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Governments, governing and cooperation

by das monde Thu Apr 16th, 2009 at 05:10:27 AM EST

A while ago I was asked by Migeru to extend a comment on government and economic synergy to a diary. I am not certain whether these musings satisfy Migeru's request exactly, but it should be close.

Here is the part of my previous remark I will be discussing:

Absence of synergetic considerations in economic theories is indeed interesting. Synergies are abound in the natural world - almost compulsively. The role of government should be seen primarily as synergetic - i.e., capturing large common wins. But common interest is politically dead, and the government is unabatedly promoted as a free-rider helper. The libertarian understanding of "There is no free lunch" appears to mean "There is no synergy through governing" (but they appear to believe in a "synergy" of making money out of thin air through credit extension).

The brief history of government as "for the people" is finished and is being erased. The only "legal" cooperation is corporation - it feels like no one else is allowed to take care of own interests in a coordinated matter, or do any good to others. The rhetorical mix-up of what is a cooperator, or a free-rider, or a rentier is amazingly Orwellian in this world.

For a representation of the currently dominant (among conservative, libertarian, corporate and political commentators) paradigm on the role of governments and free markets, I take this peer-reviewed article:

"Was Hayek Right About Group Selection After All?"
Review Essay of Unto Others: The Evolution and Psychology of Unselfish Behavior,
by Elliott Sober and David Sloan Wilson

Author: Todd J. Zywicki (George Mason University School of Law)
Source: The Review of Austrian Economics, Volume 13, Number 1, February 2000 , pp. 81-95.

Abstract:  One of the most controversial aspects of Hayek's social theory was his acceptance of the concept of cultural group selection. The publication of Unto Others: The Evolution and Psychology of Unselfish Behavior provides an opportunity to revisit this much-maligned component of Hayek's thought. Sober and Wilson are concerned with biological group selection, but much of their argument is equally applicable to cultural group selection. This essay revisits Hayek's views on cultural group selection in light of the model proposed by Sober and Wilson. Comparing their model to Hayek's model suggests that group selection theories are more plausible than traditionally thought and that their viability in any given situation is an empirical, not an a priori, question. So long as there are benefits to a group from greater levels of altruism and cooperation, and so long as free rider problems can be mitigated, group selection models are plausible.

I stumbled upon this article while (still) working on my hobby project on selfishness and cooperation in Darwinian evolution.

Friedrich Hayek (1899-1992) is one of the most famous libertarian economists and political philosophers. He was awarded the 1974 Nobel Memorial Prize in Economic Sciences (together with Gunnar Myrdal) "for their pioneering work in the theory of money and economic fluctuations and for their penetrating analysis of the interdependence of economic, social and institutional phenomena".

Hayek's most influential work is the book The Road to Serfdom. It shaped the Reaganomics and Thatcherism as we know them.

Despite his aversion to any kind of collectivism as "serfdom", Hayek apparently had a theory of group selection. From Zywicki's article:

While Hayek never made completely clear the level of selection on which this competition was taking place, it seems that he had in mind some sort of competition between cultures or sets of moral and legal rules and institutions. Nor was Hayek ever completely clear about the mechanism for selection, whether superior sets of rules would spread to new adherents through voluntary acceptance or whether they would be imposed forcibly by conquest. {pg 82}

.... Hayek observes that groups that adopt social practices such as several property and free contract will become wealthier and be able to maintain larger populations at higher standards of living than those that adopt inferior political and legal institutions [].

