Key lessons of cooperative economics

This is the second part of a five part series based on lessons gleaned from the book "A Cooperative Species, Human Reciprocity and Its Evolution" By Samuel Bowles & Herbert Gintis, 2011.

The previous part summarizes the highlights of the book and lists the 14 key lessons.

Now we delve into each of the 14 lessons in turn.

Caveats

The authors stress that their take on cooperative economics is an explanatory model of how people behave, not a prescriptive one saying how they should behave. If you're looking for a model of how people should behave in order to better their situation, this is not necessarily it. If you're looking to understand how people actually do behave, this is arguably a better model than classical economics. Classical economists themselves have largely conceded this point and some are openly admitting this in public.

The authors repeatedly caution that “altruist” does not necessarily mean “kinder and gentler”. This is no less evident now as the mixing of cultures and ancestries continues in many of the more open societies around the world.

“individual motives and group-level institutions that account for cooperation among humans include not only the most elevated, including a concern for others, fair-mindedness, and democratic accountability of leaders, but also the most wicked, such as vengeance, racism, religious bigotry, and hostility toward outsiders.”

Institutions proliferated because the groups that adopted them secured high levels of within-group cooperation. Groups develop their own lingo or signaling to improve group cohesiveness. Groups having high within-group cooperation were very successful in competing with other groups.

Group-cohesiveness is a good predictor of within-group cooperation. This seems to be a commonality of all cultures of the world. This also causes great conflicts when groups are merged or intermingle. Emotional reasoning utilizes shortcuts that allow it to reason on-the-fly in real-time about complicated matters with incomplete and uncertain information. This tactic is bumping up against modern sensibilities about right and wrong.

Focus of the book

This book has such sweeping scope that in order to summarize the book's core message while keeping this document relatively brief I found that I needed to use a minimum of explanation much less interpretation otherwise this document would explode in length. I'll reserve my own opinions to separate documents. Most explanations had to be cut to minimize the length.

Much of the authors’ argument is academic in nature -- intended to add to a scientific body of knowledge. The authors go into great detail about the evolutionary basis for their arguments. They delve deeply into population genetics, experimental economics, evolutionary game theory, archaeology, genetic inheritance and cultural transmission. There exist some excellent book reviews that address the scientific validity of the arguments. That won't be the focus here.

Also not part of the agenda here is policy debate or debate on the philosophy of economics.

Scope of these articles

I try to simply distill the key points of the book leaving explanations elaborations and interpretations to future musings. However, even by my act of (hopefully mostly if not entirely unbiased) distilling I impart at least a little bias if only in the way of choosing what to emphasize. Full disclosure on this point -- coming in to writing this article, I was particularly interested in the following aspects of the book:

the difference between non-cooperative (that is, purely competitive) economics and cooperative economics.
how decentralized coordination is explained by non-cooperative and cooperative economics.
how much of this we take for granted because it is such a matter of common sense, such that much less of this is addressed in the typical education curriculum than classical economics.
the relevance of these lessons to small group dynamics, including workplace teamwork and household family groups.
the relation to computer science and algorithms, and what this bodes for the future of artificial intelligence and machine learning.
the difference between groups comprised of humans and groups comprised of nonhumans, such as corporations, governments, and algorithmic autonomous agents.
the dramatic difference in behavior of human groups when they are forced to cooperate under the constraints of anonymity, time constraints, and poor communication.

Politics

Both authors have done work that they themselves would describe as marxist.

I for one am not marxist. Nor have I ever found any part of its message compelling. I would consider marxism to be more of a political idealogy than a social science. However, marxism is a charged label, so it makes sense to be clear about my motives.

Just because this book is written by someone who is an avowed marxist and has given that idealogy serious consideration elsewhere in their professional life does not dissade me from being open to learning lessons from this book. That said, it would be naive to think that just because I claim to be a free-thinking open-minded individualist, that others might not label me as a marxist just for giving this much consideration to the words of avowed marxists.

This book seems to avoid overt political messaging and claims to base its claims on scientific evidence -- and to my mind seems to succeed in that regard. I definitely noticed a socialist leaning in several parts of the book. However, on my numerous readings I cannot remember encountering any paragraph was overtly political much less marxist. Having a socialist bent makes sense, being that the book is about cooperation as an alternative to classical economics. However, when people think "anti-capitalist", they often think "marxist".

