Steve Reads

Bowles’s Microeconomics has hit me like a revelation. It deeply and grandly reconnects economics with political science and with moral theory, and gives a sound mathematical and empirical basis to both. It steadfastly resists dogma, even while arguing persuasively for behavioral economics and a realistic socialism. It is a work that could only have come from someone who’s studied the issues and listened patiently to his opponents for many years.

Bowles’s fundamental contention is that it doesn’t make sense to study economic interactions in isolation; such an interaction cannot be understood outside of the institutions that make it possible. The simplest example here would be the free market: markets exist because the government will defend your private property with guns; because the government will enforce contracts; because private property is freely exchangeable by such contracts; etc. Without those protections, there would be no free market.

So Bowles zooms in. Consider economic actors behaving inside of the market. They are participating in a game that evolves over time by rules that the institution sets. But at the same time, an institution can be viewed as the endpoint — equilibrium — of a game; institutions themselves change over time, for at least a few reasons that would be valuable to study:

1. Invaders from outside the institution. Consider, for instance, a nomadic bartering society which has just been attacked by a Western capitalist power, and consider what effect the invasion will have on the bartering society’s existing institutions. Will barter survive, or will it be supplanted by the market? (Of course we’d need to consider that the invader may have more guns. This may or may not be a part of the economic model itself.) Under what conditions could barter be expected to continue?
2. Technological change within the existing institution. Consider the effect of the printing press within a pre-industrial society.

Bowles makes the case strongly — if implicitly — that ignoring institutions, or more specifically treating them as a settled affair, has left the most interesting problems beyond the reach of economics. Why do institutions change at all? Under what conditions will an institution resist invasion by novel institutions? By asking questions like these, we can turn economics into the quantitative study of problems that interest all humans — not just the very limited problem of how a market with alienable property and complete contracting will evolve.

To address these problems, Bowles has a number of tools at his disposal, but two important ones are worth calling out:

1. Evolutionary game theory, particularly the Evolutionarily Stable Strategy. An ESS is a strategy that will successfully fight off invading strategies. ‘Belief in a supernatural being,’ for instance, may be a strategy, with atheism viewed as an ‘invader’. (Without thinking too hard about it, it seems that we’d have to explain the empirically observable fact that theism is an ESS. I don’t quite know whether a strategy is an ESS if it will survive as time goes to infinity, or whether finite time is what we need.)

   Bowles gets tremendous power out of the simplest models. Imagine we’re divvying up some shared resource, like a large animal that we’ve all just felled in a group hunt. Suppose there are three kinds of people in our society: Grabbers, Sharers, and Punishers. Sharers will try to share any resource before us. Grabbers will always try to steal it, and we can state some conditions under which they’ll tend to dominate Sharers. Punishers, when faced with a Grabber, will team up and try to fend him off, with a probability of success that increases with the number of Punishers in the group; when there are no Grabbers around, Punishers act like Sharers. If they succeed in Punishing the Grabber, they will split his stolen goods evenly amongst themselves.

   Now, with those stipulations, under what conditions will the society fill with Punishers? Under what conditions will Grabbers come to dominate? The answer clearly depends on how many of each type we start with, though it may be that Punishers will always dominate Grabbers, and that over time the proportion of Punishers in the population will rise. The initial intuition is that Punishing dominates Sharing if there are enough Punishers in the population, because Punishers get just as much as Sharers do when faced with Sharers, and also have the potential to get resources from Grabbers. The answer, though, depends on the exact numbers.

   What does any of this have to do with anything? The great beauty of it is that in just a few pages Bowles has sketched out a quantitative reply to the debate between Hobbes and Rousseau. Under appropriate conditions, a culture based on mutual punishment for theft can, in fact, persist and remain stable against invading strategies — a reply to Hobbes. Of course any realistic model would have to factor in far more variables than this, and would have to consider far more types of people than the three we’ve listed here. But it’s a start. And it’s empirical, which is an improvement over mere thought (‘The method of “postulating” what we want has many advantages; they are the same as the advantages of theft over honest toil’). And it extends economics far beyond the interaction of homogeneous actors in financial markets.

2. Incomplete contracting. It has been known since at least Herbert Simon’s paper “A Formal Theory of the Employment Relationship” that employment agreements cannot be treated like contracts for the exchange of commodities: in the latter case, the contract can completely specify what I will get out of the trade, and what I will give you in exchange. Employers, by contrast, cannot perfectly monitor your or my work; the contract is incomplete in that sense. Incomplete contracting, in Bowles’s analysis, gives rise to a great range of institutions; all are based in some way or another on trust, and how we respond when trust is missing. The most straightforward modification of the complete-contracting model to employment is the contingent-renewal model, in which I incompletely contract with you for a job, I hold that job for a while, and at the end of a period of time you renew the contract if you think I’m doing a good job — or fire me if you don’t. This seems to be a much more realistic model of how employment works, and Bowles uses it to good effect.

   I should mention, in the employment-contract context, that Bowles is gifted at telling me things that I should have thought of on my own. E.g., if employment could be completely contracted, then why would a boss be necessary at all? And he praises the Fundamental Theorem of Welfare Economics — namely that under certain precise conditions, the free market implements an economic optimum — but thoroughly refutes its application beyond those conditions. For instance, the Theorem requires that economic actors be price-takers (i.e., they exist in a large, undifferentiated market, and do not have the power to set prices). He then notes the standard question that every Econ 101 student should have (but I’m not sure that I did have): if no one has the power to set prices, then how do prices change?

Bowles’s book is invaluable for

1. Studying the growth and change of markets, where Econ 101 would tend to depict markets as settled problems with static equilibria;
2. Introducing the reader to a host of tools that are valuable well beyond economics, particularly those of evolutionary game theory;
3. Extending the scope of economics to moral and political theory, where its roots lay.

It is an absolute masterpiece, which I would recommend to anyone who prefers to think concretely.