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February 08, 2006

What Game Would You Rather Play?

Anderson on Political Economy, Elizabeth Anderson: February 8, 2006

Let's conduct a thought experiment.  You have to play a mountain-climbing game.  The higher you climb, the better off you are.  Rarely, players climb solo.  Most of the time, they climb in teams.  The members of each team are connected by pulleys and gears in such a way that, if everyone climbs in a cooperative fashion, everyone in the team goes higher than if each just climbed the team rope in an uncoordinated way.  The job of the team leaders--those highest on the rope--is to figure out how to get everyone to coordinate their climbing so as to get the maximum total lifting force for the whole team.  However, depending on the gear setup, the lifting force of each member's step may accrue unequally to each team member.  (In most setups, those at the top get lifted higher by any team member's step than anyone below.)  The mountain face is swept by gales, although the winds tend to be milder at higher altitudes than at lower ones.  Sometimes the gales blow you or even your whole team off your rope.  Other times, the team leaders--those at the top of the team rope--eject you from the team and toss you off the team rope.  If you are lucky, your mountain-climbing skills may be attractive enough to another team that they extend you a part of their team rope before you hit the ground.  Or you will have family or friends who will toss you a saftey rope to catch you on your way down.  But you may not find a team with an open place on their rope that they will offer you, and you may not have family or friends willing to offer a rope, or the rope they are able to offer may be too frail to stop your fall.

You don't know your initial place on your rope, nor which rope it is, nor your mountain-climing skills, nor how well-off, benevolent, and numerous your family and friends are.  In this state of ignorance, you get to choose some of the rules of the game you must play.  Which rules would you prefer to play by?  Here are your choices:

1. Free Fall: if you are blown off or ejected from your rope, and find no family, friends, or other teams willing to toss you a rope, you hurtle to your death below.  The dispersion of players is very large:  some are at extraordinarily high altitudes, some are dead.

2. Safety-net: there is a safety-net placed somewhere between the ground and the lowest-altitude player that will catch you before you hit the ground.  You will be worse off than anyone still on a rope--at a miserably low altitude--but you won't die.  And you'll often, but not always, have a chance to find a new rope and start climbing again.  There is a small price to pay for the safety-net: everyone will climb at a slightly slower pace than if the net were not there.  The disperson of players is almost as large as in Free Fall, except that the worst-off players in Safety-net are better off than the worst-off players in Free Fall.

3. Long Bungee Cord: in addition to a safety-net for those who never get going on a rope, you have a bungee cord anchored to a point on the mountain equal to your highest achieved altitude.  The bungee cord prevents you from falling more than 60% of the way down the mountain.  That way, even if you never get another rope to climb, your previous climbing efforts will not have turned out for naught.  There is a modest price to pay for the long bungee cord: everyone will climb at a modestly slower pace than if they were not supplied with the cord.  The dispersion of players in Long Bungee Cord is almost as large as in Safety-net, except that the highest players are not quite as high, the lowest players are not as low, and there is not as much fluctuation of position for any given player.  A few players are at gloriously high altitudes; many players are at comfortably high altitudes; some are at miserably low altitudes.

4. Short bungee Cord: this is the same as the long bungee cord, except that the cord prevents you from falling more than 30% of the way down the mountain.  There is a correspondingly steeper price everyone must pay for this cord.  The dispersion of players in Short Bungee Cord is considerably smaller than in Long Bungee Cord: the highest players are lower down, the lowest players are higher up, and there is little fluctuation of position for any given player.  Almost everyone is at a comfortable altitude, few are at glorious altitudes, and it's harder than in Long Bungee Cord to climb much higher than or fall far below one's current altitude.

5. Maximin: in addition to a safety-net for those who never get going on a rope, all the ropes are equipped with a special gear assembly that works as follows: those higher on the rope don't get to ascend unless their ascent helps pull up the lowest-altitude climber to the highest altitude possible for a low-altitude climber.  In this game, the lowest-altitude climber is higher up than the lowest-altitude climber in any of the other games.  But the higher-altitude climbers are lower down than in any of the games above.  No one is at a miserable altitude; nearly all are at a just-comfortable altitude, except for a few who are little higher than this.

