Rationalization Of Altruistic Behavior In A Wealth Maximizing Economy

Rationalization of Altruistic Behavior in a Wealth Maximizing Economy

Ellis I. Lee Politics of International Economic Relations Young-Bae Hwang February 10, 1995

Rationalization of Altruistic Behavior in a Wealth Maximizing Economy “This study focuses on two central but neglected tasks of economic history: to theorize about the structure of economies, and to account for either stability or change in those structures” (North, 1981, p. 3). With these words, Douglas C. North not only begins his book Structure and Change in Economic History, but he also begins to fabricate a structural theory that addresses the infirmities of the neoclassical theory of economics. These infirmities are caused by the neoclassical postulates that institutions and the cost of transactions do not exist (North, 1981). Thus, North “attempts to integrate some structural elements ignored by neoclassical theory into his explanation of history” (McGuire, 1982, p. 306). However, an immediate and problematic enigma arises in the neoclassical theory. To understand this enigma, it becomes paramount to understand the wealth maximizing postulate which assumes that “individuals prefer more goods (and services) to less” (North, 1981, p. 4); therefore, resources, whether human, capital, or natural, will be utilized to increase the production potential of the economy. And this utilization of resources in an environment of scarcity represents the costs and benefits of the particular transaction. If a transaction incurs more costs than benefits, the rational decision, as mandated by the wealth maximizing postulate, would be to not undertake that transaction. Thus, North (1981) argues that the neoclassical theory cannot explain altruistic behavior or societal stability when “an individualistic calculus of costs and benefits would suggest that cheating, shirking, stealing, assault, and murder should be everywhere evident” (p. 11). However, an expanded examination and assessment of altruistic behavior from a biological and mathematical perspective might rationalize such transactions as having greater benefits than costs from the individual’s perspective. North’s assumption that the neoclassical theory cannot adequately explain altruistic behavior is based upon two unstated premises: First, the individual acts without regarding the transaction’s consequences for others; second, the costs of altruistic behavior is greater than the benefits. When these premises are examined, it becomes evident that the first premise becomes unrealistic to maintain and that the second premise is incorrect. To begin with, the assumption

that individuals do not consider the consequences of their actions on other people negates the fact that human beings are social animals that have evolved through history by interacting with each other. This has led Wilson (1978) to examine whether or not there might be a genetic predisposition for people to act in an altruistic manner since there exists numerous example of other social animals, such as chimpanzees, honeybees, and birds, engaging in altruistic behavior. Although a definite genetic basis of altruism has not yet been established by biologists, it was Wilson’s (1978) contention that although there might be more examples of altruistic behavior among relatives since “during most of mankind’s history the predominant social unit was the immediate family and a tight network of other close relative” (p. 153), altruistic behavior has become more ubiquitous since the “perfection of the social contract has broken the ancient vertebrate constraints imposed by rigid kin selection” (p. 156). Wilson (1978) thus concluded that “the most elaborate forms of social organization, despite their outward appearance, serve ultimately as the vehicles of individual welfare” (p. 159). This conclusion seems to contravene North’s narrow attempt to define an individualistic calculus of costs and benefits without further examining the individual’s relationship to society since benefits to social organizations could also return benefits the individual. North also assumes that altruistic behavior incurs more cost than benefits for the altruist. But this assessment fails to consider the emotional or religious motivation of the individual. As Wilson (1978) observed: No sustained form of human altruism is explicitly and totally self-annihilating. Lives of the most towering heroism are paid out in the expectation of great reward, not the least of which is a belief in personal immortality. (p. 154) Thus, it cannot be maintained that altruistic behavior lacks more benefits than costs if an individual’s decision also considers the possible reciprocation of a grateful society, which may provide more compensation than costs for that individual. If this understanding of altruistic behavior is maintained, then altruism may not actually exists, especially in context of the neoclassical viewpoint since there would be benefits to be gained; for example, recipients of the

