The benefits of cooperation

Philosophy and Public Affairs

Volumn 34, Issue 4, 2006, Pages 313-351

  Heath, Joseph ^a  

^a NONE

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EID: 33748938739     PISSN: 00483915     EISSN: 10884963     Source Type: Journal    
DOI: 10.1111/j.1088-4963.2006.00073.x     Document Type: Article

References (90)

1. One can see this idea most clearly in the work of David Gauthier, Morals by Agreement (Oxford: Clarendon, 1986), or Andrew Schotter, The Economic Theory of Social Institutions (Cambridge: Cambridge University Press, 1980).
2. The dominant opposition to this view stems from those who consider "conflict"to be a more important determinant of the structure of social institutions than the "consensus"that Pareto-efficiency supposedly creates. As we shall see, the version of the "consensus"approach used here predicts much higher levels of social conflict than the more traditional versions, and thus goes a long way toward undermining the force of the "conflict"objection.
3. John Rawls, A Theory of Justice, 2d ed. (Cambridge, Mass.: Harvard University Press, 1999), p. 4. When he does go on to discuss more concrete institutional proposals, his analysis suffers from the catallactic bias diagnosed below (especially his proposal for an "exchange branch"of the state to handle efficiency issues, pp. 249-50).
4. Robert Putnam, Bowling Alone (New York: Simon & Schuster, 2000), pp. 19-26. James Coleman, who introduced the concept, writes, "Social capital is defined by its function. It is not a single entity but a variety of different entities, with two elements in common: They all consist of some aspect of social structures, and they facilitate certain actions of actors-whether persons or corporate actors-within the structure. Like other forms of capital, social capital is productive, making possible the achievements of certain ends that in its absence would not be possible"("Social Capital in the Creation of Human Capital,"American Journal of Sociology 94 supp. [1988]: S95-S120, at S98).
5. See Putnam, Bowling Alone, p. 21, and also Francis Fukuyama, Trust (London: Penguin, 1995), p. 27.
6. For an example of an analysis based upon a list of goods, rather than mechanisms, see Jack Knight, Institutions and Social Conflict (Cambridge: Cambridge University Press, 1992), pp. 22-24. When he does specify mechanisms (p. 25), he presents only one: Gains from trade, along with two abstract categories-gains from cooperation, and gains from coordination.
7. The term "catallaxy"was introduced by Friedrich A. Hayek as a way of referring to a system of order established through exchange. See his Law, Legislation and Liberty, Vol. 2 (Chicago: University of Chicago Press, 1977). The highest expression of this catallactic perspective can be found in the work of James M. Buchanan, who essentially redefines efficiency in such a way that only gains from trade count as efficiency-promoting. See "Rights, Efficiency, and Exchange: The Irrelevance of Transaction Costs,"in his Liberty, Market and State (Brighton: Harvester, 1986), pp. 92-107.
8. Mark Blaug, Economic Theory in Retrospect, 4th ed. (Cambridge: Cambridge University Press, 1985), pp. 585-97. Also known as the "first theorem"or "first fundamental theorem"of welfare economics, e.g., see Gareth D. Myles, Public Economics (Cambridge: Cambridge University Press, 1995), pp. 37-40.
9. The extent to which these limitations prevent one from drawing normative conclusions is often not fully appreciated, however. In particular, there is a widespread failure to recognize the significance of the "second best theorem."See
10. Richard Lipsey and Kelvin Lancaster, "The General Theory of Second Best,"Review of Economic Studies 24 (1956): 11-32.
11. Of course, the exclusion of economies of scale is explicit. However, the significance of the assumptions made about information, uncertainty, and preferences is less obvious. Sophisticated economists have long understood these limitations (e.g., see
12. Kenneth Arrow, "Limited Knowledge and Economic Analysis,"American Economic Review 64 [1974]: 1-10
13. David Gauthier's "No Need for Morality: The Case of the Competitive Market,"Philosophic Exchange 3 (1982): 41-54.
14. Perhaps the most important example of this in contemporary political philosophy is Rawls, A Theory of Justice, pp. 242-51. For a more explicit version, see Nicholas Barr, The Economics of the Welfare State, 3d ed. (Stanford: Stanford University Press, 1998), chap. 4. Adam Przeworski, States and Markets (Cambridge: Cambridge University Press, 2003), describes this as the "markets whenever possible, the state whenever necessary"view, p. 40.
