Wednesday, February 7, 2007

21st Century Capitalism

Greetings, fellow nerds.

Today, we're going to examine a cornerstone of our western world: capitalism. I'm going to first give a brief history of capitalism starting from its evolutionary roots which set us aside from other animals, then I'll settle down into a rant about what I think is wrong with our current implementation of capitalism, and finally I'll give a few specific ideas about how we can tweak public policy so that capitalism achieves its goals better.

Capitalism and Humanity

Capitalism, and its relative friendship, set us apart from the majority of the animal kingdom. I don't believe that early humans were categorically smarter than other animals; even today's humans would have a hard time without cooperation.

Imagine if you were dropped on a desert island without having had any kind of education. (This is really impossible, because humans need nurturing to develop properly, but stay with me.) I doubt you'd be able to do better than the New Caledonian Crow, which can fashion its own tools (National Geographic video link) even out of metal (significant, since metal hasn't been around long enough to develop instincts involving it). You may counter by saying that this crow probably learned form another crow; that's exactly my point though. Individually, we're puny, but together we can build spaceships and make good cheese.

We specialize, we discuss things and we pass on knowledge to others. Why? It's more than having selfish genes; we are happy to forge friendships and help people totally unrelated to us. It's more than the herd mentality; I've met my share of loner humans, and besides I don't think sheep specialize. We share, lend things, trade, and educate each other because we live in a social construct where we can expect roughly the same degree of favors given to us as we give to others. (Doing nice things without reciprocity is a bad evolutionary strategy. However, the reciprocity needn't come directly from the people you help; doing good without expecting anything in return provides evidence to others that you're not a psychopath; see below.) In small groups, reciprocation is mediated by friendships, where we (usually) keep some sort of tally as to how nice the partner has been to us. We don't numerically quantify the favors our friends do us, although your typical human sees one-sided friendships as unhealthy, as if there must be some deeper, twisted exchange going on.

Genetically,We're All Cold, Calculating Psychopaths

I don't mean to suggest that we're consciously cold, calculating psychopaths who use each other for common gain. Our genes shape us to be good-natured towards each other, and it's a good thing too. Imagine if you knew somebody who appeared friendly most of the time but had a few Jekyll and Hyde moments. You'd steer clear of that shady character, and never want to engage in friendly behavior with them. Moreover, you'd tell your friends to watch out for the creep. As a result, being a conscious psychopath is a poor strategy in the long term, since others won't trust you enough to be friendly with them.

However, if our genes keep us behaving civilly towards one another all the time, we're less prone to the slip-ups that betray psychopaths. If we can demonstrate that we always help our friends, more people will want to be friends with us. We don't have to be cold, calculating psychopaths on a conscious level; our genes do a much more consistent job for us without our conscious minds having to bother.

Does understanding the selfish reasons behind friendship make one cynical about human nature? In some ways, knowing that we're hard-wired to do good does exactly the opposite. What do you think?

Money and Friendship
Money, you got lots of friends
-Billie Holiday and Arthur Herzog Jr., "God Bless the Child"

Money becomes necessary when the group of people you want to collaborate with becomes too large to develop a personal relationship with everyone. Money lets you have strangers do friendly things towards you, and to earn it you (usually) have to do friendly things to others. Money is impersonal, quantified, anonymous, fungible friendship, in the sense that it keeps track of the favors you're owed from any member of your trading community.

Capitalism and Human Evolution

Capitalism (if you extend its definition to include its instinctual analogue, friendship) is what lets us specialize, and gives us the incentive to work together to produce all those wonderful creations only large groups of (mostly) cooperative humans have been able to do. Without capitalism, we'd be brawling in the muck.

Language is also one of the fundamental abilities humans have that sets us apart from other animals (if, indeed, we are set apart as far as we style ourselves). Language, however, is mostly useless without capitalism (in the sense I've defined it). Without capitalism, you have no framework within which to trust the speaker. Without capitalism, you have no specialized skill set to describe to others. Without capitalism, you have little incentive to divulge information (especially information about food, mates, etc.), so you probably wouldn't bother. Therefore, language evolved to make us better capitalists; without capitalism language would confer little benefit. Either capitalism predated language in our history or there was so much synergy between the two that sorting out who came first is moot.

People also talk about the "theory of mind" as being important in human evolution. Having a theory of mind means that you try to predict what other entities around you know, often by putting yourself in their shoes and wondering what you would do in the same situation. Clearly, having a theory of mind is useful to both capitalists (for outfoxing your fellows) and speakers (so you can relate exactly what the listener needs to hear given what they already know), so it's no surprise that humans excel at guessing what others are thinking. However, having a theory of mind can also be useful in purely competitive (i.e., non-capitalist) contexts: ravens (but not most birds) notice when something (like food) captures the attention of other animals, and even the odd octopus has demonstrated that it is aware of how others see it. However, these animals lack capitalist tendencies (and therefore have no incentive to develop language), which are the true sine qua non of humanity in evolutionary contexts.

