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.

5. No One Makes You Shop at Wal-Mart

Now who here among us, still believes in choice? Not I.
- The Arcade Fire, Ocean of Noise

This post summarizes Tom Slee's 2006 book, 'No One Makes You Shop at Wal-Mart' The title is a little misleading as the book doesn't really have anything (directly) to do with Wal-Mart.

Instead, it talks about how although right wing folks champion the idea of 'free choice,' there are many situations where free choices doesn't have the consequences you might think (the book's subtitle is 'the surprising deceptions of individual choice')

Slee labels as 'MarketThink' the idea that giving people more choices always leads to better outcomes and that the outcomes from a process of free choices always represent a fair reward to all involved.

Naturally, the first way in which people's choices might not lead to the outcomes they expect/desire is the one I described a couple of posts back, the Prisoner's Dilemma. In fact, making choices that help you but don't lead to the best outcome is pretty much the definition of the prisoner's dilemma.

Slee devotes the first 5 chapters of the book to prisoner's dilemma type situations. Chapters 1 and 2 introduce the concept of the prisoner's dilemma, much as my previous post did.

Chapter 3 provides some more examples, focussing on cases where the prisoner's dilemma leads to private gain at public expense, for example the case of littering (in everyone's interest not to bother putting their stuff in the garbage, but also in their interest not to have a park full of litter), or urban sprawl, where we have an interest both in a compact, livable city, and in a house overlooking lots of open space, but we are able to choose the latter, but can't choose the former on our own.

Chapter 4 talks about the 'arms race' type of prisoner's dilemma in which participants make alternating attempts to get ahead of the other people only to find that the other people retaliate in kind and all parties end up spending a lot of resources while not gaining any relative advantage.

Chapter 5 discusses the conditions in which people can overcome prisoner's dilemmas, noting that where groups are small, everybody knows each other and there is little turnover, people remember what you did last time and will punish you if you do not cooperate. So in a small village there is a stronger push for conformity to local standards of behaviour than there is in a city. As a group of people trying to overcome a prisoner's dilemma grows larger and has less knowledge of each other, the need for a central enforcement mechanism to ensure cooperation grows.

Chapter 6 considers that the nature of many interactions may or may not be a prisoner's dilemma depending on how the interaction is structured. And it is in interest of parties that will benefit from cooperation to remove the prisoner's dilemma element from a situation, while it is in the interest of parties that benefit from a situation remaining a prisoner's dilemma to prevent any escape from the prisoner's dilemma via cooperation (i.e. to promote competition instead, where choice automatically creates competition).

For example, in a workplace, employees pushing for higher wages are in a prisoner's dilemma because any one employee has an incentive to work for slightly less than his co-workers so that they might be fired instead of him if costs are being cut. A union is designed to enforce cooperation by removing the element of choice/competition between workers. This has the effect of levelling the bargaining environment between workers and management. Naturally management has an interest in promoting the freedom of employees to choose to undercut their fellow employees or to work as scabs.

In the same manner, companies have an interest in countering any tendency towards standard corporate taxes across jurisdictions, instead promoting the freedom for any one jurisdiction to profit by undercutting other countries as they so frequently do.

Chapters 7 and 8 move to a different type of situation, one where instead of the negative externalities of the prisoner's dilemma, there are instead positive externalities. Typically, these are cases where what is important is less what you do, and more that a lot of people are doing the same thing you are. The archetypal case is that of the zebra. Even black and white stripes on a brown and green savanna is the best camouflage if that's what everyone else is wearing. Choosing a nightclub to go to is another example of this type of situation. The best club is one that a lot of other people like.

Included in this group of cases is the network externalities that the last post in this series described, where the prototypical case is the 'QWERTY' keyboard (and also the selection of VHS over Beta). What matters is not what the arrangement of the keys is, only that everyone use the same arrangement.