Remember though that this book is arguing the case for an alternative way to decentralize consensus. I did not interpret any part of the book as recommending a top-down command economy

The conclusions are about decentralizing decision-making, not concentrating it.

If it had not been for the huge amount of reading that I had done on behavioral economics and algorithmic game theory, I would not have considered reading this book. However, the conclusions of behavioral economics and algorithmic game theory demanded that I do so.

I came to this book because algorithm theory pointed me in this direction. The evidence I've gleaned from theoretical computer science and algorithmic game theory indicates (to me and increasingly many others) that non-cooperative game theory is fundamentally limited. It has proven enormously successful in certain settings. However many of those settings require computational horsepower that is not only unavailable to most human beings in natural settings, but also beyond the capability of their computers.

“If your laptop can’t find it then neither can the market“ -- Kamal Jain

Recently, algorithmic game theorists and theoretical computer scientists have been surfacing algorithms that are more practical than the ones traditionally utilized by non-cooperative game theory and classical economics. This has important ramifications for both human actors as well as autonomous algorithmic agents. The "social norms" described in this book are potentially useful for people who want to better understand group behavior; however, in addition to that they are potentially algorithm designers who can borrow techniques that people have found to be useful.

The great experiment bumps up against limits

The invisible hand meets the prisoner’s dilemma

“Americans. . . are fond of explaining almost all the actions of their lives by the principle of self-interest” -- Alexis de Tocqueville, Democracy in America, 1835

In the 18th century, Adam Smith saw cartels and other collusion by powerful interest groups to be “antisocial.” His solution was “an invisible hand” to guide the contributions of self-interested group members. When this insight was popularized it resulted in the ability to coordinate the division of labor on a massive scale. The key idea here is that letting the invisible hand guide the actions of self-interested participants results in better coordination on a larger scale. Many of the effects are indistinguishable from cooperation. This was a huge evidence in favor of positive effects of individuals pursuing their own best interests. These methods were espoused as the solution to a great many problems, and had great success.

“freedom in a commons means ruin for all” -- Garrett Hardin

In the 20th century, the invisible hand brushed against two demons the dark side of self-interest:

(a) The prisoner’s dilemma. 
(b) The tragedy of the commons.

In prisoner's dilemma, a single encounter could destroy group cohesion by putting two group members on the spot in a lose-lose situation. In tragedy of the commons, situations where cooperation is the only good solution, self-interest could doom the entire group. "Group" here could mean an entire municipality, region, country, continent, or globe.

This is a serious and possibly fatal flaw of market-based economies -- i.e., large groups where each member is completely self-interested, behaving without regard to what is good for the group as a whole.

Classical economics, largely based on non-cooperative game theory, attempts to explain how kinship and reputation-building over many repeated interactions can lead to the type cooperative group dynamics that give a kinder gentler society that is for the betterment of all.

Recent developments in game theory and the theory of computation indicate that for designing effective teams comprised of all-too-human participants instead of an invisible hand, we need an “invisible coordinator”.

Key lessons of cooperative economics

Lesson 1: People are naturally cooperative

People’s behavior is a combination of self-interest and altruism. What makes humans so successful is their ability to coordinate in a decentralized manner, in large groups, but also in small groups. People are able to layer cooperative and competitive behaviors in sophisticated and nuanced ways, mixing strategies on the fly, in real-time, often without realizing what they are doing and why they are doing it.

Theories of group behavior based on “enlightened self-interest”, “indirect reciprocation”, and “mutualism” tried to explain all human cooperation using non-cooperative game theory. “Non-cooperative” is a nicer way of saying “competitive”.

Scientifically, simpler models are prefered over more complicated ones. It is usually preferable to explain everything with a simple model than with a model having more moving parts. It is also usually simpler to explain everything with a single model, rather than two models. Non-cooperative game theory has been extraordinarily successful in explaining many aspects about group behavior, and in some ways is a simpler model than cooperative game theory. It makes sense to push a model as far as it can go. However, in order to explain many common human behaviors, non-cooperative game theory has to be twisted and turned into mechanisms that end up being more complicated than cooperative game theory. Cooperative game theory is naturally more able to explain many things that seem puzzling under non-cooperative game theory.