6. Strict Equality: all the ropes are equipped with a special gear assembly that distributes the lifting force of everyone's steps exactly equally across all players.  No matter how hard or skillfully you climb, or how well you coordinate the team if you are a team leader, you cannot get higher than those who are dead weight on the rope.  Since everyone knows this, no one wants to do much climbing, so everyone is stuck at the same miserably low altitude.

7. No Rules Dictatorship: besides the teams, there is a marauding party high above which does no climbing itself, but issues orders to the teams from a central location on how they should coordinate the movements of their members.  The party claims to have expertise in coordinating the teams, but its orders are in fact clumsy and unproductive, and wear down the mountain at a shocking rate.  The party also keeps the teams in a state of terror.  It can toss anyone or any team off the mountain at any time, for any reason or no reason at all.  There are no safety nets, no bungee cords, no rules.  You can try to keep your place on a rope by pledging to submit yourself completely to their orders.  But even that may not keep you safe.  Everyone but the marauding parties is at a low altitude.

How to choose among these games?  We can use Hayek's rule: to choose the game that "improve[s] as much as possible the chances of anyone selected at random" (Law, Liberty, and Legislation, vol. 2, 129). It's pretty clear that by this standard you'd be crazy to play by the rules of Strict Equality or No Rules Terror.  It's also pretty clear that Free Fall carries absurdly high risks for trivially small gains compared to Safety-net.  So no one would rationally choose any of these games if they had a chance to play any of the others.  I also think that Safety-net is a poor bargain compared to Long Bungee Cord: it's well worth it to pay a modest price for a guarantee that one will always have something significant to show for one's hard climbing--that, once having gotten even modestly high, one will never fall back to an utterly miserable altitude.  So, the credible options are among Long Bungee Cord, Short Bungee Cord, and Maximin.

Speaking for myself, I'd probably prefer to play a game somewhere between Long Bungee Cord and Short Bungee Cord.  I'd prefer to have a fairly solid guarantee that I'd never be at a miserable altitude; but I'd also like to have a reasonable prospect of being able to climb substantially higher than my initial placement, if it is low, even at some risk that I might fall significantly from a high placement.  Still, I can see the case for any of these three games.  They are all reasonable games to choose to play.

Let's draw some lessons from this thought experiment for different systems of political economy.  No rules dictatorship is communism; Strict Equality is pure egalitarianism.  Maximin is Rawls' preferred system in A Theory of JusticeFree Fall represents Robert Nozick's preferred system in Anarchy, State, and Utopia. Safety-net represents F. A. Hayek's preferred system.  Here's a representative statement from The Road to Serfdom:

There is no reason why in a society which has reached the general level of wealth which ours has attained the first kind of security [against physical privation] should not be guaranteed to all without endangering general freedom. . . . There can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody. . . .  Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision.  Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance--where, in short, we deal with genuinely insurable risks--the case for the state's helping to organize a comprehensive system of social insurance is very strong. . . . There is no incompatibility in principle between the state's providing greater security in this way and the preservation of individual freedom [pp. 120-1].

Hayek contrasted this "first kind of security," which he endorsed, with a second kind, designed to protect people from any falloffs in their income, relative to what they were accustomed to receive, or which would change their accustomed position relative to others.  This entails a rejection of any Bungee Cord game where the cord is of zero length, as well as any game that forbids some climbers from overtaking or falling below others.  Hayek correctly argued that any game of the latter sort would return us to a status-based society, in which everyone has their position fixed.  He also correctly argued that any attempt to fix incomes on the basis of some judgment of individual desert would violate the rule of law and be incompatible with a free society.

What's missing from our canonical list of major theorists of political economy in the post-WWII era is anyone who has defended, as a primary theory of justice, any form of Bungee Cord.  This is ironic.  For the capitalist democracies that currently exist have implemented social insurance schemes most closely analogous to games of this form.  Anglo-American forms of capitalism are closer to Long Bungee Cord; continential European forms of capitalism closer to Short Bungee Cord.  The structures of social security retirement, disability insurance, survivor's insurance, and unemployment insurance in nearly all of these countries pays more to those who earned more before  retirement/ disability/ unemployment (in return for having paid higher taxes into the system), although all pay considerably less than 100% of previous earnings.  The fact that all advanced democracies have converged on some form of Bungee Cord suggests that it has strong attractions.  One main attraction seems to be that, once people get used to a particular standard of living, they have a very hard time adjusting to drastic falloffs.  Another seems to be that once people have worked hard to attain a particular standard of living, they have a strong interest in protecting what they have built up.  But these and other possible attractions of Bungee Cord have been undertheorizedTheorists to the left of Hayek, such as Rawls, have tended to jump toward some form of egalitarianism like Maximin, skipping over the inegalitarian elements of Bungee Cord.