Slee makes the point that in cases that fit this description, the 'winners' can reap huge rewards, and although business magazines will attribute these rewards to the winners brilliance and contribution in the form of value added, much of their fortune stems simply from having their standard chosen over someone else's - something that can often be a result of luck as much as skill.

Chapters 9 covers market failure due to limited information. If one side to a potential transaction has valuable information that the other side lacks (i.e. a used car sale where the seller knows more than the buyer, or a life insurance purchase where the buyer knows more than the seller) simply allowing both sides to make a free choice of whether to make a deal or not may lead to problems because it is hard for the two sides to agree on a fair price when one doesn't know the value of what they are buying/selling. In insurance, this is dealt with by removing the element of choice on the purchaser side (e.g. through universal plans, or group plans through employers). Once the insurer knows they can set a price without fear that healthy people (or people who are low risk, with respect to the insurance being sold) will reject their price while people who are sick (high risk) will accept their price, then the market can function reasonably well - but it rests on removing freedom of choice from those signing up for insurance.

Chapter 10 makes the point that a voluntary transaction is only voluntary to the extent that both parties have an alternative that is just as good and just as easy to obtain. Buying apples in a farmer's market is a case where if you don't like one farmer's price, the next farmer over may do just as well. At the other extreme, Slee gives the example of a person trapped in a well in a remote area bargaining with a passerby. Given that the alternative to getting help may be death, the person in the well may 'voluntarily' agree to just about anything.

Slee notes the continuance between having good alternatives and making a voluntary decision and having bad alternatives (high transaction costs, lack of a good alternative, etc.) and making a quasi voluntary, quasi involuntary decision. As we move towards the involuntary side of the spectrum, relying on both sides having freedom to choose as the mechanism that will ensure a good outcome instead of employing some stronger moral imperative will lead to exploitation rather than exchange.

Chapter 11 is a conclusion that summarizes the following 7 lessons that the book teaches:

1) Individual Choice Does Not Give Us What We Want
2) Freedom of choice promotes the private and degrades the public
3) Freedom of choices produces inequality based not on merit but on luck
4) Freedom of choice does not preclude the exercise of power
5) Freedom of choice does not preclude exploitation
6) Predictability drives out quality
7) Social Exclusion is Self Sustaining

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Some other notes:

1) On page 45 Slee makes the important note that, "wise people often take steps to eliminate choices they know will lead to bad outcomes" and further notes that there are many cases where you might desire all to be bound in a certain way, but not be willing to be bound yourself unless everyone else is. For example, I might prefer not to have a Wal-Mart in my town knowing that it will eventually drive out of business all the local retailers leading to a dead downtown area. But once a Wal-Mart is in my area, and the consequences are set regardless of what I do personally, that it is in my interest to save money shopping at Wal-Mart, notwithstanding my earlier objections. Even while shopping there, I might prefer that the store be shut down, and this is not inconsistent.

2) On page 201, Slee makes the bizarre claim that his is not a book about 'ethics' - the whole thing is about ethics!

3) This ties in with the final conclusion of the book which reads,

"The ideas of MarketThink clearly work within a limited domain. ...To sell this picture of choice as "the way the whole world works," as MarketThink does, is overreaching on an epic scale ... It is time to place collective action back on the table. ... Most of all, it is time to embrace complexity. This book is about a worldview; it does not pretend (as MarketThink does) that a single solution exists to solve all our problems. Jane Jacobs got it right...."

Now if you're me, you're thinking that this last sentence ends by saying Jacobs got it right in her book (Systems of Survival) explaining that we need both the commercial (MarketThink) set of ethics AND the guardian (collective action) set of ethics to make sense of the world. But no. It ends with a quote from Jacobs (from 'The Death and Life of Great American Cities" about how cities are complex and we need to care about the details and complexities of how they work). So a disappointing conclusion, but a worthwhile book all the same.

4) In researching this post, I realized that Tom Slee has a blog, entitled 'Whimsley' (many of the examples in the book are set in the fictional town of Whimsley.)