15. This broader way of speaking of externalities, not as an effect on a third party, but merely as an effect upon another, is one that I find very helpful. It is used in this way by Gauthier, in Morals by Agreement, p. 96 and passim.
16. W. D. Hamilton, "The Evolution of Altruistic Behavior,"The American Naturalist 97 (1963): 354-56
17. J. Maynard Smith, "Group Selection and Kin Selection,"Nature 201 (1964): 1145-47.
18. Bengt Holmstrom, "Moral Hazard and Observability,"Bell Journal of Economics 10 (1979): 74-91.
19. Adam Smith, Inquiry into the Nature and Causes of the Wealth of Nations, 3 vols., ed. E. G. Wakefield (London: C. Knight, 1835-36), 1:26. John Stuart Mill saw fit to reproduce lengthy segments of this discussion in his Principles of Political Economy (Amherst: Prometheus, 2004), p. 134.
20. With regard to the former, see Friedrich A. Hayek, The Counter-Revolution of Science (Indianapolis: Liberty Books, 1979), and on the latter, see Gauthier, Morals by Agreement, p. 84.
21. See Walter J. Schultz, The Moral Conditions of Economic Efficiency (Cambridge: Cambridge University Press, 2001), pp. 67-70.
22. See Ian Hacking, An Introduction to Probability and Inductive Logic (Cambridge: Cambridge University Press, 2002), pp. 190-92.
23. The standard deviation is 0.4 tons. See David A. Moss, When All Else Fails (Cambridge, Mass.: Harvard University Press, 2002), pp. 28-31.
24. The law of large numbers is also at the root of the "wisdom of crowds"phenomenon: The fact that two heads are generally better than one, even in the absence of complementarities. This connection is stated most explicitly in the Condorcet Jury Theorem, but see also James Surowiecki, The Wisdom of Crowds (New York: Anchor, 2005).
25. For an example of a discussion that unhelpfully blurs the distinction between the two mechanisms, see Barr, The Economics of the Welfare State, pp. 111-12, or Frank H. Easterbrook and Daniel R. Fischel, The Economic Structure of Corporate Law (Cambridge, Mass.: Harvard University Press, 1991), p. 53.
26. Ian Hacking, "Risk and Dirt,"in Risk and Morality, ed. Richard V. Ericson and Aaron Doyle (Toronto: University of Toronto Press, 2003), refers to the former as the "Lloyd's of London"model of insurance. The mutual society model, on the other hand, which involves symmetry in the relation between all policyholders, is the arrangement that predominates in the standard categories of health, life, home, and automobile insurance.
27. Emile de Girardin, La politique universelle (Paris: Librairie Nouvelle, 1855).
28. See George Ainslie, Picoeconomics (Cambridge: Cambridge University Press, 1992). See also Howard Rachlin, The Science of Self-Control (Cambridge, Mass.: Harvard University Press, 2000).
29. George Ainslie, Breakdown of Will (Cambridge: Cambridge University Press, 2001), p. 33.
30. Jon Elster provides an extreme formulation of this thesis. Following Henry Sidgwick, he regards zero discounting as the only "rational"preference, and thus treats all time preference as a symptom of irrationality. Jon Elster, Ulysses and the Sirens (Cambridge: Cambridge University Press, 1979), p. 66.
31. Rachlin, Science of Self-Control, p. 89. Jon Elster, Ulysses Unbound (Cambridge: Cambridge University Press, 2000), pp. 76-77.
32. Elster, Ulysses Unbound, p. 66.
33. David Hume, A Treatise of Human Nature, 2d. ed., ed. P. H. Nidditch (Oxford: Clarendon, 1978), p. 537.
34. Hume, Treatise of Human Nature, p. 536. Incidentally, it is sometimes thought that Hume's argument relies merely upon our tendency to privilege our "short-term"over our "long-term"interests. Yet this alone is not enough to explain the phenomenon of self-binding (and thus the reasons we have for enlisting the assistance of others). A person who merely privileges his short-term over his long-term interests has no reason to take preemptive action to constrain his own future choices, since the lesser, nearer good will always appear superior to him. What Hume's argument relies upon is the preference reversal that occurs as the lesser good becomes nearer. The anticipation of such reversals is what motivates precommitment, and such reversals occur not merely through impatience, but rather through heightened impatience in the near term. It is only this specific sort of infirmity that is capable of becoming "a remedy to itself."
35. Hume writes, "Tho' we may be fully convinc'd, that the latter object excels the former, we are not able to regulate our actions by this judgment; but yield to the solicitations of our passions, which always plead in favour of whatever is near and contiguous,"Treatise of Human Nature, p. 535.
36. Michael Tomasello, The Cultural Origins of Human Cognition (Cambridge, Mass.: Harvard University Press, 1999).