The book makes some fairly sound arguments that the non-cooperative models fail to explain two aspects of human cooperation:

It happens in groups far larger than the immediate family, and
It happens in interactions that are unlikely to be repeated, where it is impossible to improve one’s reputation by cooperating.

Experiments showed that a majority of subjects were conditional altruistic cooperators -- this means that they will cooperate if they feel assured that the other subjects will cooperate. They make a strong case that this is not predicted by non-cooperative theories.

The same evidence shows that the fraction of most populations motivated solely by amoral self-regarding preferences to be quite modest. Other experiments show that subjects in the ultimatum game behave the same, all around the world, in cultures ranging from hunter-gathering tribes to technologically advanced. Non-cooperative game theory simply does not predict how people behave in this game. This experiment alone suffices to call into question the axiom of self-interest. There are many other experiments that provide additional proof. Much of the book goes into depth on the various experiments, their methodology, and why their results are not adquately explained by non-cooperative theories.

Even the most critical reviews had to begrudgingly given the authors credit for laying out such a strong case. Seek out those reviews for critiques about methodology and conclusions. The rest of the way we are going to focus mostly on the facts as seen by the authors.

Lesson 2: Institutions are important but limited

Governments enforce property rights and provide incentives for self-interested individuals to contribute to massive common projects, such as building a hydroelectric dam or sending robots to Mars.

Commercial markets are able to coordinate the division of labor in impressive ways. However, we encounter matters involving division of labor on a daily basis that are not coordinated by a market-based approach. Many if not most are negotiated using a form of human judgment that is applied in real-time on the fly by people who have no idea that they are using game theory. In some cases, non-cooperative game theory is a better predictor of how a group will behave; in many cases, group behavior is predicted better by cooperative game theory, where group norms upheld by individuals rather than institutions, using emotional reasoning rather than rational intellect.

Respect for property rights is deeply embedded in the code of law at all levels. However social psychology experiments show that our sense of right and wrong with respect to property ownership is internalized at a very young age. Whether this is a genetic predisposition or due to training by parents and other adult role models, this happens very early. This training is reinforced continually until children can begin to actively participate in the community, at which point they begin to learn by doing.

Lesson 3: Altruism is red in tooth and claw

Altruism: behavior of an animal that benefits another at its own expense. A selfless concern for the well-being of others.

Proponents of cooperative economics often emphasize the “altruistic” aspect of human selflessness. In the book, “altruism” can mean something much different than what we expect it to mean in everyday use of the term. Altruism can be directed at a group instead of an individual. A member of a group that is upholding the code of ethics on behalf of a group may use that code to justify acts of punishment towards an individual deemed in violation of that code. In some cases, behavior that is being done " altruistically" on behalf of the group might be anything but kind to the immediate target of the punishment.

The book describes ways in which groups have evolved to be more effective by being ever-vigilant of free-riders and infiltrators. Some of these ways are now considered to be morally objectionable. The book (and this review) don’t condone these practices. The core message is that these behaviors are deeply embedded in the human psyche, and despite our supposedly higher reasoning skills and cultural sensitivities, are still a major part of group dynamics.

Lesson 4: The three habits of highly effective groups

There are three main group dynamics behind decentralizing consensus and control.

1. Protect altruistic members from exploitation by the self-interested.

Prominent among these is the public-spirited shunning, ostracism, and progressively stricter forms of punishing free-riders and others (such as infiltrators) who violate cooperative norms. Others are “leveling” practices that limit hierarchy and inequality. Sharing food and information are examples of such leveling practices.

2. Internalize the norms.

People use prolonged and elaborate systems of socialization that lead individuals to internalize the norms that induce cooperation. Working together and punishing shirkers becomes a worthy goal in its own right.

3. Distribute the enforcement.

Some group members are motivated to take it upon themselves to punish free-riders, often at a great personal costs to themselves. However, this is more effective than designating a selected subset of enforcers, such as a police force, whose oversight is much easier to evade than a peer member of the group. Sacrifice on behalf of others helps the entire group thrive.

Lesson 5: Psychological basis of social institutions

Effective cooperative groups do the following well:

formulate norms of conduct,
devise means of regulating this conduct,
communicate these rules and what they entail in particular situations,
alert others to their violation and
organize coalitions to punish the violators.

This can be done using institutions. However, while institutions are certainly a powerful outcome of human culture, they are centralized. This limits communication, vigilance, and punishment.