United States Congressional Medal of Honor receive a monthly lifetime monetary stipend if they are able to survive their selfless acts of heroism, but, unfortunately, most Congressional Medals of Honor are awarded posthumously. Suicide for the benefit of others seems to be the ultimate form of altruism since there seems to exist no goods or services which can be reciprocated to the individual. However, if an expanded definition of benefits can be implemented, then suicide can be rationalized in terms of a cost-benefit analysis that results in the conclusion that the benefits of suicide outweigh the costs. For example, according to the teachings of the Koran, if a person dies for the cause of Islam, then their souls are immediately taken to Heaven where eternal happiness and contentment is assured; these heavenly conditions provide far more benefits then the current standards of living in the Palestinian controlled Gaza Strip and provide Islamic fundamentalists with the necessary incentive to engage in activities that would most likely result in their deaths (National Public Radio, 1995). By rewarding altruistic behavior with emotional or civic praise, society hopes to “promote its recurrence in others” (Wilson, 1978, p. 149). However, in contrast to altruists, “the cheat, the turncoat, the apostate, and the traitor are objects of universal hatred” (Wilson, 1978, p. 162). From this framework of rewarding behavior that benefits the cohesion of society and by punishing behavior that tends to undermine that cohesion, an explanation to Mancur Olson’s free rider dilemma might be forthcoming. North (1981) asserts that “rational individuals will not incur the costs of participating in large group action when the individual benefits can still be received by being a free rider” (p. 10). But by participating in a large group action even when the individual would receive the benefits without participation, an individual would have the added advantage or benefit of being recognized as someone who promotes either societal cohesion or a specific agenda. This might be useful for politicians in establishing credentials or for patriots who need to demonstrate ideological loyalty, as with the citizens of either North Korea or the former Soviet Union where there existed only one legal political party which, contrary to the free rider assumption, had high rates of participation. By extending the reasoning of why the neoclassical model cannot adequately explain

altruistic behavior, North (1981) also asserts that the neoclassical model is deficient is explaining societal stability: The neoclassical model has an asymmetrical dilemma built into its behavioral function because it assumes both wealth maximization and the Hobbesian model of the state, which will constrain behavior to produce a viable political system. If individuals are acting rationally with respect to the first assumption then they are acting irrationally with respect to the second. It is certainly in the interests of a neoclassical actor to agree to constrain behavior by setting up a group of rules to govern individual action...[b]ut it is also in the interests of the neoclassical actor to disobey those rules whenever an individualistic calculus of benefits and costs dictates such action. That action would, however, result in the non-viability of any state, since enforcement costs of the rules would be, if not infinite, at least so large as to make the system unworkable. (p. 45) However, a mathematical game known as prisoner’s dilemma might be able to provide an explanation of how it might be more beneficial for people to cooperate with each other in an environment of uncertainty. Bass (1993) explained the parameters of the game: Imagine two prisoners facing life in the slammer for a crime they committed together. They are questioned separately by the authorities. If they resist the temptation to rat on each other, their alibi will hold and they’ll both be released after a few months in jail. (Let’s assign this outcome a value of 3 points each, with the object of the game being to score the most points.) If both prisoners chicken out and rat on each other, they’ll each get a longer sentence (albeit less than the maximum because they get time off for turning state’s witness); this lower payoff is worth 1 point each. But the highest payoff goes to the prisoner who rats while his buddy remains silent; then the ratter goes scott-free, for 5 points, while the silent sucker gets the maximum sentence, for 0 points. (p. 64)

From Bass’s (1993) description of the game, the following scoring table can be formulated:

