POSTED ON MARCH 17, 2010:
Roll of the Dice
Hidden agenda might tilt toward favored individuals
Imagine: A philanthropist offers to give $100 to Person A only if the lucky recipient shares some portion of the gift with Person B. There's more.
Person B is told that Person A will not be allowed to keep even a penny of the $100 if B does not agree with whatever share of the $100 is offered by A. Those are the facts.
So, how much should A offer B? A wants to offer as little as possible, and he's in control of the situation. If he offers a single dollar, B is made better off in taking it, rather than walking away empty-handed, along with A. This simple game has been played thousands of times all over the globe under the watchful eye of game theorists, and the answer is surprising. B will usually reject any share less than 40 to 50 percent of A's total amount.
Now, it is interesting that B demands 40 to 50 percent of A's total share. B, as a rational actor, ought to accept any offer that leaves him in a better position without regard to how others fare. One dollar from A leaves B in a better position than pre-bargain. No other data need enter the transaction decision.
This result, where B usually rejects anything less than 40 to 50 percent of A's share is particularly troubling to economists, who can't understand why B would choose nothing at all unless he got nearly half the pie.
How can B's behavior be explained? Maybe like this: A is not entitled to his holdings, so B expects fairness in how A treats him. If A takes advantages of him, B suffers reputational loss. B might value this reputation just as much as his own self-interest. That's one explanation at least. Clearly, the game challenges widely held views that people are primarily motivated by self-interest.
Interestingly, studies show that if a slight modification is made to the facts, B will accept about half as much. In the new game, A is given the $100 because he has a high IQ. Simulations show that Person B in this version of the game accepts between $20 and $25, allowing A to keep the rest. Why take less than in the game where A's IQ isn't mentioned? After all, A is no more entitled than in the original game, yet B settles for half of what he would under the original version. A should have to work for his holdings whether he has a higher or lower IQ.
Behavioral economists hoping to challenge canonical economic tenets have spent a lot of time thinking about this modified game. Their efforts to offer an alternative organizing principle, one based on cooperation not competition, altruism not self-interest, depend on how B and A interact in the real world. What is our capacity for cooperation? Will altruistic genes survive in a world dominated by competition? Is the best way to maximize surplus goods through the promotion of self-pursuit? Can the interests of the polity co-exist with the preferences of the citizen? These are questions addressed in the interaction between Person A and Person B.
These questions are really about human nature and human society and are the deep fissures that underlie the political divide over the role of government in a free country society. To oversimplify, on the one side, there is a belief in the organizing principle of competition and non-interference with capital investment; on the other side, there is a conviction on the need to smooth the rough edges of the free market to ensure not just a fair shot at a decent life but to guard against privation in a world of scarcity.
I bring this up because there's a movement at hand, hidden in the past, that now openly supports transfer payments and directed government spending to favored industries and individuals. The plunder of government by private interests used to be disguised as a "noble lie."
Plato believed that leaders must dupe their citizens with such lies to preserve stability, even at the expense of progress. In the "Republic," the noble lie is the supposed type of metal flowing in your blood, a genetic constraint, which determines the citizen's social status, vocation and overall life prospects.
For nearly a thousand years, during the Medieval Period, Christianity held that the monarch owed his rule to the will of God, not his subjects. Individuals were stewards, fettered to the tyranny of the king by divine dispensation. Transfer payments to the kingdom amounted to legalized thievery. To protest a tax is to question the will of God.
It was not until the Glorious Revolution and John Locke that individual freedom and self-determination emerged, with rebellious force, as a core Western value. Lockean celebration of private property and support for the industrious by protecting their surplus produce from state appropriation continues as a formidable organizing force in contemporary political thought.
We don't know what Locke might have thought about welfare payments to the poor; although he might well have supported them. Duties to fellow human beings that existed before the state was formed were not erased in his social contract. But it is certain that Locke would not support giving more money to people with the talent for making it. He instead would say, let them earn it.
This brings me back to the game I mentioned at the outset. The fact that B thinks A is privileged or entitled based on status alone is a serious problem, and a real one seen in government, where the already privileged seem to get more and more benefits.
The Cato Institute estimates that, in 2006, two years before the financial collapse that led to near-nationalization of the finance and auto industries, the United States government spent $92 billion in 2006 to subsidize private businesses, much of it to multi-billion dollar companies like GE, Boeing, Dow Chemical and Xerox.
Here in Oklahoma, in the midst of the worst budget failure in generations, legislators are cutting senior nutrition programs, nursing home funding, healthcare and education for kids. At the same time, they have turned a blind eye to hundreds of millions of in-state taxpayer transfer payments to favored industries.
There was a day when our political leaders had the grit to stand up to the captains of industry. No longer. The pervasive influence of money and its recent further unshackling by the key chains of the Supreme Court have tilted legislatures in favor of clients and donors. And a new fiction might be gaining wider acceptance that the recipients of corporate welfare deserve our tax dollars.
We must look elsewhere for grit. I fear it won't be found among the populace as long as B thinks he must forfeit his property to A, or as long as B thinks A's social status alone makes her deserving of more money. Maybe, to stop the public mulcting, we have to look to business leaders themselves. I hope they emerge soon. For an appeal to platform issues such as fairness and opportunity simply does not resonate with an electorate as it might have in the past. Game theorists might understand exactly, if sadly, why.
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