The ability to internalize norms is connected to social emotions as shame, and moral outrage. These allow decentralization by co opting all group members to participate in some way or another in communicating the rules and enforce compliance.

Lesson 6: Social preferences exist and cannot be explained by self-interest alone

The self-interest axiom ... provides a clear prediction of how a one-shot and anonymous game will be played. However, when actually played, the predicted outcome is almost never observed and rarely even approximated.

A substantial portion of experiment subjects experience a strong urge to punish the proposer for being unfair, even though it means giving up some of their own money to do so. This contradicts the self-interest axiom. These results were surprising at first, but are now commonplace.

Lesson 7: Strong Reciprocity Is Common

The book argues that self-regard does not explain strong reciprocity. Strong reciprocity is common around the world.

Lesson 8: Free-Riders Undermine Cooperation

In a social dilemma that is repeated for a number of periods, subjects tend to start with a positive and significant level of cooperation, but unless there are very few free-riders in the group, cooperation subsequently decays to a very low level.

The experimental public goods game is an n-person prisoner’s dilemma.

the dominant strategy for a self-regarding player is to contribute nothing to the pool.
in public goods experiments, only a fraction of subjects conform to the self-interest axiom.

Part of the reason for the difference is that people have an intrinsic motivation to punish shirkers.

This is not simply an instrumental desire to alter the shirker's behavior, or to affect the distribution of payoffs to either reduce unfairness or enhance one’s own relative payoffs.

Subjects not only punished shirkers when it was non-strategic, that is, not in their own self-interest, they enjoyed meting out punishment, expressing a desire for retribution.

Lesson 9: Effective Punishment Depends on Legitimacy

Experiments with public goods with punishment games confirm that altruistic punishment improves cooperation within a group.

This raises the question: do groups that punish free-riders actually benefit? Or do the costs of punishing outweigh the benefits to cooperation that result? The answer is the former. Groups that punish free-riders do benefit.

However, this is effective only if it is regarded as legitimate according to widely held social norms. Cultural differences are significant.

In many societies a significant amount of punishment was directed at high contributors, possibly as a retaliation against punishment received in earlier rounds by subjects who believed that it was the high contributors who were doing most of the punishment

The result was vendetta-like retaliation against punishment. This can lead to costly and escalating rounds of wasteful punishment called “antisocial punishment.” Antisocial punishment hurts average payoffs.

On the other hand, moderate types of "legitimate" punishment improve average payoffs.

Punishment possesses time horizon effect. It raises average payoffs in the long run.

Getting the group to participate in determining the mode of punishment is an effective way to improve participation after this mode is put into action. The determination of the punishment system by majority rule made the punishment not only an incentive but also a signal of group norms.

If the population is allowed to vote on the means of punishment, it is a means for them to indicate what the social norms are, not what is necessarily ‘rational’ according to self-interest from a homo economicus perspective.

Punishment of group members in tends to follow the following dynamics:

it is tuned to achieve legitimacy,
it is coordinated by gossip and rarely carried out by a single individual.

Making individual contributions publicly observable raises contributions to the public good substantially.

Free-riding elicits extremely strong negative emotions among the other group members.

Unless there are indirect reciprocators, strategic reputation-building can have no effect.
Nonetheless even self-regarding individuals may engage in third-party punishment if they believe that this will induce other-regarding individuals to behave favorably toward them.

Punishment is thus not simply retaliation in response to personal damages but appears to reflect more general ethical norms.

Lesson 10: Social Preferences Are Not Irrational

In classical economics the term “rationality” is misused as a synonym for “consistent pursuit of self interest.” For many people virtue is its own reward, and can be assigned a value.

in actuality people are no less rational when deciding to cooperate and punish than when comparison shopping prices for food.
the preferences that lie behind their social behavior are consistent with the basic axioms of rationality, namely on transitivity (i.e., consistency) and completeness.
This is perfectly consistent with the fact that, as in the case of people with self-regarding preferences, they would consider the price.

If you include the proper factors into the equation, behavior that seems to be ‘irrational’ is actually rational.

Lesson 11: Though limited, culture and institutions matter greatly

This may seem redundant with Lesson 2 -- however, whereas that lesson presents the evidence that culture and institutions are not the sole source of ethics, this lesson emphasizes that on the other hand, social preferences and moral reasoning cannot displace culture and institution.