For group selection to be viable, there must also be a mechanism for between-group competition to occur, i.e., for groups with more superior traits or practices to displace others. Hayek was never very clear about the mechanism by which the struggle between groups occurred. More important were the end results of this process -- namely that groups that adopted free markets and the cultural beliefs that underpin them would increase their populations relative to other groups. Increased population, in turn, enabled the growth of a more expansive division of labor within society leading to increased wealth. Societies receptive to capitalism, therefore, would be both wealthier and more populous than others []. For Hayek, it was largely irrelevant whether the struggle between groups was conducted through violence or peaceful means (such as imitation and migration) because wealthier and more populous capitalist societies held the edge either way []. Thus, population growth was the key to success in inter-group competition, and the adoption of capitalism and its values was the key to population growth []. He suggests that in the realm of cultural competition, superior cultures can spread rapidly through voluntary adoption by new groups, and that improved communication technology has tended to increase the speed and intensity of this competition. Indeed, Hayek sees the speed at which new cultures can and have emerged and spread as evidence that cultural evolution is the primary force in human social evolution, as biological transmission is a much slower process []. {pg 87-88}

Hayek concluded that the result of inter-group cultural competition resulted in the preeminence of individual liberty, constitutional government, and free markets, "especially those dealing with several property, honesty, contract exchange, trade, competition, gain, and privacy." [] Only through the adoption of institutions of several property and capitalism and the norms that sustain them can societies coordinate dispersed knowledge throughout a society and maximize productive capacity. Societies that adopt capitalist institutions will prosper and be able to sustain larger populations than those that fail to do so. Consequently, over time capitalist societies will come to displace other types of societies through an unspecified process of group selection. {pg 90-91}

So, Hayek's theory is incomplete even by standards of typical group selection conjectures. "Inevitable" primacy of population growth or free market institutions is likely to be just as short-sighted conclusion as supposed supremacy of selfishness between individual genes. Why do we still have so many "maladapted" cultures after that much evolution?

It is not my purpose here to discuss technical aspects of cooperative versus selfish behaviour. I will just recite a few resonating Zywicki's statements:

The difficulty again arises in explaining behaviors that apparently are advantageous to the group in which they are practiced, but appear to be disadvantageous to the individual practicing them. These rules are the core of Hayek's group selection theory--societies that can create and maintain these "group benefiting" rules will tend to prosper over those that do not. But these group benefiting rules would seem to be susceptible to the same free riding tendencies that undermine group selection models in the biological context. {pg 83}

.... the group must be able to prevent free riders from preying on the group's altruism. The benefit of altruism is that it creates a social surplus that would otherwise be unavailable without the altruistic practices. The existence of this social surplus presents an opportunity for others to free ride on this altruism. These free riders are in the nature of parasites, living off the social surplus created by others. In economic terms, the existence of this social surplus gives rise to a rent-seeking opportunity to divert some of this surplus to the individual without contributing to it ....

For now, however, it should be recognized that the ability to control free riding is the fundamental hurdle to a group selection theory ....

Sober and Wilson argue that the primary function of social norms is to police individual free riding behavior. {pg 88}

But enforcing the norms are potentially subject to the same sort of free-rider problem that the norms were designed to solve in the first place. To the extent that it costs an individual to punish someone else's transgression, then each individual will have an incentive to free ride on the enforcement efforts of others, the so-called "second order" public goods problem. To be most effective, therefore, these norms must be enforceable at relatively low-cost []. {pg 89}

I wish to underscore concluding parts of Zywicki's article, where the author expresses his view on alternative economical models, or government's role:

.... Hodgson comments that selection at the super-group level "would involved a plurality of types of economic structure and system, in addition to the mere plurality of groups and individuals in a competitive market system. This means some kind of mixed economy, of whatever type or hue .... We may make the related observation that many of the developments in modern biology no longer seem to sustain a noninterventionist and free market philosophy, contrary to the claims of many social theorists in the past." []

On the claim that the insights of evolutionary biology make a case for a mixed economy, Hodgson is incorrect. Recall that the fundamental difficulty confronting advocates of group selection theories is the need to protect against parasites and free riders. Far from policing free riders, the core element of a mixed economy and welfare state is the fundamental empowerment of free riders to tap into the general surplus created by cooperative activity. Thus, Hayek is correct in stressing a system of several property and limited government, as such systems are designed to maximize social surplus by providing individuals with incentives to use scarce resources in the most efficient manner.

