Saturday, November 08, 2008

Why economists should study the origins of bargaining?

Having presented part 1 of my paper, ‘The Prehistory of Bargaining: a multi-disciplinary approach’, to the EAEPE in Rome, I had a conversation later with one of the participants about why I worked on such a subject, it being distant from the normal concerns of economics.

In parenthesis I must confess I have asked myself the same subject many times since I moved on from my research and the writing of successive versions of my incomplete manuscript in 2003.

I began the work almost accidentally while pondering why economists had so little to say about the ubiquitous behaviours of negotiation, which dominate human relationships, and not just in commerce. While teaching and writing about negotiation for many audiences, I had consumed fairly early on the sum total of books and papers appearing within the modern discipline, beginning with Zeuthen (1931) and Hicks (1931), Nash (1950) and onwards.

Surprisingly, Zeuthen and Hicks were least useful in that they were about the process of coercive bargaining through threats and their affect on the participants’ willingness to risk strikes or lockouts if they did not comply with the other party’s offers or demands. Incidentally, Zeuthen’s book was entitled ‘Problems of Economic Warfare’, to which Joseph Schumpeter contributed the forward to the English edition.

While such approaches had interest within the confines of a special case of bilateral monopoly, they were not within the scope of the universal experience of voluntary exchanges that take place in commerce. We all buy and sell; we don’t all run trade unions or large corporations, and nor do we all negotiate the termination or wars between belligerents.

Economists moved on from interest in the behavioural aspects of price determination once satisfied with the robustness of supply and demand theory. Dealing with managers almost daily through Business Schools, price determination was not a distant coincidence of MC=MR, once the players got ‘close and personal’ in their everyday work of buying and selling in multiple meetings, post-tender negotiations, and in covering multiple contingencies during the life of a contract. It seemed something was missing in price determination theory.

John Nash wrote ‘The Bargaining Problem’ in 1950 (Econometrica, XVIII, pp 155-62), which ‘solved’ it by assuming away the process of negotiation, covered in Zeuthen and Hicks), to concentrate (brilliantly) on the determination of the optimal bargain (where the product of the parties’ net numerical utility gains were maximised). This too was not immediately applicable to the behaviours of bargainers in the real world (though the insight was interesting!).

I soon turned back to Wealth Of Nations to re-read what Adam Smith had to say about the bargaining problem and was not disappointed. My educative work with bargainers, and repetitive observations of them at work (a rare privilege), had already taken into account that the significant element of their process was the multiple consideration of the ratios of exchange in making their offers; each made offers to settle the price (or whatever the subject of their deliberations) and eventually worked their way to either an irretrievable disagreement (a failure) or an agreed solution to the terms of an agreement (a success).

Struck by Adam Smith’s statement of the process and outcome, I was impressed:

Whoever offers to another a bargain of any kind, proposes to do this. Give that which I want and you shall have this which you want, is the meaning of every such offer; and it is this manner that we obtain from one another the far greater part of those good offices that we stand in need of.” (WN I.ii.2: p 26)

This is what I witnessed bargainers the world over (no exaggeration) doing two hundred years after he published Wealth Of Nations. Yet, among economists –even those few writing about bargaining – I found nary a mention of it. In the intervening years to 2000-3, I kept coming back to this absence of comment or recognition of Adam Smith’s statement of the bargaining process by modern economists.

Smith, famously, wrote however briefly about exchange and not just in Wealth Of Nations It is a common feature in all his writtings. For him exchange was a universal constant if you like, and had great significance among humans long before commercial society appeared. In that most famous other quotation – often quoted but seldom sung about – he set it out:

This division of labour, from which so many advantages are described, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another” (WN I.ii.1: p 25)

In the same paragraph, Smith identified tentatively that the ‘propensity to exchange’ was probably ‘the necessary consequence of the faculties of reason and speech’. This suggests that exchange behaviour was learned and not innate. The question became what process of social evolution promoted conditions for the learned behaviour of bargaining?

And that started my quest to answer the question.

Smith himself had much to say about how bargaining may have emerged with, for exampe, his parable of the deer and beaver hunters transacting by ‘higgling and bargaining’ to find a satisfactory ratio for their exchange. I was not satisfied that this was more than an attempted ‘explanation’ for an imaginary exchange for another purpose.

That is why I widened my search beyond economics to history, eventually to prehistory, to evolutionary psychology, to anthropology, to sociology and beyond.

Some part of this work is contained in my paper, ‘The Prehistory of Bargaining: a multi-disciplinary approach’, Part 1 of which you may download from the Lost Legacy Home page.

Comments and questions, of course, are most welcome.



Blogger michael webster said...

Few economists, except for maybe Thomas Schelling, have made a serious study of stepping into the other fella's shoes.

For example, game theory requires a high level of commensurability of preference - witness the nash bargaining solution which is technically meaningless if one party is allowed to substitute an equivalent utility function. A VM utility function is unique up to linear transformation, but the nash solution is not unique with respect to a change in a one persons utility function.

But I am not sure that we will improve our understanding of the process of bargaining by looking into the past.

Can you explain what you hope to find?

4:44 pm  
Blogger Gavin Kennedy said...

Hi Michael

Apologies for the delay in responding but traelling leaves gaps in access to full Internet services...

“John Nash wrote ‘The Bargaining Problem’ in 1950 (Econometrica, XVIII, pp 155-62), which ‘solved’ it by assuming away the process of negotiation, covered in Zeuthen and Hicks), to concentrate (brilliantly) on the determination of the optimal bargain (where the product of the parties’ net numerical utility gains were maximised). This too was not immediately applicable to the behaviours of bargainers in the real world (though the insight was interesting!).”

There is much that is uninteresting in the Nash ‘solution’ because it does not treat with negotiation as a process; it defines an outcome on assumptions that eliminate interactions between negotiating parties.

The consequential vast literature on Nash solutions was not very meaningful, at least to my work as a student of negotiation behaviour, though the observations I made over the years that people traded things they valued less for things they valued more (however we define ‘value’) and that Nash defined when such an exchange was optimal (the product of their net gains was maximised), which seemed ‘logical’, if non-operational, had some resonance if kept at a distance.

I am not sure what I ‘hope to find’, other than explanations of how the behaviours we think of as negotiation evolved socially as an alternative to violent plunder or coercion.

Not being too flippant, I hope, I see the exercise as being more about from whence we came rather than where we might be going. If I knew what I was looking for at this stage I would be kidding myself.

Perversely, perhaps, I am motivated the look at the phenomenon and its history precisely because nobody else appears to be doing so. In this regard, my curiosity is anything but idle!

3:46 pm  

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