Listen, I got a question about economics that's been bugging me for a really long time. Maybe someone can help me out.
Let me take as a starting point here the excellent short piece in yesterday's New York Times by the economist, Robert H. Frank on the successes and limitations of free market competition. The successes, he points out, were seen and understood by Adam Smith. As Frank puts it, "when greedy people trade for their own advantage in unfettered private markets, they will often be led, as if by an invisible hand, to produce the greatest good for all."
The invisible hand: a powerful idea. But Frank says that though most economists probably think of it as the most basic and fundamental idea of their discipline, he predicts they won't do so for long. Because alongside the invisible hand, he says, we have the powerful example of evolution putting self-interest against the interests of the group. Sometimes individual and collective interests coincide; sometimes they don't.
Consider the example of the elk, he says. Though a mutation for huge antlers tends to help any individual elk, the resulting evolutionary pressure for larger and larger antlers is a disaster for elk as a whole, who now have antlers that are a hazard in general -- getting in the way, for instance, when the elk are pursued into forests by predators.
It's like an antlers arms race. If male elk could vote to scale back their antlers, with a kind of antler-regulation, Frank says, they would have excellent reason to do so. Likewise, he says, in those cases in which unfettered competition puts individual interests against group interests, humans have excellent reason to enact regulation to, in effect, scale back our antlers.
Frank cites examples of neighborhood schools and steroid use. If everyone works extra to earn money to try to get the house with the best schools for their kids, housing prices just go up, while schools stay the same. If everyone uses steroids in sports, then you must use them to be competitive, and everyone suffers. What is good for the individual is bad for us collectively.
Frank uses these points as an argument for regulation in certain cases. Sounds good to me. In fact, it sounds so obvious to me that I'm prompted to wonder again, as I have before, about why it gets so little attention.
The idea that what is good for individuals is sometimes good for groups, but not always, seems pretty obvious just from looking around, but it was confirmed in precise terms by game theory. In games like the prisoner's dilemma, pursuing what is best for you alone doesn't always lead to the optimal outcome for all. Indeed, a classic example is the arms race: if any country disobeys a disrmament treaty while its neighbors obey it, they do best as individuals. But if all countries obey, the outcome is best overall.
But game theory, and prisoners' dilemma cases, have been known to economists for decades. These are concepts familiar to most of my undergraduates. So if the conflict between individual and collective success is underappreciated by economists in general and free market proponents in particular, as Frank suggests and as seems plausible, what is going on?
That's my question: why do economists still talk so often in terms of the rationality of doing what is in one's individual self-interest, when game theory shows clearly that optimal outcomes in certain cases are only reached by not doing so, are reached only through treaties, regulation, and antler-decreasing voting?
Is it a normative committment to the idea that that it is better to allow people maximal individual autonomy even if the outcome isn't best overall?
Or is it a factual committment to the belief that the vast range of cases we tend to see in terms of conflict between individual and collective good -- like the housing prices-schools case Frank cites -- aren't really examples of conflict after all, appearances to the contrary?
Either way, I'm skeptical.