Hodgson, by contrast, has it exactly backward: by empowering the recipients of government largess, he is giving free riders the power to determine the allocation of wealth within society and undermining the process of wealth creation. Moreover, moving the process of wealth allocation from markets to politics has the effect of replacing the market process of cooperation and reciprocity with the zero-sum, conflict-riven game of politics []. Politics is fundamentally a grab game, where each individual and group seeks to transfer as much unearned wealth as possible to themselves. It has been long-understood that the failure to restrain rent-seeking activity through constitutional limits on government can result in a destruction of the social surplus created by productive activity []. One only need to observe the stunning combination of unlimited greed and political ruthlessness exhibited by the AARP and able-bodied retirees in the United States to recognize the essential nature of the political process.

Hodgson's error seems to be that he equates altruism with large-scale state activity, a claim that rests on a fundamentally erroneous understanding of the nature of the State. The State is founded in conquest, bloodshed, and slavery [] .... Restated in biological terms, the purpose of the state can be understood as a formalized mechanism for higher-ranking "alpha" members of society to expropriate wealth and power from lower-ranking members of society and transfer them to themselves []. In this view, constitutional limitations on government are a mechanism for lower-ranking members of society to band together to resist this expropriation []. In unleashing the power of the state and those who act for it, therefore, Hodgson is returning power to the dominant actors that constitutionalism was designed to tame. {pg 91-92}

Even to me, after reading quite much National Review Online (for example), this view is pretty original. There should be a fundamentally erroneous understanding of the nature of the State somewhere indeed.

A lot depends on identification of:

  • higher-ranking "alpha" members of society expropriating wealth and power;
  • lower-ranking members of society in need to band together to resist the expropriation.

We may guess Zywicki's distinction in today's complicated world. But let's start with an easier example: a feudal state. Most likely, here we can reach an agreement that the ruling "alpha" classes of kings, dukes and priests were self-servingly taxing urban and rural commoners, extracting unaccommodating rents or outright expropriating wealth. There was some broad economy, with craftsmen, merchants, farmers and manufacturers, but as it was observed by Adam Smith and other classical economists, the economy was heavily subdued by rents and taxes of the privileged and ruling classes. The classical free market ideal was a market free of privileged rents, as Michael Hudson is reminding us frequently.

Then something happened: a few or more governments became more like "governments of the people, by the people and for the people". To a considerable extent, lower-ranking members of society had banded together to take part in governing. To some degree, they were the government. Especially this applies to the post-war Western governments, even if they had pretty high taxes for highest incomers and a large scope of welfare distribution. Where we can start to argue with Zywicki, is whether those higher taxes plus large welfare distribution were manifestations of some rentiers' power, or whether they were manifestations of some rentiers' power of pooled weaker interests.

Extremities of today's crisis allow us (at least) to formulate principal views clearly. Today's rentiers and real power holders are elite bankers. Government officials increasingly look like public relations' clowns for the bankers. The real rents and taxes are not the pity collections of official taxmen, but debt payments (with compounded interest) for farcically inflated mortgages and running credits. The fact that most working people pay taxes from their income until mid-April is just an insult to injury. Ask not when is the usual "tax day" for Goldman Sachs or hedge funds.

As for speculative attainability of society-wide cooperation, the postwar "big welfare" governments were much more promising than today's strict accounting of properties and rents. We were told that the government is a problem, that it never works as intended. But today's cooperation of big banking and big politics is working out very nicely for those involved. Now we indeed have governments not worth any trust. It is time to get some confidence in people's governing again. The dynamics of naked wealth grab under "natural" economic power relations is no different from unconstrained tribal power grab.

Nature itself does some policing work on free-riding, but it does not try too hard. Rather, it provides amazingly much for free-riding. Over millions of boom-and-bust cycles, relationship codes developed that help the living beings to take only as much as they need, without conspicuous "tragedies of commons" or emphatic suffering around.

Todd Zywicki came last week into news for his opinions on mortgage crisis. Let's debunk that into dust.

