53. Personal, Group and Public Interests

Note: This post is the fifty-third in a series. Click here for the full listing of the series. The first post in the series has more detail on the book 'Systems of Survival' by Jane Jacobs. Just a short post this week as I'm going to be on the road for a bit, so time is a bit tight.

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"Ask not what your country can do for you, ask what you can do for your country"

- John F. Kennedy.

"By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."

- Adam Smith



To a large extent, people pursue their own interests, and this is in the public interest as well. For example, people don't want to starve to death so they take care that they have enough food to eat, and similarly society has no interest in its members starving to death either.

In some cases, people form groups to better pursue their goals. The reasons people form groups generally were covered previously in a post on the types of cooperation - in order to take advantage of economies of scale, to share risk or to share information, groups are generally helpful*.

But once groups form, the potential for conflict between group goals and personal goals, as described by Mancur Olson is unavoidable. Olson makes the point that one way to overcome the weakness of large groups due to the conflict between personal and group interest is through moral values which 'reward' people for contributing to group activities and 'punish' them for free-riding on the efforts of other group members.

For the most part, society places a (positive) moral value on cooperation, where cooperation means putting the group interest ahead of the personal interest. To me, this suggests that society recognizes that cooperation is beneficial in ways that free-riding on the cooperation of others is not.

But to say that group interests are better than personal interests is overly simplistic. Naturally, it's possible that groups can be formed with interests that are inimical to the wides social interest. Where a group is formed with an intention that is hostile to the public interest, the action generally goes by the name conspiracy rather than cooperation.

But there is one particular case, the case of the marketplace, where cooperation goes by yet a different name, collusion.

One of the fundamental insights that Adam Smith had in 'The Wealth of Nations' was that, in the case of a market, cooperation could be harmful to the public interest, while competition - which is inimical to the pursuit of the other forms of cooperation - is helpful in this particular case.

If all the grocery store owners get together and agree to raise prices, this will be good for their group, but will, most likely, be harmful to the public interest because the higher prices will prevent win-win transactions from taking place.

A common view of this is that the difference between the competing market participants and the cooperating group members is that the market participants are acting in a self-interested manner while the group members are acting in a selfless manner (but the invisible hand yields a public benefit from the self-interested market behaviour).

But we know that the market participants are doing something more than simple pursuit of self-interest - they are also following a moral code that restricts them from taking actions that would harm other people through the use of force, through fraud or through breaking promises. By the other side of the same token, we wouldn't necessarily say that OPEC members, for example, are sacrificing their self-interest by maintaining a cartel.

The point I'm trying to make is that the distinction between pursuit of the benefits of cooperation through groups vs. pursuit of the benefits of cooperation through trade is not a distinction between self-interest and selflessness, it is really just a distinction between cooperation and competition. In the case of (market) competition, the interests outside of the self that we take into consideration are those of the person we exchange with (and possibly any third parties affected by externalities). In the case of cooperation, the interests outside of the self that we take into consideration are those of our fellow group members.


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* The case of gains from trade is different in that it does not require forming a group to take advantage of this gain, it merely requires that each individual entity respect the commercial precepts in its dealings with other entities.

29. Community and Market Economy

Note: This post is the twenty-ninth in a series. Click here for the full listing of the series.

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.

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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.

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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.

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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.

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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.

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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.

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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.

15. The Logic of Collective Action

Note: This post is the fifteenth in a series. Click here for the full listing of the series.

The Logic of Collective Action, by Mancur Olson, is a pretty straightforward book, at heart. There is one primary argument which is at once profound and straightforward:

Almost all group activity has a prisoner's dilemma type structure.

The argument is as follows:
1) People form groups to further their interests
2) The interests that the group is intended to further are non-excludable* in the sense that the benefits will accrue to all group members, regardless of their contribution towards achieving them.
3) People have an incentive to 'free ride' by getting the benefits of group membership while not contributing personally towards the achievement of group goals.

* Olson calls these public goods but acknowledges that the 'non-rival' component of the standard definition of public goods is not all that relevant to his argument

For example:

1) a labour union is formed to further its member's (the workers) interests.
2) the goals that the union pursues higher wages, better working conditions, etc. will go to all union members
3) Maintaining an effective union takes work (dues need to be paid to support it financially, people have to be willing to go on strike and forego their paycheck if necessary, etc.) and workers have an incentive to try and gain the benefits from the union without contributing towards achieving its objectives.

The notion is that if other people are going to cooperate (i.e. contribute towards group goals), then the best approach for a person is to defect or free-ride (i.e. not contribute towards group goals). And if other people aren't going to contribute towards group goals then you are still best off to also not contribute.

This is equivalent to the original Prisoner's Dilemma scenario where regardless of what your fellow prisoner does, the best option is to rat them out and confess.