The Octopus: Not a Capitalist

Current Issues with Capitalism

If capitalism really is the Promethean panacea I've proposed, why is everybody complaining about it? Let me list a few possibilities, and suggest a couple of remedies.
  1. People don't feel the love when making economic transactions.
  2. Governments and capitalist institutions often do not share a common agenda.
The Alienation of Commercialism

A few days ago, a total stranger picked a bunch of grapes for me. She set these grapes on a truck in Chile, which proceeded to a port where a monumental ocean-going vehicle waited. This floating steel mountain's sole purpose it to get things to where people want them; in my case it crossed the Equator and continued to an undisclosed location in North America. Total strangers unpacked the grapes, checked them for damage, and then placed them in a location where I could easily reach them for my culinary enjoyment.

By now, you've probably guessed what I'm up to: I've described what we'd consider to be the most mundane of commercial transactions: buying Chilean grapes. However, all the people involved in the chain of events (most of them total strangers to me) performed well-orchestrated diverse tasks for my benefit and enjoyment. If the context were anything but commercial, I would be touched to the brink of tears by the selfless generosity implicit in shipping me grapes out of season. Yet, somehow, in the monetized context of buying grapes from a local supermarket, it's unnatural to feel gratitude to the ship's crew or the shelf stocker - it's all in a day's work for them, and that somehow nullifies the joy I'd feel from having all these people slave away for my benefit.

Does it have to be that way? I'm going to give an exercise to my readers. For the next week, please try, at least once a day, to feel the connection you have to the millions of people who help you through the messy web of financial transactions we call an economy. Just for a split second, imagine that they were all doing you favors without letting money enter into the picture. Then open your eyes, and ask yourself if you really have to ignore the fact that all these people are conspiring to do you good just because you're paying them for it.

If your assignment rings false, we should try to find out why. I bet that financial transactions, by default, don't tickle the "friendship detector" circuits in our brains. Possibly we don't feel that friendship glow at the market because friendship with total strangers is impossible. It's also possible that brands have taken center stage in stores; give me a show of hands: who finds it easier to remember the brand of a product you bought than the name of the person who sold it to you? It's hard to feel friendship with a faceless company (although many people try).

Why not try to get to know the local shopkeepers a little by name? Maybe entering into a friendly relationship will give your instinctual friendship detector a face to latch onto, and maybe some of the gratitude you feel for the stuff you buy will brush off a little onto the human. You'll have your instinctual craving for mutual support reinforced at the same time as getting low, low prices. (Prices are ridiculously low because of specialization: imagine how hard it would be to travel on foot to Chile to grow your own February grapes.)

I promised this post would lead to practical suggestions; here's the first:

Quirky Staff, not Faceless Drones

I bet not many corporate executives are going to read this blog, but if they do (or if you know one - remember the power of talk), maybe suggest to them that instead of having sales-force employees follow the replaceable-parts model (i.e., interchangeable, single-faceted, lowest-common-denominator automata), they should show a little more personality, especially if they work in small enough units that customers might recognize them in subsequent visits.

I was a regular at Enterprise Rent-a-car until I got a car, and let me tell you, that company understands the benefit of human interfaces. Even though the company Enterprise might be a monolithic, faceless mega-corp, the employees I talked to at the branch were all charismatic, genuine-personality outgoing types. It's true that they were made to recite wrote-learned phone greetings, but other than that visits were all fun-loving chutzpah. I don't know exactly how to foster that kind of environment, but staid companies might do better if they encouraged their staff to be lively and idiosyncratic enough to make customers see them as people.

Marginally Legal, Inc.

Let's consider the second problem with contemporary capitalism: capitalist institutions often do things against the public good. I haven't mentioned law yet, but let me try to describe it as succinctly as possible. Capitalism:friendship :: law:enmity. I'm not suggesting that capitalism is intrinsically good and law bad. However, law and enmity both keep you from doing bad things to other humans; the former uses explicit codes while the latter uses the same level of thought as friendship (i.e. feelings of attraction/repulsion based on how you've been treated).

Enmity is the necessary mirror of friendship: it's the instinctual process which makes you try to be a pain to those who do you disservice. It's also a good game-theoretic strategy to demonstrate that pissing you off makes you a formidable enemy for an analogous reason to why psychopathy is a bad strategy: if people know you have a mean side, they'll try to avoid crossing you.

Law and capitalism are based on opposite reinforcement mechanisms, though, so when government meets private industry strange things can happen. Typically, corporations will do for themselves as much good as possible while narrowly avoiding getting sued. It's usually a good thing that laws change slowly: anarchy is just democracy with constant elections and one voter. However, when corporations can take advantage of this sluggishness through loopholes, capitalism can lead to technically-legal injustices. Moreover, using negative reinforcement (law) on entities that respond best to positive reinforcement (corporations) is a recipe for trouble: public-private incentives aren't going to magically align themselves without help.

