“Social Capital” and Community Governance Samuel Bowles

Santa Fe Institute andUniversity of Siena

Avercamp, On the Ice

Recently I asked a farmer in Palanpur, a poverty stricken village in Uttar Pradesh, India:

Q: Seeing that planting early would substantially increase crop yields, why do you plant late?

A: Because the first to plant will lose their seeds to the birds.

Q: Have you ever tried to organize an agreement perhaps among your caste group or even the whole village so that you would all plant early?

A:If we knew how to do that we would not be poor.

Background:Background:

Social capital refers to trust, concern for one’s associates, a willingness to live by the norms of one’s group and to punish those who do not…

…these behaviors were recognized as essential ingredients of good governance among classical thinkers from Aristotle to Thomas Aquinas and Edmund Burke…

But..

• … since the late 18th century the analysis and evaluation of both policy and constitutions have taken the self interested and amoral Homo economicus as a starting point; and

• partly for this reason, they have stressed other desiderata of good government, notably:

•efficient, well-intentioned states•well-defined property rights•competitive markets• Good rules of the game thus came to displace

good citizens as the sine qua non of good governance.

Good rules are sufficient (good people are unnecessary):

• “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

Adam Smith, Wealth of Nations.

• “Good fences make good neighbors.”Robert Frost, “Mending wall.”

But the substitution of good rules for good people was not entirely successful. Two problems arise: the canonical model’s incomplete representation of (a) what people are like and (b) how we relate to one another:

a) the individual (Homo economicus)

b) social interactions (complete contracts)

Political writers have established it as a maxim, that in contriving any system of government..every man ought to be supposed to be a knave and to have no other end, in all his actions, than his private interest.

David Hume, Essays (1898[1754]):117

The first principle of economics is that every agent is actuated only by self-interest.

F.Y. Edgeworth, Mathematical Psychics (1881):104

Homo economicus: selfish preferences

Homo economicus: exogenous preferences Let us return again to the state of nature and

consider men as if but even now sprung out of the earth, and suddenly, like mushrooms, come to full maturity without any kind of engagement to each other. Thomas Hobbes, De Cive,

(1949[1651]):100

Goya

But the representation of society as:

• a set of anonymous individuals

•with exogenously given selfish preferences

• interacting exclusively by means of exchange under complete contracts

is inadequate as a model of real social interactions where…

Courbet, Enterrement a Ornans

…we belong to communities of frequently interacting people known to one another, among whom such non self-interested behaviors as sharing, revenge, and punishing those who violate social norms are common…

Degas, A La Bourse

…even in modern economic environments such as financial markets, the process of exchange is often based less on contract and more on trust (enforced by gossip and ostracism)…

The policy and constitutional paradigm supported by the canonical model:

• Because non-market social interactions are rare, market failures are exceptional (bees pollinating apple trees, not global warming)

• ..and the rare cases of market failure can be addressed by introducing taxes and subsidies to redirect selfish individual motives toward common social objectives

Objective of this lecture: to reformulate the problem of good governance to take account of two facts:

• social interactions in markets, workplaces, residential neighborhoods and elsewhere are not governed by complete contracts and

• in addition to self-interest, a common motive is strong reciprocity (which induces individually costly behaviors which are generous or punishing of others conditional on their behaviors) and shame (which induces conformity with social norms, especially when mobilized by peer monitoring).

The two aspects (individual behaviors, social interactions) are related: non-market social interactions (lack of complete contracting) increase the importance of social norms and other aspects of behavior unknown to Homo economicus.

In the absence of trust…opportunities for mutually beneficial cooperation would have to be forgone…norms of social behavior, including ethical and moral codes (may be)…reactions of society to compensate for market failures.

(Kenneth Arrow, 1971):22.

A key idea in the reformulation advanced here is that communities provide solutions to what would otherwise appear as market failures or state failures.

Examples:• collective efficacy and reduced crime in Chicago’s

neighborhoods (Earls et al., 1997);• mutual monitoring and high-level productivity in

Washington state’s worker-owned plywood coops (Pencavel 2000);

• risk sharing, information pooling, and skills sharing in Toyama Bay fishing cooperatives (Platteau and Seki, 1999)

By community we mean a group of people who interact directly, frequently, and in multi-faceted ways. People who work together are usually communities in this sense, as are some neighborhoods, groups of friends, work teams, professional and business networks, gangs, and sports leagues. NB: connection, not affection, is the defining characteristic of a community.

