Tuesday, April 21, 2009

Self-Interest is Not Always Benign

A regular correspondent writes:

‘I don't know if you take requests, but I would love to see one of your posts on the recent interview at the Freakonomics blog about "The Invisible Hook", a new book about the economics of piracy. Here's the link:

Here is the quotation from the Freakonomics article on piracy:

"In Adam Smith, the idea is that each individual pursuing his own self-interest is led, as if by an invisible hand, to promote the interest of society. The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest. So they were driven to build systems of government and social structures that allowed them to better pursue their criminal ends. They’re connected, but the big difference is that, for Adam Smith, self-interest results in cooperation that generates wealth and makes other people better off. For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively."

Comment
The first question is easy: I am delighted to respond to requests about any subjects related to Adam Smith’s Lost Legacy. I receive these regularly by email and I usually replied privately by correspondence, but there is no inhibition on my part from replying via ASLL.

I have also read the article by Freakonomics in the New York Times (link above) and my initial response to the sentence: ‘The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest', was incongruity.

Who suggests that criminals do not act according to their self-interest? Of course they do. They certainly do not act for anybody else’s interests!

When Mugabe authorises maltreatment of opponents by his hired thugs, he acts in accordance with his self-interest as he sees them. Indeed, Adam Smith gives 60 instances of people acting according to their self-interest but not in the interests of others in Books I and II of Wealth Of Nations, and these people’s actions certainly did not benefit society as a whole, nor were they intended to do so.

That’s part of the problem with the Freakonomics’ approach: it seeks the rational motives behind people’s actions, when rational decision-making can have non-beneficial consequences for those affected by the decisions. But the Freakonomics authors, ingenious as their explanations often are, sometimes fail to find unanimity in the decision makers’ cohorts – not all members of a cohort, sharing, say, the same characteristics as gang members, become gang members, or take drugs, get pregnant, or kill anybody.

So the pirates ‘driven to build systems of government and social structures that allowed them to better pursue their criminal ends’ is only part of the story.

Smith noted a significant and relevant point in this regard:

Society, however, cannot subsist among those who are at all times ready to hurt and injure one another. The moment that injury begins, the moment that mutual resentment and animosity take place, all the bands of it are broke asunder, and the different members of which it consisted are, as it were, dissipated and scattered abroad by the violence and opposition of their discordant affections. If there is any society among robbers and murderers, they must at least, according to the trite observation, abstain from robbing and murdering one another. Beneficence, therefore, is less essential to the existence of society than justice. Society may subsist, though not in the most comfortable state, without beneficence; but the prevalence of injustice must utterly destroy it.’ (TMS II.ii.3.3)

Now, pirates in the 17th and 18th centuries were composed of experienced seamen and their officers. The learned their trade as seamen in the merchant marine and the Royal Navy. Both sections of the shipping business had many shared customs, some of ancient vintage. For example, in times of severe scarcity, food from a captured seabird’s carcass was divided among the crew by the venerable system of ‘who shall have this?’ and not by the captain’s prerogative.

One seaman turned his back of the divided segments of the bird and another seaman pointed to a piece of dismembered bird and asked ‘who shall have this’. The crew member who could not see what his colleague was pointing at would shout out a name, and that piece, whatever it was – beak, feathered tail, webbed feet, or succulent breast – was allocated to the man whose name was called out. This happened to Captain Bligh and his boat crew after the mutiny – the men were amused (quietly) when Bligh received the feet on one occasion.

So, much of the so-called drive ‘to build systems of government and social structures that allowed them to better pursue their criminal ends’ which were merely simple rules for self-preservation, and, as Smith put it: ‘any society among robbers and murderers, they must at least, according to the trite observation, abstain from robbing and murdering one another’, because ‘the prevalence of injustice must utterly destroy it.’

Now fast forward to Somalia and the pirate menace to shipping.

The first big difference is that 18th-century pirates sailed large, self-sufficient, and well-armed and fast ships, crewed by excellent seamen, and captained by proven leaders who could keep the crew in order according the conventions among pirates. Everybody received a share of the loot according to their station (much like Prize Money paid by the Royal Navy for captured foreign vessels).

The Somalia pirates are in a different league; their ships are less seaworthy, their crews number a half-dozen men, and the ships they board are defenceless largely. Their leaders, judiciously, are on shore, not on the little boats. They take the bulk of the loot obtained – ‘independents’ are rare – and they launder the vast sums with the efficiency of banks through high-level international contacts. When a heist goes wrong, it’s the boys in the bum boats who die, not the shore-based quasi-bankers.

For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively’.

Pirates do not create nor destroy wealth; they redistribute it. Plunder as an alternative to wealth creation is as old as, if not older than, voluntary exchange. Hijacking a lorry full of merchandise is not different that sea-born piracy and regularly happens inside all major economies.

The nature of an activity does not alter the self-interested activity of criminals, polluters, spoilers of the commons, kleptomaniac African (or Russian, or Prohibition Mafias), and petty thieves in supermarkets.

What Freakonomics adds to what we know about self-interested actions, for good or ill, I am not qualified to comment, but on the piracy phenomenon, I am not impressed.

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2 Comments:

Blogger Dan said...

There's something about the Freakonomics style of argument that makes the simple (and sometimes inaccurate) seem profound. It's very frustrating - as Yoram Bauman, the stand-up economist, notes, people responding to incentives isn't a theory it's a tautology (his Principles of Economics, Translated, are fantastic). Thanks for tackling a piece of Freakonomics here!

2:19 p.m.  
Blogger Gavin Kennedy said...

Dan

Freakonomics is popular in the media it appears to 'explain' sociological behaviour sets of interest.

It doesn't explain deviant sub-sets within the main sets, yet it applies a common Homo economicus assumption.

Some aspects of behavioiural psychology have the same weakness (not all step-parents are 'evil' towards their step-children).

6:02 a.m.  

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