure the success of the willing sacrifice, the voluntary principle is not enough. The contributions and obligations must be legally determined and laid down. In fundamental contrast to the exchange society and market economy, community and public economy rest on compulsory military service and taxation.

Ritschl comments on how the State economy resembles that of a household more than that of a firm (I made the same point at some length back here)

...the State is, in the last analysis of its nature and content, not a production economy but a consumption economy ... This consumption aspect is expressed meaningfully in speaking of the public household. The economy of the State is comparable not to the firm but to the household.

Finally, Ritschl comments on some of the ways that the State gets involved in the economy to meet individual needs that the market fails to meet for one reason or another, but he notes that this meeting of individual needs is not the fundamental basis of the communal economy. He also distinguishes between market economy wages which are based on the value brought to exchange by an individual and State economy salaries which reflect the status of the person being paid rather than the economic value of their labour.

Given unequal endowment with material goods and intellectual capacity, the market system by itself does not lead to an harmonious and complete satisfaction of all socially important needs and the gap must be filled by the public economy.

..[this is] not, however, the meaning and historical basis of public economy itself.

...

In the free capitalistic market economy the hiring of outside labour for services and work is again subject to specific compensation: payment by performance, the wage principle.

...

In the State economy, by contrast, we find the principle of maintenance. The soldier is adequately clothed, housed and fed, and his pay is a sort of pocket money.

...

For old age, widows and orphans, the State provides by old age pensions ... and thereby assures a proper standard of living for the officials family as well. In the free market all these cases of loss of earnings are covered not by the maintenance principle, but by the insurance principle. But since the market economy does not apply the insurance principle generally or in good time, the State provides by social insurance for collective needs partaking in care of the unemployed, the old and the sick, the disabled and widows and orphans. State coercion thus makes the insurance principle universal.

----
My reading of the essay picked up on the following traits identified by Ritschl with market economy:

"Come to voluntary agreements"
"Shun force"
"Collaborate easily with strangers and aliens"


And the following traits identified with communal economy:

"Exert prowess"
"Be obedient and disciplined"
"Adhere to tradition"
"Respect hierarchy"
"Be loyal"
"Take vengeance"
"Dispense largesse"
"Be exclusive"
"Treasure honour"

Ritschl didn't cover all the ethics that Jacobs identified in Systems of Survival (although he's not far off on the Guardian system), but those he did identify are a perfect match with what Jacobs came up with in her similar dichotomy between market ethics (market economy) and guardian ethics (communal economy).

Sadly, Ritschl's essay doesn't provide a more theoretical framework which can take us past a simple identification of the two distinct syndromes, but it is another voice in favour of the notion of two distinct, complementary systems that govern ethics/economics - one based on the ethics of 'shopkeepers and hawkers' and one based on communal needs and the state.