The term community better captures the aspects of good governance that explain social capital’s popularity, as it focuses attention on what groups do rather than what people own.

Main point 1: Community governance addresses some common market and state failures, but typically relies on insider/outsider distinctions that may be morally repugnant

To explore why this is true we need to ask: for which kinds of tasks are states, markets and community governance well suited?

Markets• Where complete contracts may be written and

enforced at low cost, competitive markets are often superior to other governance structures (e.g: exchange of well defined commodities)

• And where residual claimancy and control rights are closely aligned (ie people own the consequences of their actions), market competition provides a decentralized and difficult-to-corrupt disciplining mechanism that punishes the inept and rewards high performers.

• But if contracts are incomplete, markets fail; and increasing returns preclude marginal cost pricing.

States

• The capacity to coerce gives the state superior performance in making and enforcing the rules of the game; essential where good governance requires mandatory participation (Examples: provision of public goods, insurance where adverse selection is a problem).

• State failures occur where state officials lack the necessary information or incentives.

Communities

• Where the relevant information cannot be used to enforce contracts or implement government directives (leading to market failures and state failures) communities often succeed (Example: maintaining neighborhood amenities, regulation of work effort).

• Communities may be ineffective where members do not share common interests (due to economic inequality, cultural heterogeneity) or where limited size precludes economies of scale and gains from trade.

How communities work:• An illustration is provided by the voluntary provision of a

public good in which individuals may contribute but the selfish strategy is not to contribute, while benefiting from others’contributions.

• Examples: work effort by team members, activities to sustain local environmental quality.

• In experiments simulating this situation subjects’ contributions often begin at about half the maximal contribution, but typically decline sharply over ten rounds.

• Communities may solve this problem by providing members with opportunities to monitor and sanction those who contribute little, evoking feelings of shame.

An experimental public goods game illustrates …

Main point number 2: Neither self-interest nor altruism adequately describe the motivations supporting peer monitoring and other aspects of community governance

A public goods with punishment experiment• A public goods game with groups of 5 or 10 members• Subjects played ten rounds, and were re-assigned to a

new group after each round (strangers treatment)

• In each round subjects i) contributed, ii) their contributions were made public, and in the punishment treatment iii) they then had the opportunity to reduce their own payoffs in order to reduce the payoffs of a member of the group.

• 205 subjects (145 in the punishment treatments, 60 in the no-punishment treatment), whose payoffs, including the show-up fee, averaged $20

Source: (Bowles, Gintis and Carpenter, 2001, following Fehr and Gaechter, 2000)

Figure 1: Results of a Public Goods Experiment with and without Punishment of Non-Contributors

Shirking, if no punishment

Punishment per unit of shirking

Shirking per person with punishment

What does the experiment show?

• Shirkers are punished• Those punished for shirking

contribute more in later rounds (punishment works)

• Punishment by peers sustains high levels of contribution

• Punishment is not motivated (only) by the expectation that the shirker will contribute more (to others) in the future.

• Shirkers’ increased contribution following punishment is not a best response defined over game payoffs (shirking pays)

A Puzzle: Shirking pays but punishment works

• The willingness of members to punish shirkers cannot be explained by its effect in modifying the shirker’s behavior; it is motivated in part by the desire to enforce a norm at a material cost to the punisher and with no expectation of material benefit either to oneself or to others (an example of strong reciprocity)

• Shirkers’ response to punishment cannot be fully explained by the shirkers’ desire to avoid the reduction in payoffs which punishment causes; it is motivated as well by the shame which is felt when one is punished for violating a norm.

NB: understanding the emotional basis for these actions is the subject of much current research (Laibson, Loewenstein, Rabin..)

Interpretation: Strong Reciprocity and Shame

Main point number 3: well-designed institutions make communities markets, and states complements, not substitutes; but with poorly designed institutions, markets and states, community governance can be crowded out

Public policies and institutional complementarities• Existing policy paradigms have sought to

– Improve property rights so that private transactions support more efficient allocations (Coase Theorem; neo welfare economics))

– Improve state capacities and accountability to address market failures (paleo-welfare economics, eg. Marshall, Pigou)

• But because neither approach can implement a first best solution, and because social capital or community governance may be crowded out by private material incentives and government fiats, these paradigms often fail.

Q: when does the better definition and enforcement of property rights worsen allocational inefficiencies?