Olson is primarily arguing against those who assume that group members always have individual interests that are aligned with the group interest.

Olson figures that in small enough groups, the members may each get enough benefit for it to be worth it to contribute (although contribution levels will still be less than the optimal or efficient level) but for larger groups there is unlikely to be any contributions (or any group) at all.

Taking the example of labour unions, Olson notes that historically unions started from small groups and only later merged into bigger organizations.

For large or 'latent' groups, as Olson calls them, to maintain themselves, they either need to make membership in the group mandatory to prevent free riding, or they need to provide a specific benefit to group members that justifies their membership beyond the public benefit. This is why unions want a closed shop and why professional associations (e.g. bar associations) want the same thing.

It is also why small groups of people with a common interest are often more powerful than large groups with a common interest. Olson notes that business lobbyists are effective within a particular industry, where there are typically only a handful of players, but lobby groups that represent business as a whole are weak because the individual members have little incentive to support the general business lobby group.

One way around this dilemma, Olson notes, is for large groups to use a federated structure, much in the way that most large unions are organized with locals and umbrella groups. Another similar option, that Olson doesn't mention, but I want to throw in so I don't forget about it later, is to use a hierarchical structure, where there are small groups that report to a single superior, and then a small group of superiors who report up to another higher superior, and so on.

Naturally, the larger the group, the less likely it is that you can count on everyone else to contribute, which in turn means the less likely you are to contribute so the harder it gets to achieve the group goals as the group gets larger.

On the topic of large groups, Olson notes that even the state, which can appeal to patriotism and which provides large economic benefits to the citizens by virtue of its existence, can not rely on voluntary contributions and instead must compel people to pay taxes.

Unfortunately, Olson does not pursue this further to inquire why, under a democracy where voters could presumably elect those politicians promising to eliminate taxes, taxes still remain, or to consider the possibility that a significant number of people are happy to pay taxes as long as they know that everybody else is paying a fair share as well - meaning that the compulsory nature of taxation might only be down to a small group of anti-social people who would try to free-ride. Or, in other words, the ironic prospect that it might only be due to the presence of libertarians that we need a coercive state.

We can see the limitations of Olson's concerns about the impossibility of collective action in large groups more clearly from a passage on page 64,

"Some critics may protest that even if social pressure does not exist in the large or latent group, it does not follow that the completely selfish or profit maximizing behaviour, which the concept of latent groups apparently assumes, is necessarily significant either; people might even in the absence of social pressure act in a selfless way. But this criticism of the concept of the latent group is not relevant, for that concept does not necessarily assume the selfish, profit-maximizing behaviour that economists usually find in the marketplace. The concept of the large or latent group offered here holds true whether behaviour is selfish or unselfish, so long as it is strictly speaking "rational".

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"A man who tried to hold back a flood with a pail would probably be considered more of a crank than a saint, even by those he was trying to help. It is no doubt possible infinitesimally to lower the level of a river in a flood with a pail ... but the effect is imperceptible, and those who sacrifice themselves in the interest of imperceptible improvement may not even receive the praise normally due selfless behaviour."

It's hard to imagine a poorer choice of analogy. Anyone who's ever lived near a river, and even most who haven't, probably appreciates that you don't hold back a flood with a pail (what would you do with the water in your pail?), you hold back a flood with sandbags. I mention the word 'sandbag' and what mental image comes into your head? If you're like me it's the image of a large group of people working day and night often with the help of many selfless volunteers to build walls of sandbags to prevent a river from flooding a community - exactly what Olson is arguing will not happen.

Moving on, there's a very interesting passage on page 100 where Olson quotes at length from Hans Ritschl in 'Community Economy and Market Economy',

"The fatherland and mother tongue make us all brethren together. 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 ... Through the veins of society streams the one, same money; through those of the community, the same blood...

Any individualist conception of "the State" is a gross aberration ... [and] nothing but a blind ideology of shopkeepers and hawkers.

The State economy serves the satisfaction of communal needs ... If the State satisfies needs which are purely individual, or groups of individual needs which can technically be met otherwise than jointly, it does so for the sake of revenue only.

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 economy was appropriately and securely anchored. This is not changed by the fact that more economic units, such as those of associations, cooperatives or charities, may have inner structures where we find motivations other than self-interest. Internally, love or sacrifice, solidarity or generosity may be determining: but irrespective of their inner structures and the motives embodied therein, the market relations of economic units with each other are always governed by self-interest.

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 communal spirit ... 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.

The objective collective needs tend to prevail. Even the party stalwart who moves into responsible government office undergoes factual compulsion and spiritual change which makes a statesman out of a party leader ... There is not a single German statesman of the last 12 years .. who escaped compliance with this law."