Also, the National Review is following a taxing debate at Economist.com. What do we write to them? ;-)

by das monde on Thu Apr 16th, 2009 at 05:16:13 AM EST
The article on Zywicki's theories on current crisis is not that simplistic than I assumed. Zywicki offers two separate claims.

One claim is on the role of Greenspan. Zywicki concludes that he did create the bubble, but with good intentions, via a supposedly critically misplaced incentives to switch to ARMs. The mechanics of incentives works very smoothly in libertarian theories - you can always find an incentive that works. Is human behavior that straightforward and knowledgeable?

The other claim is actually his classification of real estate markets in the US. He basically concludes that only 9 out of 50 states are experiencing historically serious meltdowns of real estate markets - thanks for relative assurance! To me, governments' "unintended consequences" compare pretty favorably to free market's awful overbuilding or abandonment.

As for the discussion at Economist.com, someone has to say that the rich are not doubtlessly the productive class "carrying the rest of America on their backs". More often than not the rich live of rentier claims or near monopolistic powers. Even such "productive" entrepreneur as Bill Gates is successful mostly because he was very good in pushing competitors out of offering better products. People would find ways to live even without the particular rich winners we have - perhaps with other lucky winners of the same kind, perhaps with a more democratic sharing of spoils in some industries.

by das monde on Fri Apr 17th, 2009 at 06:29:25 AM EST
[ Parent ]
The only "legal" cooperation is corporation - it feels like no one else is allowed to take care of own interests in a coordinated matter

Well, I've been thinking that the credit card companies ability to raise our rates because of some late payment on some other loan consitutes a kind of inter-corporate collusion, that feels illegal to me, and yet apparetly it is perfectly legal right now.  The fact that Congress is apparently trying to modify this power that the banks now have seems a kind of proof that it is at least immoral.

Your points about free-rider problems are very interesting, especially at the end.  A free-rider may be in the eye of the beholder, and a producer today is a free-rider tomorrow, and vice versa.  This so-called problem may be a manifestation of the universal belief that one is overworked and underpaid.  

Yes, I believe the rule of law, the "limited government" concept has to be intended to reign in (oooh, pun there) the rulers, the elites and their friends at the banks.  I wonder where the culture of reciprocity fits in with this because it seems that a culture of reciprocity--I'll buy this round, you get the next--goes nicely with a powerful elite for those who are at the bottom, as well as for those at the top.  As long as you know your place and you hang out with those who are your equals.   The culture of reciprocity works nicely in a farming community (or so I've read) where I help you raise your barn and you help me cut the hay fields.  Who are the free-riders in these cases?  Does it matter if the man with the broken leg and the three orphans who can't do any work get to sit down to supper at the end of the day anyway?  

Does rule of law mean interject taxes into the culture of reciprocity--one for you, one for me, and one for "the people?"

Rule of law and government of, by and for the people would seem to replace an elite-defined relationship between classes of unequals, of deference and condescension.  In the US example, historically, the revolution was not only political--no king, no titles, but also social--no more bowing and scraping (of course there is the view that the institution of slavery seriously complicates this because while whites were all "equal" now, they were still more equal than some.  Equal can mean equally low or equally high, of course, and the Euro-Americans apparently preferred to see themselves as equally elevated, nevermind the whole history of "whiteness.")  Clearly operating as equally one of the people is difficult for those who would rather just seize power, especially if they have the means, motivation and opportunity to do so.  This idea that a government of the people by the people and for the people could work seems optimistic.  Perhaps it can't work without optimism.  Sprinkle me with fairy dust. I know I can fly.

by jjellin on Thu Apr 16th, 2009 at 04:37:02 PM EST
The term "free-riding" can be used in very complimentary ways. For example, on one hand Zywicki writes:
These free riders are in the nature of parasites, living off the social surplus created by others. In economic terms, the existence of this social surplus gives rise to a rent-seeking opportunity to divert some of this surplus to the individual without contributing to it. {pg 88}
Here free-riding is associated with rent-seeking behavior.  But rent-seeking is not exactly avoidance of contribution to the social surplus; rather it is aggressive extraction from the social surplus.