37. Lee Dugatkin, Cheating Monkeys and Citizen Bees (Cambridge, Mass.: Harvard University Press, 1999), pp. 17-20.
38. See Joseph Heath, Communicative Action and Rational Choice (Cambridge, Mass.: MIT Press, 2001), pp. 86-107, and Robert Brandom, Making It Explicit (Cambridge, Mass.: Harvard University Press, 1994), pp. 3-66. The role of cooperation in transmitting information is typically underemphasized in the so-called memetics literature, with the central role assigned to imitation. See, e.g., Daniel Dennett, Darwin's Dangerous Idea (New York: Simon & Schuster, 1995), pp. 342-69.
39. Jürgen Habermas, The Theory of Communicative Action, trans. Thomas McCarthy (Boston: Beacon Press, 1986), pp. 77-92. Habermas himself is loath to accept the "contractualist"label, for reasons that are somewhat beside the point here. Reasons for including him in this camp can be found in
40. Samuel Freeman, "Reason and Agreement in Social Contract Views,"Philosophy & Public Affairs 19 (1990): 122-57.
41. For an analysis of the "politics of recognition"in terms of status, see Nancy Fraser, "Social Justice in the Age of Identity Politics: Redistribution, Recognition and Participation,"in Nancy Fraser and Axel Honneth, Redistribution or Recognition? (London: Verso, 2003).
42. Bengt Holmstrom, "Moral Hazard in Teams,"Bell Journal of Economics 13 (1982): 324-49.
43. See James G. March and Herbert A. Simon, Organizations (New York: John Wiley & Sons, 1958), pp. 59-70.
44. John Kenneth Galbraith, The New Industrial State (New York: New American, 1971), pp. 138-39.
45. Armen A. Alcian and Harold Demsetz, "Production, Information Costs, and Economic Organization,"American Economic Review 63 (1972): 777-95
46. See Joseph Heath, The Efficient Society (Toronto: Penguin, 2001), pp. 151-59.
47. The availability of free-rider strategies in this context is consistently downplayed, both by Humeans who emphasize the "conventional"nature of property arrangements, and by proponents of "spontaneous order,"who for ideological reasons want the market to be conceptually prior to any formal systems of constraint, such as the law. See Schultz, Moral Conditions of Economic Efficiency, pp. 60-70.
48. Robert Nozick, Anarchy, State and Utopia (New York: Basic Books, 1974), p. 280.
49. Eric Rasmusen, Games and Information, 3d ed. (Cambridge, Mass.: Blackwell, 1989), pp. 165-69.
50. For an accessible overview, see Rasmusen, Games and Information, pp. 224-35.
51. For example, see Karl Polanyi, The Great Transformation (Boston: Beacon Press, 1957), p. 49.
52. See Hillard Kaplan, Kim Hill, and A. Magdalena Hurtado, "Risk, Foraging and Food Sharing among the Aché,"in Risk and Uncertainty in Tribal and Peasant Economies, ed. Elizabeth Cashdan (Boulder: Westview Press, 1990).
53. Kaplan, Hill, and Hurtado, "Risk, Foraging and Food Sharing among the Aché,"p. 129.
54. See C. G. Lewin, Pensions and Insurance Before 1800 (East Lothian: Tuckwell Press, 2003), pp. 37-48.
55. Lewin, Pensions and Insurance Before 1800, pp. 49-51.
56. Lewin, Pensions and Insurance Before 1800, p. 216.
57. Ian Hacking, The Taming of Chance (Cambridge: Cambridge University Press, 1990), p. 48. For further discussion, see Gøsta Esping-Anderson, The Three Worlds of Welfare Capitalism (Princeton, N.J.: Princeton University Press, 1990), pp. 88-92.
58. The former observation was apparent to nineteenth-century commentators as well, e.g., see Charles Ansell, A Treatise on Friendly Societies (London: Baldwin and Cradock, 1835), p. 4. On the persistence of "level premium"societies into the twentieth century, see
59. J.C.H. Emery, "Risky Business? Nonactuarial Pricing Practices and the Financial Viability of Fraternal Sickness Insurers,"Explorations in Economic History 33 (1996): 195-226.
60. Elster, Ulysses and the Sirens.
61. Ainslie, Breakdown of Will, pp. 100-101.
62. Elster, Ulysses Unbound, pp. 88-89. Elster notes certain disanalogies, however, since constitutions bind collectivities (i.e., legislatures) and individuals only indirectly.
63. Heath, The Efficient Society, pp. 160-61. John Kenneth Galbraith's discussion, in The New Industrial State, pp. 85-97, pays due regard to the diversity of functions the modern corporation serves. For reasons of his own, however, Galbraith chooses to subordinate all of these various mechanisms of cooperative benefit under the general rubric of "planning."
64. Oliver E. Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985), pp. 90-98.
65. See Barr, The Economics of the Welfare State, p. 78; see also Blaug, Economic Theory in Retrospect, pp. 592-95; Gareth D. Myles, Public Economics, chap. 2.
