Markets, China and segregating the wheeling and dealing devils of our nature

In the comments of Paul’s post on face I mentioned a hypothesis I had never published that I felt overlapped with, or at least was tangental to the ideas he was using. I’m still very unhappy with the piece and the reasoning, but I thought I may as well publish the last version I wrote (Dec 2010, but the idea goes back to roughly 2008) with minimal alterations. I’d like to see if the overlap in the reasoning (in so far that there is reason) is apparent to anyone else without tailoring the post.

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I love The Big Issue – the magazine published to be sold by vendors whom are homeless or otherwise disadvantaged. I buy it all the time, although I read it infrequently (though the content is well above par for a magazine). As ugly as this sounds, I love it because it assuages my conscience. Not because I am acting charitably, or even because I believe I am making a difference. I love it just because the transaction allows me to interact with the vendors – to acknowledge that they exist in the same society as me.

I can’t shake the feeling it’s a terrible manifestation of middle class self indulgence to dwell on my reactions to homeless people in urban areas, but here goes nonetheless.

Like a great majority of the population I try to ignore them. I am afraid I will be asked for money, because I don’t want to either lie about why I am not giving it, or to tell the truth about why I am not. Ignoring is easier, if still unpleasant.

But why do I want to avoid giving them money? My rationalisation seems to go something like this: There are an estimated 100,000 homeless people in this country. But the proportion that asks me for money must be a tiny fraction of this. I cannot imagine asking a stranger for money because of engrained pro-social tendencies, and I assume that homeless people are more or less like me, just with less luck. The majority is disinclined to pan handle, or trouble strangers. Were I to give money to the minority who asked, I would be rationing my aid based on a flawed selection mechanism – if those who ask are those least likely to share my pro-social tendencies, I might be helping those I want to help least. This is a division between “worthy” and “unworthy” poor, which whilst unpleasant, I am apparently making.

This selection mechanism has solutions – Tyler Cowen once suggested that to assuage one’s conscience in Delhi you were best off giving money to someone doing anything (sleeping, eating etc.) but pan handling, or I could give to a charity instead and pass off the problem at the same time. But there is still the problem with interaction. That tiny minority who lack pro-social tendencies are willing to exploit those tendencies in others. Since they have learnt that it is very difficult for people to say no once interaction has started (something also learned by telemarketers), they are eager to start this interaction based on anything, as small as eye contact. Since I can’t judge whether anyone who looks vaguely hard on their luck is one of this minority or just being friendly, I ignore them all. The minority crowds out good will towards the majority. This is coupled with the fact that I know that if I encourage the behaviour of the minority, it will lead still others to ignore and close their hearts to all homeless people, and increase their isolation.

This horrible guessing game doesn’t happen with a vendor of the Big Issue. They want to sell a magazine, and declining to buy it is not unpleasant. I am assured that any other discussion is not a trap or a prelude to asking for money – money has been restricted to the issue of the magazine. It’s just pleasant social interaction and patter like I might have with any other member of society. Patter about the weather, or the stuffed dinosaur I’m carrying . Simple patter that is just an acknowledgement that you are two people in society together.

Patter with shopkeepers and other staff is one of the great mundane and underrated joys of life, and I think a important social glue. I also think that the norms around market exchange may be of great assistance to social cohesion. Whist Smith once argued something similar, I’m beginning to suspect something different.

In recent years experimental economics has provided a couple of interesting inputs. For instance, Dan Ariely describes research in which “market norms” drive out “social norms”. Providing explicit incentive drives out intrinsic motivation. Exchange drives out altruism. Paying a dollar drives out doing a favour. This seems to favour the first hypothesis.
If we look at work like this (produced with heterodox stalwarts like Herbert Gintis) we get results that show greater aspects of “good will” amongst strangers from more complex and thus more exchange heavy societies. This is attributed to the institutions that evolved with markets and house them.

I have no reason to disagree with either bit of research and I think they are fairly easily reconciled, but in a fashion that is distinct from Smith’s conception.
The terms “market norms” and “social norms” come from Ariely’s popular work, and they are slightly misleading. When Ariely says “market”, he means specific actions undertaken with a specific return in mind, rather than the less tangible rewards associated with social norms. These are quid pro quo situations in general.

“Market” suggests the set of institutions and norms that foster and govern exhange. It’s quite obvious however, that such quid pro quo situations need not take place in in a market. Wheelers and dealers try any number of gifts and favours for favoured outcomes. Parents may allow television watching in exchange for housework. Mutual backscratching takes place in any number of places, especially in command hierarchies. These can still drive out the “social norms”, despite not being explicit, or in a market.

And in any society of reasonable complexity (i.e one where you have to deal with a great number of people) such exchange will inevitably take place. Many social norms rest on strong bonds that can only exist amongst close kinship groups or friends, the in group. Any resource allocation out of these groups will have some sort of explicit exchange. Nonetheless, many social norms can continue outside these small close knit groups in which the strong bonds exist. Society is better off for them continuing in the outgroup, if only because it feels nice to be nice.