On the other hand, when I say that Nature provides amazingly much for free-riding, I mean that no rent payment is asked for many natural benefits. This is close to the classical ideal of free markets as underscored by Michael Hudson.

The real wonder of Nature is absence of conspicuous rent seeking (in the sense of aggressive extraction or exploitation). The "sure" scenario that everyone will eventually maximize their benefits by consuming and procreating as much as possible remains just a theory. The hidden type of natural altruism is that living beings are not optimally greedy; they do leave a lot for "consumption" by others.

In human societies, identification of free-riders and producers is largely a political problem. Already the transition from feudalism to capitalism was muddled by "natural" rent-seeking of capital holders. Marx was working on that new disequilibrium of production and wealth condensation. The current social climate is very favorable to big capital holders. A lot is done in the name of small or mid-size businesses, or small "investors", but eventually the relative (and absolute) benefit is conducted to flow steadily from capital renters to capital holders. In effect, the neo-liberal ideology says that capital holders are the most valuable producers, earning every cent they collect, while capital renters are potentially free-riders living on the goods of capital holders. It does not matter, who are working their asses off day in day out, and who is commuting between New York and London for a weekend just because a bailout profit for sinking mortgage speculations is so juicy.

Eventually, capital holders provide just money, and for that they deserve a much lesser status. The current crisis is a capital crisis - the world is awash with impotent capital, just because the real economy cannot provide double-digit profit growth to the capital holders. Entrepreneurs need capital badly, but a steep rent-price is asked.

The "welfare state" with social security and basic health care is more than just distributing some benefits. It provides an environment with less overhead costs for ill or elderly care to the productive (=actually working and producing) population, and some security of accidents or temporarily setbacks. Redistribution variances between individuals are taken somewhat too seriously. The people most keen on optimal individual benefits from common goods are paranoid profit or rent counters. They tend to project their "rational" delusions to everyone else. Normally, people do their best to earn their living and avoid outside support, even if that means paying off impossible debts or exhaustive work. But if politicians offer no better image but "welfare queen" future, many poor people may find no other option but to subscribe to the picture.  

by das monde on Thu Apr 16th, 2009 at 11:15:23 PM EST
[ Parent ]
Geez! We start to get a handle on Neo-Classical Economics only to have the Austrian School rear its head!  Points to Das Monde for wading through this stuff.  Arrrrgg!

I am certainly no expert on the Austrian School.  We tend to think of them as being a lot the same as the NCE folks, but my own reading has shown me that there has been a long standing feud between the two schools.  Gaffeny makes the point that for the Austrians it became second nature to assume opposition from those operating out of a Hegelian thesis-antithesis-synthesis paradigm, which underlies Marxist ideology of all sorts and is common in European Socialism.  But Marx did not resonate in the early 20th Century USA.  

Gaffney discusses this in his paper starting on p. 53.  Interestingly, Clark's ideas about capital were closer to Marx than to Henry George.  And in the USA George and his ideas were the threat.  Had he focused on Marx, the Austrian school would have been natural allies.  Instead, Clark picked a fight with the Austrian School and his student, Frank Knight, who went on to found the Chicago School, carried that fight on to "outlandish extremes" according to Gaffney.  

Gaffney suggests that the affinity for Hegel found in Clark, Knight and Ely derives from the fact that they or their mentors  received their Ph.Ds from German Universities in the latter 19th century.  Clark found Bismark's Prussian determination to impose state approved though patterns on the citizens through education to be quite natural!  All part of nation building.  At least Bismark gave the world social security.

Interesting stuff, as are your findings about the Austrian School.  And wading through the National Review!  Clearly more heroic than reading The Economist.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Apr 16th, 2009 at 04:52:20 PM EST
You surely mean Gaffney's article on Henry George, right?!
by das monde on Thu Apr 16th, 2009 at 11:19:09 PM EST
[ Parent ]

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