Experimental evidence accumulated in the 1990’s showing that many, perhaps most, individuals are not entirely self-regarding. This lead to some musings that perhaps economists just need to replace the Econ with a unit of population that more closely matched average human behavior.

Could Homo economicus simply be replaced by Homo sociologicus, Homo altruisticus, or, as we once suggested, Homo reciprocans?

The book doubts that such a universal model will prove viable. While there are some norms that seem to be universal over cultures across the globe, there are important behaviors that seem to be extremely sensitive to cultural learning.

Institutions serve as cues for appropriate behaviors.

As an example they give the competitive gift giving that serves as a means of establishing status and subordinacy in New Guinea societies.

In experiments examining culture effects, not a single group behaved according to the self-interest axiom. However, the way the group behaved, while cooperative, was markedly different from group behavior in other parts of the world.

Where voluntary public goods provision was customary in real life behavior in the experiment mirrored the real life system. For example, among Orma herders in Kenya those having more contributed more.

By contrast, in the ultimatum game, for which there apparently was no everyday life analogue, the wealthy behaved like the other Orma, meaning they did not seem to be influenced by culture or institution, instead behaving according to more deeply internalized norms.

I think the authors emphasize this to caution those who think that their model can be applied universally and that it would be a mistake to try to do so.

One implication would be that economists may not be able to rely as heavily upon a single universal model for explaining the behavior of small groups of people in contexts dominated by social preference. One of the appealing aspects of the non-cooperative models is their supposed universality.

Lesson 12: Behavior Is Conditioned on Group Membership

Those who condition their behavior on the group membership of the other may do this because group membership is thought to provide information about the other’s likely behavior. Or perhaps instead, group membership may matter because people would like to help or to interact with members of some groups more than others.

In the first case the actor’s beliefs are involved.
In the second case, group-sensitive preferences are at work.

Group-sensitive preferences may be other-regarding (valuing the well-being of members of one’s own group, for example) or self-regarding preferences (for example experiencing anxiety in culturally unfamiliar interactions).

Some experiments showed that subjects’ allocations favor in-group members not because of altruistic sentiments toward those who are similar to themselves, but because they expected reciprocation from in-groupers and not from out-groupers.

It turns out that taking account of ethnic, racial and other characteristics of those with whom one interacts appears to be a quite common human trait.

We find no evidence for a commonality of tastes within ethnic groups, or greater degrees of altruism toward coethnics or for an impact of shared ethnicity on the productivity of teams. [Instead,] successful collective action among homogeneous ethnic communities is attributable to the existence of norms and institutions that facilitate the sanctioning of non-contributors.

Here, ethnicity does appear to matter.
Norms may dictate ethnic favoritism.
In public settings subjects may fear sanctions were they to not respect these ethnic norms.
Remarkably, ethnic favoritism, which was absent in an anonymous dictator game, was evident among some subjects when the dictator’s identity was public information.

Lesson 13: People Enjoy Cooperating and Punishing Free-Riders

Results from the ultimatum game, public goods game, and other social dilemma experiments is that

People think that cooperating is the right thing to do and enjoy doing it.
People dislike unfair treatment.
People enjoy punishing those who violate norms of fairness.

On neuroeconomics

Recent studies of brain functioning provide some support for this hedonic view of cooperative behavior.
Using positron emission tomography (PET), fMRI, and other techniques, neuroscientists, economists and others have begun to study the activation of the different brain areas of subjects playing experimental games
ultimatum game responders who reject a low offer exhibit heightened activation of the bilateral anterior insula, an area associated with negative emotional states such as anger and disgust. “It is irresistible to speculate that the insula is a neural locus of the distaste for inequality and unfair treatment.”
mutual cooperation with a human partner produces a higher level of striatum activation than does cooperation with a computer partner

Lesson 14: "internalized" does not imply "innate"

The above studies do not suggest that cooperating and punishing defectors is innate. People can learn how to associate norms with a social emotion.

Examples:

Foods that trigger disgust in one culture are considered delicacies in others.
Cross-cultural experiments indicate that social interactions that trigger aversive response vary across societies.

Part i : Introduction.

Part 1 : Overview of competing alternatives.

Part 2 : Failures of non-cooperative theory.

Part 3 : Evolutionary economics, rise of institutions, and the co-evolution of genes and culture.