Some Hayek fans I have talked to seem to think that any system beyond Safety-net will send us sliding inexorably down the slippery Road to Serfdom to No rules dictatorship.  I have even heard one suggest that the difference between capitalism and communism lies somewhere between Long Bungee Cord and Short Bungee Cord--i.e., between the US and, say, France.  These thoughts are absurd.  The rule of law governs all systems up to and including Maximin.  All of these systems implement a form of pure procedural justice (as Hayek himself recognized in the case of Maximin), in which what one receives is determined by the impersonal operations of the market as constrained by the rules of the game.  That is why all of the social insurance systems from Saftey-net through Maximin are called entitlement systems:  what one is entitled to is not up the discretion or judgment of any bureaucrat, but defined by impersonal rules set out in advance, independent of any moral judgments of desert or responsibility.  All of these systems, including even Maximin, permit individuals' relative incomes to be influenced by their own choices and efforts, as well as by the outcomes of market competition.  Individuals' incomes in all of these systems may change relative to others'.  So none create a status-based society.  In all of these systems, ownership of the means of production lies overwhelmingly in private hands.

Fans of Nozick and Hayek may complain that I have rigged my case by failing to consider the availability of private insurance to fill the role that Bungee Cord fills for all on a universal basis.  Private insurance, however, cannot fill the role of Bungee Cord, as I have previously argued.  In addition to the previously mentioned problems, complete reliance on private insurance suffers from the following defects:

1. To avoid the problem of adverse selection, private insurers either refuse to insure those judged to be most at risk of needing the insurance, or charge draconian premiums that are beyond the reach of lower-income workers.  In general, the private deals available to lower-income workers are worse than those available to higher-income workers--exactly the reverse of social insurance.

2. The kinds of insurance that would be needed to substitute for social insurance are very complicated financial instruments that are difficult for the financially unsophisticated to understand.  This opens up opportunities for insurers to bury complicated loopholes and rules in their policies, cast in legal language that is nearly unintelligible to most people, who have a hard time reading a 35 page single-spaced small print document while those capitalist gales of creative destruction are whipping around their faces and they are just trying to hang on.  The loopholes and complicated rules are designed to enable insurers to deny or delay coverage for losses the insured were led to believe were covered.

3. The loopholes and complicated rules are different for each insurer, generating vast arrays of options. This seems like an advantage, since consumers supposedly can choose a set of options tailor-made for their tastes and circumstances.  But in fact these complications make it very difficult for consumers to compare competing policies, especially given their relative ignorance of the risks they are likely to face in the future.

4. Even financially sophisticated consumers lack something insurers have:  experience with the product before they need to use it.  Consumers are very good at learning about products with which they have lots of experience.  But they don't know how well insurance will work until the time comes to make a claim.  By then, it's too late to switch to a better product if the purchased one didn't work out.

My point is not to deny the value of private insurance altogether.  Often, it offers excellent value, especially for simple risks, as for life insurance.  But the more complicated the risks, the worse the deals available through private insurance.  We are witnessing problems 2-4 in spades today with respect to the botched private Medicare prescription drug plans.

My point is rather that, given the uncertainties and defects of private insurance, people have a strong interest in insuring against the frequent failures of private insurance to meet their needs at a reasonable cost.  This is a major purpose of social insurance schemes that take the form of Bungee Cord.


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Tracked on Feb 8, 2006 5:14:53 AM


Posted by: John Smith

Sorry, Short Bungee Cord sounds absolutely dehumanizing. I would never choose it. I'm not sure why a position between Long Bungee Cord and Safety-net is not the best position. I think that such an argument can be made. Could you please explain why that argument cannot be convincingly made? Or why it does not convince you?

Posted by: John Smith | Mar 7, 2006 10:07:52 PM

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