There's a way to resolve the root problem caused by the negative/positive reinforcement mismatch between government and corporations:

Align Public and Corporate Interests with Results-Based Incentives

If governments encourage companies to do as much good as possible, such that their rewards are proportional to the good they do, we can resolve the negative vs. positive reinforcement conundrum.

Practical Example: Road Bonds

Right now, governments set certain requirements in terms of what they would like in a road: they want it made of X material with Y safety feature, and it should last Z years. The company's reward is not affected at all by the value given to the public by the road, so long as the government's contractual expectations are met. If the road doesn't meet expectations, the government can try to sue the construction company for breach of contract: a long and inefficient process. Even in the best cases, the company has no incentive to build a road which will last longer than Z years (indeed they wouldn't want it to last any longer than Z years, since they're in the construction business), and all safety and durability research has to be done by the government body who decides the specifications of the road to build. Research isn't free, and it's hard for public institutions to make the correct call in terms of what research needs to be done.

Scrap the meets-contract/doesn't-meet-contract model. We can do better. Imagine an incentive system like this. When a government wants a road built, the incentive they offer is in the form of a transferable bond. The bond would pay the holder annually according to a formula like so:

Annually, pay $A if the road is usable, but deduct $B per cubic foot of pothole in the road (averaged over the year), $C per vehicle-hour of delay due to repair, $D for every human life lost on this road due to traffic accidents on this road and E% of the costs to drivers arising from damage to their vehicles due to accidents. If, in any year, the road is not usable or the net value of this payment in negative, this bond is valueless for all subsequent years.

Let the government choose B-E, and issue the bonds to the company which accepts the contract for the lowest value of A. Then, the private sector would be able to use new road durability and safety technologies where they make sense in terms of public benefit, without the government having to test any materials or make any policy regarding the specifics of what materials to use. In this case the lowest bidder won't be the one that does the crappiest acceptable job, it will be the one able to maximally align public and private interests, since it benefits exactly when the public does.

In turn, the construction company has the incentive to make durable, safe roads so as to collect the maximum reward from the bonds. By making the bonds transferable, companies good at construction (but maybe not inspection or maintenance) could sell the bonds to investment firms. The better the job they did the more money they could potentially make in the sale.

Governments are bad at details. If you reward results instead of punishing breeches, you align interests and harness the power of that uniquely human tool: capitalism.


Capitalism (including friendship) is more than just what makes being human so good; in many ways capitalism is the fundamental trait that distinguishes humans from other animals. It's vital for our policy makers to understand what capitalism really is and how to harness it to pull our 21st century in the right direction: towards the fellowship, harmony and cooperation. If you like the idea of aligning interests using rewards proportional to benefits, or if you like the concept of being friendly in your commercial transactions, try them out by all means, but also please talk about them. A million cocktail parties could change the fate of the world.


Anonymous said...

I take issue with your use of two major concepts: friendship and psychopathy. Whereas friendship is a social, personal and emotional relationship between two people, you have reduced it to its lowest form, at least according to Aristotle, who called "friendship for the sake of utility" the lowest form of friendship - one that is not lasting and which cannot therefore be complete - what he calls true - friendship. What you address is a relationship not only between individuals, but among indirectly linked people or groups of people that all participate in some kind of "social contract" that successfully allows exchange to take place. Which brings me to my second point: psychopaths, by definition, are "lacking in conscience and in feelings for others[.] [T]hey cold-bloodedly take what they want and do as they please, violating social norms and expectations without the slightest sense of guilt or regret. What is missing, in other words, are the very qualities that allow a human being to live in social harmony." The genetic predisposition of humans to participate in "friendly" (what I would call co-operative or utility-based relationships of exchange) is therefore precisely not psychopathic - as you say, somewhat contradictorily, "we're hard-wired to do good" - to trust that doing good and/or participating in exchanges is useful to us as human beings living in society. Thus our genetic predisposition is not at all psychopathic; instead,, as you put it, "our genes shape us to be good-natured towards each other."

Anonymous said...

Your use of the term "friendship" has led you astray in the section of your post on alienation. Why does buying grapes not tickle our "friendship detectors"? Because capitalism and friendship are not the two key concepts you discuss. What you have called friendship is in fact exchange (monetary and otherwise). Our society indeed encourages people to keep their friendships and their economic exchanges separate. We have friends, with whom we share food, drink and conversation; we also have people with whom we exchange money and services. These people have the potential to be friends, but society encourages some kind of distance between us (hence the negative connotation of nepotism). This is not to say that I disagree with your point that yes, we should be friendly with our local service providers and grateful for the grapes we are sent from abroad. But the people who exchange money and services with us are not friends - they are members of a system of economic exchange. At this point, the people in Chile picking grapes aren't even utilitarian friends - we have no personal relationship with them and we do not directly exchange anything with them. Instead, we are both participants in a larger system of collaboration or co-operation which has as its base the belief that the work I do to produce grapes is compensated by my wage (and not by any kind of "good deed" of "friendly" gesture on the part of a distant consumer.