66. John Kenneth Galbraith, American Capitalism (Cambridge, Mass.: Houghton Mifflin, 1952), p. 110.
67. This example of course draws its force from the elimination of a collective action problem that arises through negative externalities, whereas in this article I am only considering arrangements that resolve collective action problems involving the failure to produce positive externalities. However, it would be quite easy to vary the example to provide the correct illustration. The Jamestown bowling story, for example (in which no one is willing to work the fields, because the crops are divided up equally among all, regardless of work effort), would suffice. See
68. Robert C. Ellickson, "Property in Land,"Yale Law Journal 102 (1993): 1315-400.
69. This fact has been noted by anthropologists (e.g., see Bruce Winterhalder, "Open Field, Common Pot: Harvest Variability and Risk Avoidance in Agricultural and Foraging Societies,"in Risk and Uncertainty in Tribal and Peasant Economies, ed. Cashdan, pp. 68-70), but the impact of the observation has not been widely felt in normative economics and political philosophy. The "tragedy of the commons"argument for property rights is still typically presented as a straightforward efficiency gain.
70. Rasmusen, Games and Information, presents a simple model of an insurance arrangement in which "there is a trade-off between efficient effort and efficient risk allocation,"p. 187. The fact that this trade-off arises from a conflict between two different mechanisms of cooperative benefit is obscured, however, by the fact that Rasmusen analyzes insurance contracts as a trade between a risk-neutral insurance company ("perhaps because it is owned by diversified shareholders") and a risk-averse individual (p. 183). This treats the central mechanism as a gain from trade, obscuring the role played by the law of large numbers.
71. François Éwald, L'état providence (Paris: Grasset, 1986).
72. David Laibson, "Golden Eggs and Hyperbolic Discounting,"Quarterly Journal of Economics 112 (1997): 443-77.
73. World Bank, Curbing the Epidemic (Washington, D.C.: World Bank, 2000), chap. 4.
74. I am grateful to Patrick Turmel (personal communication) for this formulation of the distinction.
75. George Bittlingmayer, "Property Rights, Progress, and the Aircraft Patent Agreement,"Journal of Law and Economics 31 (1988): 227-48.
76. Adam B. Jaffe and Josh Lerner, Innovation and Its Discontents (Princeton, N.J.: Princeton University Press, 2004), p. 51.
77. For this distinction, see Alan Shipman, The Market Revolution and Its Limits (London: Routledge, 1999), p. 297.
78. Williamson, Economic Institutions of Capitalism, pp. 90-96.
79. Galbraith, American Capitalism, p. 24.
80. For the former, see Gordon Tullock, Private Wants, Public Means (New York: Basic Books, 1970) and Anthony Downs, An Economic Theory of Democracy (New York: Harper & Row, 1957); for the latter, see Rawls, A Theory of Justice, pp. 240-50.
81. See, e.g., Harvey S. Rosen, Bev Dahlby, Roger S. Smith, and Paul Booth, Public Finance in Canada, 2d ed. (Toronto: McGraw Hill, 2003), p. 88.
82. Teresa Ghilarducci, "Myths and Misinformation about America's Retirement System,"in Unconventional Wisdom: Alternative Perspectives on the New Economy, ed. Jeff Madrick (New York: The Century Foundation, 2000), pp. 69-92.
83. Joseph Heath, "Dworkin's Auction,"Politics, Philosophy and Economics 3 (2004): 313-35.
84. Ronald Dworkin, Sovereign Virtue (Cambridge, Mass.: Harvard University Press, 2000), p. 73.
85. On the latter, see Ronald Dworkin, "A Reply,"in Dworkin and His Critics, ed. Justine Burley (Oxford: Blackwell, 2004), p. 348. Dworkin does state that risk aversion is the basis for the utility gain associated with insurance (Sovereign Virtue, p. 95), but he goes on to elaborate this point in a way that suggests otherwise. For example, he writes, "I buy insurance on my house because the marginal utility loss of an uncompensated fire is so much greater than the utility cost of the premium,"p. 97. It goes without saying that the loss of the house is worse than the payment of the premium, but that fails to explain why anyone buys insurance. People buy insurance because-or more to the point, to the extent that -the expected utility associated with the gamble between losing and not losing one's house is less than the loss of utility associated with paying the premium.
86. Dworkin, Sovereign Virtue, pp. 99-109.
87. Moss, When All Else Fails, pp. 314-15.
88. See
89. Michael J. Trebilcock and Roy Hrap, "What Will Keep the Lights On in Ontario?"C. D. Howe Institute Commentary, No. 131 (2003), p. 6.
90. This observation has been made before, in different ways (see Knight, Institutions and Social Conflict, pp. 34-37).