Rules can be considered the secret sauce in the recipe for a successful society. The biological equivalent to a rule set is the DNA which encodes genes. Like good genes confer reproductive success and ensure the perpetuation of the species, good rules allow societies to succeed in the great game of economic survival. Two societies with equivalent endowments of natural and human resources can end up with different levels of prosperity if their rule sets are not equally good.
The question naturally arises: why do different societies end up with different rule sets? Who’s in charge of making the rules? And there is a follow-up question. Rules have public good characteristics. That is, they are not physical objects that are rival in consumption. If you use a rule, I too can the same rule without depriving you of the use of the rule. So if you have a good rule set, I can costlessly imitate the set and achieve equally good results. Rules are like secret sauces except for that they are not secret. So the question is why don’t people copy good rules. To explore these two questions, let me begin with addressing a personal matter.
I have been meaning to write about books that matter to me for a while. Since some have explicitly asked that question, it’s time to come clean. Thomas C. Schelling’s Micromotives and Macrobehavior (1978) is the book that had the most influence on my decision to study economics formally. Why does a person behave the way he does? And what is the effect of the aggregation of individuals behaving according to their own preferences? These questions naturally arise if you have the least curiosity about the world of people.
Schelling is brilliant in his analysis and lays out the arguments in terms that any lay intelligent reader would intuitively grasp. It is one of the best introductions one can have to game theory. There is hardly any algebra and yet his arguments are formal, elegant and rigorous. If for nothing else, one should read that book slowly just to learn how to write clearly. Of course, writing clearly on a topic requires thinking clearly about it. Schelling is a master wordsmith. I have been randomly flipping through the book and every page recommends itself as worthy of quoting. So here is a sample:
Some years ago Garret Hardin chose a title that is insinuating its way into our common vocabulary to describe a motivational structure that is remarkably pervasive. He gave an address entitled “The Tragedy of the Commons” what was published in Science (Dec 1968.) References to the commons are showing up everywhere, and the term is beginning to server the same shorthand purpose as words like “multiplier,” “noise,” “zero-sum,” “critical-mass,” or “bandwagon.” A decade earlier “prisoner’s dilemma” escaped the domain of game theory and became shorthand for a commonly occurring situation between two individuals, the one in which two people hurt each other more than they help themselves in making self-serving choices and could both be better off if obliged to choose the opposite. Hardin’s common grazing grounds are a particular multi-person version of the same motivational structure.
The image is provocative. Every time one of us noses his car onto a crowded highway he is likely to be reminded of cattle overgrazing the common grassland. Soon, people at a meeting who have something worth saying, but not quite worth listening to, may begin to look like the cows that eat and trample the grass that another cow has its eyes on. Economists have a long history of attention to the commons, and it is neither accidental nor the unique genius of Garrett Hardin that that concept is now regularly applied to the dumping of sewage in the common waterway as well as the extraction of oil from a common pool or the killing of whales in a common sea, and even to the proliferating human population for which the earth and its resources have been likened to a common breeding ground.
“The commons” has come to serve as a paradigm for situations in which people so impinge on each other in pursuing their own interests that collectively they might be better off if they could be restrained, but no one gains individually by self-restraint. Common pasture in a village in England or Colonial New England was not only common property of the villagers but unrestrictedly available to their animals. The more cattle (or sheep or whatever) that were put to graze on the common, the less forage there was for each animal – and more of it got trampled – but as long as there was any profit in grazing one’s animal on the common, villagers were motivated to do so. . .
Looser definitions of “the commons” will include situations that are similar but not identical in analytical structure. Hoarding library books, hogging pay telephones at a busy airport, sitting through intermission for fear of losing one’s eat, and exercising tenure in a rent-controlled apartment when one would prefer to move but has no seniority elsewhere, are other examples of the “wasteful” collective use of scarce resources.
I will resist the temptation to quote any further from the book. Add that to your reading list. I would recommend his “The Strategy of Conflict” but it is more specialized and is definitely harder to read. Although I never met him, I consider Schelling to be one of my economics gurus and was delighted when Schelling won the economic Nobel prize in 2005. I would recommend his prize acceptance speech which you can find here.
As I continue with my Tangled Web set of posts, I will return to books that were useful to me in developing my thinking. It may take me time, however, as I am not the most disciplined of people and tend to get easily distracted.
So I will come back to the matter of rules and why they matter later. For the next post, I would like to explore a matter that I believe is not fully appreciated: poverty and inequality.
Categories: Tangled Web