When I was at university studying neoclassical welfare
economics - about half a century ago - the standard discussion of the benefits
and limitations of free markets began with a demonstration that, under certain assumptions,
individuals with stable and internally consistent preferences could maximize
their utility through voluntary transactions. As I write, I have a picture in
my mind of neat sets of indifference curves in an Edgeworth Box, rather than
the gains from trade diagram shown above.
Of course, in the 1960s and 70s a great deal of attention
was given to market failure stemming from violation of competitive market
assumptions and the existence of externalities. Since then, research by
behavioural economists has provided evidence that individuals’ preferences tend
to be context-dependent, rather than stable and internally consistent. For
example, as we all know, what we choose to buy may be influenced by the
placement of items on supermarket shelves.
Just as evidence of market failure led many economists to
advocate remedial government interventions, evidence that individuals’
preferences tend to be context-dependent has been used by some behavioural
economists to argue for paternalistic interventions to nudge
people to make better choices. Wise economists urge that consideration should
also be given to government failure - the tendency for government intervention to
make matters worse even when politicians intend to produce better outcomes.
Robert Sugden has shone light through the smog caused by the standard
neoclassical assumptions about individual preferences in his recently published
book, The Community of Advantage. Sugden
dispenses with assumptions about individual preferences by substituting the principle
of individual opportunity – the idea that individuals will choose to have more
opportunities rather than less.
Sugden’s book has been praised by some eminent scholars
working at the interface between economics, psychology and ethics. It is
pleasing that Cass Sunstein, whose advocacy of paternalistic nudges is challenged
in the book, describes it as “one of the very few most important explorations
of liberty in the last half-century.
Sugden makes the powerful point that there is no basis for
behavioural economists to interpret contraventions of the standard neoclassical
assumptions as necessarily attributable to cognitive error or self-control
problems. There is no known psychological foundation for human decision-making
to be modelled as “a neoclassically rational inner agent, trapped inside and
constrained by an outer psychological shell”.
Nevertheless, humans obviously make cognitive errors and
experience self-control problems. Should economists wash their hands of those
problems and leave them for psychologists to deal with? Sugden suggests that
economists may be able to help by adopting a contractarian approach – addressing
their recommendations to individuals - usually by showing them how they can
coordinate their behaviour to achieve mutual benefit - rather than addressing
recommendations to paternalistic governments. It is consistent with a contractarian
approach for economists to point out the mistakes that individuals are liable
to make and to suggest types of choice architecture (e.g. nudges) that they
could use, if they wanted, to avoid making those mistakes.
One of the highlights of the book is the perception it
offers of the workings of “the invisible hand” of the market. The invisible
hand is sometimes portrayed as something that has to be mysterious since it is
able to convert self-interest into community benefits. Sugden suggests that the
invisible hand is far from mysterious when perceived in terms of the activities
of profit-seeking traders looking for arbitrage opportunities. If some
individuals are willing to sell something at a lower price than other
individuals are willing to pay to buy it, traders can take advantage of the
profit opportunities of that situation. From the perspective of the buyers and
sellers the transaction helps realize an opportunity for mutual benefit,
whether traders are involved or not.
As I see it, from an individual’s perspective the market
provides expanded opportunities along the lines suggested in the gains from
trade diagram shown above. A person who subsists without trading with others
has little leisure time left after eking out a living. By participating in trade
- earning a market income in this example - her consumption possibilities are
expanded. She is able to get more of what she wants – more leisure and/or more
other goods - by helping others to get what they want.
Opportunities for mutual benefit are not limited to market
exchange. Mutual benefit is possible in many different types of cooperative interaction.
Sugden provides an insightful analysis of team reasoning, contrasting a contractarian
approach in which individual team members seek to achieve mutual benefit with
the alternative of perceiving the team as a single entity and seeking to
maximize the overall good of the team, as judged from some neutral viewpoint.
The author’s analysis of adherence to voluntary practices is
also insightful. He notes that individuals realize mutual benefits directly by
conforming to voluntary practices, e.g. tipping conventions, because
regularities of behaviour provide salient benchmarks for expectations about one
another in specific interactions. By conforming to the practice, they also
sustain the expectations upon which it depends and help to maintain it as an
institution.
In my view, the most important contribution of the book is
its discussion of the ethics of intending mutual benefit. A long-standing and recurring
theme of criticism of market exchange is that it involves
extrinsic motivations that are not virtuous. That line of thinking implies,
implausibly, that the intrinsic satisfaction that I obtain from blogging might evaporate
if I were to obtain monetary rewards for my efforts. Sugden observes that when
people participate in markets they can
act with the intention of achieving mutual benefit, rather than personal
benefit. He urges readers to adopt the following principle of mutual benefit:
“When participating with others in a voluntary interaction,
and for as long as others’ behaviour in that interaction is consistent with
this very principle, behave in such a way that the other participants are able
to satisfy normal expectations about the consequences of the interaction for
them."
The author explains that one of the merits of the principle
of mutual benefit is that what it requires of us individually is independent of
the motivations of the people with whom we interact. It is in our interests to
seek mutual benefit in interactions with as many other people as possible. The
principle never requires us to make judgements about another person’s intentions.
The Community of Advantage is the best book I have read about the economics of human flourishing. This brief review has provided only a glimpse of what it is about. Hopefully, it has whetted your
appetite to read the book.
The book has raised several issues that I hope to be able to
explore further on this blog:
- Is the principle of mutual benefit consistent with the primacy of personal responsibility as discussed by Douglas Den Uyl and Douglas Rasmussen in The Perfectionist Turn?
- When is it possible for economists who are engaged in provision of public policy advice to adopt a contractarian approach?
- Does the principle of mutual benefit mesh well with the views of Elinor Ostrom on management of common property resources, the views of Vincent Ostrom on politics, and the views of Max Borders about the prospects of a Social Singularity?