A Win-Win: Nurturing Reciprocity in Markets

Businesspeople making introductions

Professor Robert Sugden, School of Economics, University of East Anglia

 

I very much like Adam Oliver’s book on Reciprocity. There are many reasons for this.  I Go Slow sticker05112019But I have to confess that one of them is that Adam gives a lot of attention to the arguments I make in my own recent book, The Community of Advantage: A Behavioural Economist’s Defence of the Market, and often expresses approval of them.

There are two very important points of agreement:

Firstly, we agree about the empirical importance of reciprocity as a human motivation, and about the normative importance of nurturing attitudes of reciprocity.  We see reciprocity as distinct from – and in a sense intermediate between – altruism and self-interest.  From the early 1980s, I’ve been arguing that a lot of non-selfish behaviour is better explained by reciprocity than by altruism, and I’ve been proposing economic theories of reciprocity.[1]  I welcome Oliver as an ally.

Secondly,  we align ourselves with the liberal tradition (and especially with John Stuart Mill) in opposing most forms of paternalism in the domain of individuals’ private choices.  Oliver says: ‘The role of policy makers ought to be to provide opportunities for people to flourish – for them to pursue meaning and fulfillment to and in their lives … as they see fit’ (p. 157).  I agree.  In this respect, we are allies against the nudge programme.

There are also several points of clear disagreement between us:

Market exchange is reciprocal.

Oliver often sees an opposition between reciprocity and the market.  He presents the market as based on self-interest, and thereby liable to corrode reciprocal and intrinsic motivations.  As a liberal, I find it worrying that he sees reciprocity as characteristic of small, stable, homogeneous ‘communities’, and hence liable to be undermined by the workings of institutions which favour social mobility, geographical freedom of movement, and the cultivation of individuality and diversity.  The essence of a liberal order is a set of rules that allows any group of people, however different in terms of income, social class, location, religion or ethnicity, to engage in voluntary interactions with one another – and that allows each individual to be a member of many such groups.

I believe that market exchange can be understood as voluntary cooperation for mutual benefit – that is, as reciprocal.  If that is right, nurturing reciprocity need not imply imposing ‘moral limits’ on the domain of the market.

Here, I think I am more Millian than Oliver.  Mill presents the market as a ‘community of advantage’ (giving me the title for my book).  His general idea (which I think Oliver would agree with) is that if social life is structured by voluntary cooperation, each person can get what he wants only by helping others to get what they want.  This is the best structure for nurturing the ‘social feelings of mankind’.  Since the market is a network of voluntary transactions, it is one component of this bigger structure.

Intrinsic motivation is not confined to the public sector

Because Oliver sees the market as based on self-interest rather than co-operation, he opposes demand-led competition and performance-related pay in public service provision.  He sees these as undermining intrinsic motivation by service suppliers and ‘encourag[ing] egoism’ (p. 89).  The suggestion is that the relationship between professional and client can be perceived as reciprocal, but the relationship between seller and buyer can’t be.  I don’t see why.

EUROPE PORTUGAL ALGARVE OLHAO MARKET
Buyers and Sellers: Reciprocity or Egoism?

Beneficial co-operation does not need collective agreement

Oliver treats the supply of public services as fundamentally different from the supply of goods and services in the market.  He argues that the supply of public services should be governed by collectively-agreed objectives.  For this reason, he doesn’t like demand-led competition: ‘feeding the wants of the demand side’ is ‘allowing the sightless tail [i.e. public service users, such as health service patients] to wag the dog [i.e. professionals, such as physicians, as public service suppliers] (p. 134).  Instead, he favours performance indicators  (i.e. measuring the performance of suppliers relative to collectively-agreed standards, rather than according to the preferences of users as individuals).

In my work, I follow James Buchanan’s ‘voluntary exchange’ theory of public goods by treating public provision of goods and services as a generalisation of the market, governed by the same principles of mutual benefit.  The mutually beneficial cooperation of the market doesn’t need any collective agreement about what firms should supply.  Firms compete to supply what consumers want to buy.  This is demand-led competition as part of a system of mutual benefit. The same could be true of demand-led competition in public services.

Supply-side controls based on subjective judgment of preferences are paternalistic

In opposition to ‘nudge’, Oliver proposes ‘budge’: ‘A budge is a regulation against an activity that relies on its effectiveness by being informed by behavioural insights, and where its effectiveness imposes potential harms on others’ (p. 162).  One of his examples: Supermarkets display confectionery in prominent positions that will attract casual buyers.  According to Oliver, if customers ‘[buy] more confectionery than they otherwise would [and] more than is good for them’, then a budge (e.g. a regulation against the placement of confectionery products close to supermarket checkouts) can be justified as correcting a ‘negative externality’ (p. 162).

Notice that Oliver doesn’t treat this budge as paternalistic, because the regulation is targeted at the firm, not at the customer’s ‘private choices’.  I think it is paternalistic, in a sense defined by Julian Le Grand and Bill New: the regulation is intended to further the customer’s own good by addressing a failure of judgment by him or her.[2]   Here, Oliver is probably being more Millian than me – but explaining why would be a digression.[3]

But whether these policies are paternalistic or not, budging and nudging confront a common theoretical problem.  Both depend on a concept of ‘true preference’ (or ‘real interest’) that is distinct from revealed preference.  The supposed source of the difference is ‘behavioural bias’.

My fundamental critique of behavioural welfare economics is not a normative objection to paternalism; it’s that the concepts of true preference and bias are empirically ungrounded.  (This is one of the central themes of The Community of Advantage).  Empirical psychology can explain why a person’s tendency to buy something depends on the prominence of the display, but it can’t tell us whether he or she truly prefers to buy it or not.

So proposals for nudges and budges have the common feature that they rest on the proposers’ claims that other people are choosing what isn’t good for them – and these claims are not supported by behavioural science, they are subjective judgements by the advocates of nudging and budging.  I keep urging them to come clean about this.

 

References

[1] ‘On the economics of philanthropy’http://www.g, Economic Journal, 92 (1982), 341‑350; ‘Reciprocity: the supply of public goods through voluntary contributions’http://www.goog, Economic Journal, 94 (1984), 772‑787.

[2] ‘In brief, we conclude that government intervention is paternalistic with respect to an individual if it is intended (a) to address a failure of judgement by that individual and (b) to further the individual’s own good’ (Julian Le Grand and Bill New, Government Paternalism [2015: 2]).

[3]  In On Liberty [pp. 150–151], Mill argues that selling a good is a ‘social act’, legitimately subject to regulation in the public interest – e.g. health and safety workplace regulations.