• Haifa day care field experiment (Gneezy and Rustichini, 2001)

• Colombia public goods field experiment (Cardenas 2001)

• Gift exchange with fines lab experiment (Fehr and Gaechter, 2000)

A: when the enhancement of private material incentives crowds out other motivations such as shame and strong reciprocity.

Fines have two effects…

• They provide incentives to alter behaviors (economists have stressed this to the exclusion of a second effect, namely…)

• they convey information about the nature of the interaction and alter preferences: either mobilizing pro-social feelings (shame in the public goods game) or eroding them (Haifa, Colombia)

Economists often propose to deal with unethical or antisocial behavior by raising the cost of that behavior rather than proclaiming standards and imposing prohibitions and sanctions. The reason is probably that they think of citizens as consumers with unchanging or arbitrarily changing tastes in matters of civic as well as commodity-oriented behavior….

A principal purpose of publicly proclaimed laws and regulations is to stigmatize antisocial behavior and thereby to influence citizens’ values and behavior codes.

Albert Hirschman (1985):10

Main idea number 4: Some distributions of property rights are better than others at fostering community governance: the key requirement – that individuals should own (be residual claimants on) the consequences of their non-contractible actions – often requires a redistribution of property titles to workers and tenants.• Group benefits and mutual monitoring in work

teams.• Home ownership and citizenship• Managing local environmental commons

Parochialism and other Community failures:

•Community governance often is based on a preference for dealing with insiders; this generally restricts gains from trade (and diversity) and economies of scale

• If more homogeneous groups succeed in governing better (due to fewer barriers to communication, greater shared values) then policies which promote and rely on community governance may tend to also promote social segregation.

Main point 5: The importance of community is not an anachronistic legacy, but is based on the contemporary problem-solving capacities of communities which are likely to be more, not less important, in the future.

Is community governance doomed by modernity?…the age of chivalry is gone. That of Sophisters, economists, and calculators has succeeded…Nothing is left which engages the affection on the part of the commonwealth…so as to create in us love, veneration, admiration or attachment. Edmund Burke (1955[1790])

Each [person]…is a stranger to the fate of all the rest…his children and his private friends constitute to him the whole of mankind; as for the rest of his fellow citizens, he is close to them but he sees them not…he touches them but he feels them not; he exists but in himself and for himself alone… Alexis de Tocqueville (1958[1830])

The bourgeoisie…has put an end to all feudal, patriarchal, idyllic relations…and has left remaining no other nexus between man and man than naked self-interest… Marx and Engels (1972[1848]) (p.475)

Q: If Burke, Tocqueville, and Marx & Engels agree, could they possibly be wrong?

A: Yes!

the weightless economy

• The old economy of grain and steel was one which produced and exchanged goods which could be readily measured (and therefore contracted for).

• The new economy is information-based; sometimes called weightless (Quah). – Knowledge -- one of the most difficult to contract for

goods -- is the most important output and input;– Its production exhibits generalized increasing returns:

very high fixed (“first copy”) costs and zero or low marginal costs (hence marginal cost is less than average cost and MC pricing will not sustain profits)

Community governance in the weightless economy• Recall that the ‘comparative advantage’ of community

governance is in cases of incomplete contracts and limited conflicts of interest, while market allocations fail under increasing returns.

• In the weightless economy, competitive market based allocations may be allocationally inefficient and institutionally unsustainable (due to contractual incompleteness and increasing returns)

• But in highly unequal societies (and firms) and in exchanges among strangers, community governance may also fail

• Successful performance may increasingly require both egalitarian redistribution and institutional innovations.

Lorenzetti, Buon governo

TheEnd

Some Related papers

Bowles and Gintis, “Social Capital and Community Governance” Santa Fe Institute working paper, December, 2000

Fehr, E. and S. Gaechter (2000). “Fairness and Retaliation: The Economics of Reciprocity.” Journal of Economic Perspectives.

Bowles, “Endogenous Preferences: The Cultural Consequences of Markets..” Journal of Economic Literature, March, 1998.

Henrich, Boyd, Bowles, Camerer, Fehr, Gintis, and McElreath“In search of Homo economicus: Behavioral experiments in 15 simple societies” American Economic Review, May, 2001.

Bowles, Economic Institutions and Behavior: An evolutionary approach to microeconomics (Princeton University Press, 2002.)

Other papers at: http://www-unix.oit.umass.edu/~bowles http://www.santafe.edu.sfi.publications.html