The visible hand in economics

Social devolution or individual freedom?

Posted on: March 20, 2008

Here I am going to discuss an issue that is way over my head – but is extremely important for the practical application of economic concepts. I am going to discuss how changes in economic policies can influence social structure.

I decided that I would attempt to write about this after reading this post. In the post the daily dissident laments the collapse of community and the movement in consumerism and its impact on individuals.

The first argument against this view is the idea of individual freedom – individuals have the right to make their own choices, and the frame of communal society alienates that right. However, it is possible to look at the idea of community while providing individuals with rights.

The most basic way to frame this problem initially is as a prisoners dilemma. In this case each individual has the incentive to take advantage of a communal relationship, if one exists, leading to a point where no-one acts with a spirit of community. However, when everyone does this they all end up worse off than they did when they co-operated. Daily dissident believes that society used to be structured in such a way that this prisoners dilemma was solved, and everyone was better off.

In this sense we are suffering from some type of social devolution. The opening up of borders and freeing of markets has influenced the structure of society in such a way that individuals no longer wish to act in such a communal way – reintroducing this prisoners dilemma.

This raises the question I wish to discuss, how do economic policies influence social structure. To an economist this question is akin to asking how parameter choices influence the structure of the game – a question that is important and often not looked at in great detail (Huw Dixon is one man that did give these issues a lot of thought, at least before he turned into a macroeconomist 😉 ).

There are two clear channels that I think economic policy can have that impact through:

  1. Influencing rules of thumb,
  2. Changing the structure of institutions.

What do I mean by these things. Well rules of thumb are behavioural rules that people follow in order to minimise the transaction costs associated with making decisions. If the structure of the game changes significantly, then any accidental deviation from the rule is likely to offer a significant improvement in outcomes – giving people the incentive to re-evaluate their rules based on personal interest. If the rule previously worked in the favour of society, it is possible that such a shift may be sub-optimal in the presence of some type of prisoners dilemma.

By changing the structure of institutions, I am talking about policies that change the optimal structure of the explicit and implicit contracts that people make with each other. This is interesting as these contracts form part of the initial structure of the game and as a result require some type of external shock (technology, social or government action stemming from a shifting of preferences) in order to get them moving once they have found equilibrium.

Now how do these factors slip into the dissidents example. Fundamentally, the shift to consumerism has changed rule following behaviour or institutional structure in such a way that the institution of ‘community’ has been weakened. How does this work – well, if we suddenly believe that we should buy more things (I feel that the word need is inappropriate here) the “free-riding” problem inside a communal system worsens thereby leading to a greater incentive to deviate from this type of behaviour by either breaking the (implicit) contract with the community or not renewing it when it comes time to.

In the way described above this type of behaviour appears concerning, however by itself it does not tell us whether the change in social structure was beneficial or not.  Evaluating such policy is notoriously difficult, as it involves placing value on intrinsic factors.

However, it does clarify a few things for me.  Firstly, my conception of anthropology (and to a degree sociology – although Tyler Cowan’s writing has convinced me otherwise) was one of a subject which was out of touch with the idea of individual incentives.

Now (as in from about a year ago) I realise that implicitly we are studying the same social group but holding different attributes constant.  Economists hold preferences constant and look at choice and to a degree institutions, that is why we are so pro-property rights, given a fixed set of preferences they offer appropriate incentives for individuals to make ‘efficient choices’ (except for social costs).  Anthropology on the other hand is looking at fixed institutions and their impact on preferences and thereby on choice (although I use the term choice weakly here).  This explains their disdain on property rights – as they do not provide people the incentive to take into account social costs.  A communal system, if set up appropriately, could lead to a case where groups act in a way consistent with the interest of the group – not the individual, by incentivising individual action as such.

As both analytical methods can be used to find the optimal outcome (in some normative sense), the best choice would be the method which provides the outcome at the least cost, more evaluation 🙂 .

Ultimately, all this tell me is that some discourse between the social science will be required if we truly want to understand what happens in the ‘long-run’ following a decision by government or a technological change.  However, hopefully this discussion has illustrated two things (I will list them as the discussion probably made no sense 😉 )

  1. To other social scientists:  Economics does have the ability and willingness to discuss changes in social structure and preferences – you just need to give us time and a little help,
  2. To economists:  Other social sciences do have relevant points.  The reason we can’t find these points with our (awesome) tools is because we have not yet developed a general theory of social behaviour.
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