Table: Scoring Patterns in Prisoner’s Dilemma Prisoner B

Prisoner A

Defect

Cooperate

Defect

1/1*

5/0*

Cooperate

0/5*

3/3*

*Scores: Prisoner A / Prisoner B

If an individual would have only one transaction with another person, then that individual’s best strategy would be to defect and not to cooperate with the other person since, if the other person cooperates, the individual would have the most to gain while protecting against a possible defection by the other person (Bass, 1993). North (1981) also conceded that if Morris, his orange retailer, never expected to see him again, then Morris might be tempted to place rotten oranges in the bottom of North’s orange sack in order to minimize his losses of unmarketable oranges while maximizing his profits. But since Morris does expect to see North again, he does not place rotten oranges in North’s sack since North is more valuable as a repeat customer. Thus, North (1981) concludes that “opportunism...is constrained by repetitive dealings” (p. 35). In the same fashion, when prisoner’s dilemma is repeated, it lacks an optimal strategy since the strategy becomes contingent on the actions of the other person. As Bass (1993) explained: If you meet a relentless defector, you should always defect. If you meet an all-outcooperator, you should also [italics theirs] always defect. But if you meet a grim retaliator—someone who cooperates until his opponent defects and from that moment on never cooperates again—you should cooperate. Political scientist Robert Axelrod decided to hold a series tournaments for computer programs to determine what strategies would gain the most points in the prisoner’s dilemma

paradigm. In the 1980 tournament, Axelrod wanted to “simulate natural selection by modeling ecological encounters in nature” (Bass, 1993, p. 65) by rewarding successful strategies with offsprings that would participate in the subsequent rounds while using the same strategy as their parents’. Under these conditions, it was discovered that the most successful strategy was when a prisoner would cooperate with cooperation and who would cooperate with a defection on an average of one in three times (Bass, 1993). The logic of this strategy manifested itself if a prisoner accidentally defected against a grim retaliator. This would result in an infinite number of subsequent defections which would force the prisoner to also defect continuously with the net result of achieving only one point each during a round. But by cooperating with a defection on average of one in three times, then the effect of an accidental defection can be negated since if another forgiving prisoners would reciprocate the cooperation of the prisoner, then they would both earn three points each during a round. This would result in their continued cooperation and reproduction. This strategy seems to suggest that it is more beneficial for people to cooperate with each other. North (1981) contends that the neoclassical model is faulty and deficient in explaining stability since it does not consider the existence of uncertainty. Since uncertainty does exist in the real world of human beings, mathematician Karl Sigmund made a poignant assertion: “Generosity pays off under conditions of uncertainty...Never forget a good turn, but try occasionally to forgive a bad one. We benefit from cultivating a keen sense of gratitude dosed with a small amount of generosity” (Bass, 1993, p. 62). And from this perspective, with the realization that it would indeed benefit people more to maintain societal stability by promoting cooperation and adherence to social norms or laws, it would be logical for people to have an expanded view of the individualistic calculus of costs and benefits that would include a temporal progression of continued uncertain interaction with other individuals. This expanded understanding of the cost-benefit calculus might explain why nation-states observe international law more often than not, despite the fact that there does not exist any effective authority that forces compliance from nation-states. Gerhard von Glahn (1986) noted that “credibility is

promoted by observing international laws and hurt badly by disregarding them” (p. 7). Furthermore, “such credibility is necessary for a successful foreign policy” (von Glahn, 1986, p. 7). In contradiction to North’s beliefs, altruistic behavior and societal stability can be explained in a manner that does not contradict an individualistic calculus of the wealth maximizing postulate if biological and mathematical considerations are taken into account. A person may consider the emotional or religious benefits of altruistic behavior to be of greater value than to use limited resources to increase the production potential, and a person would also realize that the long-term benefits of cooperation in an environment of continued uncertain interactions would offset the limited gains of an individualistic calculus of costs and benefits for just one transaction. Thus, the neoclassical theory need not disparage individuals as being irrational.

References Bass, T. A. (1993, May). Forgiveness math. Discover, p. 62-67. McGuire, J. M. (1982, April 17). Structure and change in economic history. America, p. 306-307. National Public Radio. (1995, February 9). All Things Considered [Radio] . WUGA: Athens, GA. North, D. C. (1981). Structure and change in economic history. New York: W. W. Norton. von Glahn, G. (1986). Law among nations: An introduction to public international law. New York: Macmillan. Wilson, E. 0. (1978). On human nature. Cambridge: Harvard University.