To which Olson comments,

"Ritschl's argument is exactly the opposite of the approach in this book. He assumes a curious dichotomy in the human psyche such that self-interest rules supreme in all transactions among individuals, whereas self-sacrifice knows no bounds in the individual's relationship to the state and to the many types of private organizations."

Personally, I was instantly struck by the echoes of Jane Jacobs 'Systems of Survival' in Ritschl's passage, with his references to an exclusive state sector with a spirit of loyalty, sacrifice, coercion and communal spirit in contrast with a cosmopolitan commercial sector open to all and characterized by pursuit of self-interest. Not to mention Olson's response describing Ritschl's 'curious dichotomy'!

Thinking of Jacobs helps us find the passage in Olson's work that reconciles his views with the 'exactly opposite' views of Ritschl - footnote 17 on page 61, which says,

"In addition to monetary and social incentives, there are also erotic incentives, psychological incentives, moral incentives and so on. To the extent that any of these types of incentives leads a latent [large] group to obtain a collective good, it could only be because they are or can be used as 'selective incentives," i.e., because they distinguish between those individuals who support action in the common interest and those who do not. Even in the case where moral attitudes determine whether or not people will act in a group-oriented way, the crucial factor is that the moral reaction serves as a "selective incentive." If the sense of guilt, or the destruction of self-esteem, that occurs when a person feels he has forsaken his moral code, affected those who had contributed toward the achievement of a group good, as well as those who had not, the moral code could not help to mobilize a latent group.

To repeat: the point is that moral attitudes could mobilize a latent group only to the extent they provided selective incentives. The adherence to a moral code that demands the sacrifices needed to obtain a collective good therefore need not contradict any of the analysis in this study; indeed this analysis shows the need for such a moral code or for some other selective incentive." (my italics)

So on page 100, Olson is baffled by Ritschl's argument that people will abide by a collectivist moral code when working in collective activities and a self-interested moral code when working in market activities, suggesting that this was the opposite of his argument.

But back on page 61, Olson came out and said that one way to overcome the problems of collective action was to employ a special moral code for collective activities which puts the group interest ahead of the selfish interest - something that his theory demonstrates the need for!


I'll close this post with a passage from David Hume's 'A Treatise of Human Nature' that Olson, in footnote 53 (many of the most important parts of the book are in the footnotes), says was pointed out to him by John Rawls,

"There is no quality in human nature which causes more fatal errors in our conduct, than that which leads us to prefer whatever is present to the distant and remote, and makes us desire objects more according to their situation than their intrinsic value. Two neighbours may agree to drain a meadow, which they possess in common; because it is easy for them to know each others mind; and each must perceive, that the immediate consequence of his failing in his part, is, the abandoning the whole
project. But it is very difficult, and indeed impossible, that a thousand persons should agree in any such action; it being difficult for them to concert so complicated a design, and still more difficult for them to execute it; while each seeks a pretext to free himself of the trouble and expence, and would lay the whole burden on others. Political society easily remedies both these inconveniences. Magistrates find an immediate interest in the interest of any considerable part of their subjects. They need consult no body but themselves to form any scheme for the promoting of that interest. And as the failure of any one piece in the execution is
connected, though not immediately, with the failure of the whole, they prevent that failure, because they find no interest in it, either immediate or remote. Thus bridges are built; harbours opened; ramparts raised; canals formed; fleets equiped; and armies disciplined every where, by the care of government, which, though composed of men subject to all human infirmities, becomes, by one of the finest and most subtle inventions imaginable, a composition, which is, in some measure, exempted
from all these infirmities."

Today's collective action problem

Imagine a scenario with the following characteristics:

1) The entire world has a problem.
2) Every nation is contributing to the problem, some much more than others
3) It is agreed that action needs to be taken in order to solve the problem.
4) It is believed that this action would be costly for every nation that takes part
5) The benefits from any action to solve the problem will be distributed equally to every nation, regardless of whether they themselves contributed or not.
6) Due to 4) and 5) any nation which takes action will be at an economic disadvantage vs. any nation which doesn't take any action.

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How would you go about solving this problem?

a) This problem has no solution. Just ignore the problem and hope it goes away.
b) Ask for volunteers and hope that some countries value the gain from helping solve the problem higher than the loss of economic competitiveness.
c) Try to get countries which are wealthier to take the lead in solving the problem, either by going first or by agreeing to take bigger measures
d) Try to get countries which are contributing more to the problem to take the lead in solving the problem
e) Try to get all countries in the world to agree to make contributions to solving the problem
f) Create a global level of government which has the power to force action on everybody in cases like this.

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Think about your options in cases like this (remembering the pressures that will face any government which undertakes some costly action while its neighbours freeload) the next time you hear someone saying that the Kyoto protocol is flawed, or so-and-so hasn't signed it, so we should just ignore the problem of global warming.

It's also worth keeping in mind when people say there is no need for a global level of government.