There is a problem that arises here. I am dealing with someone from outside our group. How can I tell if this person is acting solely in expectation of something? How can I know that my own “social” actions will be reciprocated in the out group member’s actions, and that I won’t be treated as a trusting fool? Ariely tells us that when market norms and social norms collide or become confused, the latter is driven out. As above the panhandler drives out my good will towards the entirety of the homeless population.

This is where the relevant institutions come in by demarcating territory between the quid pro quo and the social. Lets take money. A huge swathe of economic activity is performed by people explicitly for the receipt of money. Money is so important it gets used for the larger portion of the explicit exchange around. Money is the realm of explicit exchange.
It segregates the “market norm” and much of the world of the quid pro quo from the rest of human interaction. You can be direct about these aspects because there is a segregated area for them. It means you need not talk around them, or play careful verbal games.

This solves much of my outsider problem. I can tell far more easily when they are expecting explicit return. The out group member is offering, or asking, for money. Most of the rest I can more safely assume is simple goodwill. In a world like that, I am more prepared to share this goodwill.

This happens in concert with other market institutions to also allow us to quarantine this territory. It doesn’t mean we always do so of course, we can still bring money into inappropriate places and drive away intrinsic motivation and the like, but the institutions make it easier to avoid.

Nicholas once linked to this paper that explored the apparently positive relationship between diversity and entrepreneurial behaiviour. It suggests that this exists because diversity provides more ideas and competition. I might suggest it’s because the marketplace provides a basis for interaction when in group norms are not available.

Diversity may encourage entrepreneurialism because it’s a safer way to understand interaction when you cannot assume the same norms in a stranger. By coincidence, it can also be very lucrative.

Contrast this then with another complex society in which quarantined quid pro quo exchange was not possible: pre Deng ¹ reforms China. Tales of woe in the cultural revolution are a popular topic in the misery porn genre, so I stress the following interpretations of social interactions in the period are drawn from the accounts of personal acquaintances. They may well differ greatly from published accounts, or those heard by Troppodillia in general.

China was still a complex society. People still inevitably had to deal with people outside their near kin and friendship groups. Indeed, these kin groups and other social institutions had been consciously dismantled and disrupted by the Cultural Revolution. Additionally, all material provision was being undertaken by a state as well as decisions (such as residence permits) that could dramatically affect one’s life. But this was not by a structured and impersonal bureaucracy, but an every shifting mess of interpersonal relationships and a slippery pole of strategic denunciations. There wasn’t even the simple corruption of monetary bribes. Just connections, the much lamented guanxi.

This led to a fairly extreme situation. Basically every social interaction you could take was mixed up in situations that directly affected material well being. Any social interaction could possibly be part of some elaborate quid pro quo.

The result; a great breakdown of goodwill outside tight in-groups. An attitude that other people are to be assessed only in terms of what you can get out of them, and a resignation others will exploit you if you were foolish enough to enter social interactions with any other attitude. This is an evolutionary Stable Strategy, but very suboptimal.

An interesting corollary of this is the also much lamented “red eye disease” (what we would call green eyed), not just as jealousy directed at unequal outcomes but the active punishment of those on the good end. This is something I’ve heard a great deal of from the cohort that came of age just as the universities reopened. When you’ve been conditioned by a situation of zero meritocracy, devoid of even the veneer of it, resentment will inevitably be greater. When you’re used to unequal outcomes coming from cronyism, the greater still. One of the most absurd examples I heard was an acquaintance whom told me about guests who, whilst she was absent from the kitchen, tipped food from the pot behind the stove out of resentment towards the stove’s quality.

But the fascinating thing is how weak these norms seem to be. I get the impression that it bleeds out fairly quickly when someone’s outside China, and within China itself Chinese capitalism has also begun bleeding it out as exchange segregation takes place. This is astounding considering so much of Chinese capitalism still involves cronyism, guanxi and privilige. In the wake of the Sichuan earthquake, the unprecedented nature of non-government charitable efforts was noted by several observers. Could altruism come from the dog eat dog (or “man eat man” as the equivalent Mandarin graphically describes it) marketplace?

I say market rather than capitalism. Capitalism has firms and corporations, and the quid pro quo within a hierarchical corporation, is not well quarantined. In a dysfunctional corporate culture it can bring on it’s own red eye diseases, jealousies and adverse selections. It already selects for narcissism and, as witnessed recently, sometimes kleptocracy. The gulf between markets and organisations in markets is interesting.

This segregation idea isn’t very Smithian though. He sees the marketplace as a place where exchange can bring out our empathy as we seek to understand others desires. The segregation suggests the marketplace and money as the saddle and harness on a great dark beast called exchange. The beast is powerful and can take us wonderful places, but should the harness be broken it can consume us.

¹ This is a footnote for the person who can object that the reforms started under Hua Guofeng. I know dude, I know.

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