The Online Library of Liberty

A project of Liberty Fund, Inc.

• Foreword
• Preface
• The Reason of Rules
• 1.: The Constitutional Imperative
• I.: Introduction
• II.: Reasons For Rules
• III.: Rules of Games
• IV.: Rules of the Road
• V.: Rules of the Market Order
• VI.: Rules of Political Order
• VII.: The Importance of Rules
• 2.: The Contractarian Vision
• I.: Introduction
• II.: Noncontractarian Constitutionalism
• III.: Individuals As Sources of Value
• IV.: Contract and Exchange
• V.: Politics In the Exchange Perspective
• VI.: Unanimity As the Contractual Ideal
• VII.: Agreement On Rules and the Veils of Ignorance and Uncertainty
• VIII.: Conclusions
• 3.: The Myth of Benevolence *
• I.: Introduction
• II.: Private Good and Public Good
• III.: Science, Truth, and Politics
• IV.: The Authoritarian Imperative
• V.: Majoritarian Democracy In the Noncontractarian Paradigm
• VI.: The Aim of Politics
• 4.: Modeling the Individual For Constitutional Analysis
• I.: Introduction
• II.: Homo Economicus In Politics: the Argument For Symmetry
• III.: Science and the Empiricist Defense
• IV.: A Methodological Defense of the Differential Interest Model of Behavior
• V.: Social Evaluation and Quasi-risk Aversion
• VI.: Gresham’s Law In Politics
• VII.: Summary
• 5.: Time, Temptation, and the Constrained Future *
• Preface
• Part 1.: Individual Private Choice
• I.: Introduction
• II.: The Ultimate Z ’s
• III.: Preferences For Preferences
• IV.: Past, Present, and Future
• Part 2.: Individual Public Choice
• I.: Introduction
• II.: Society With a History
• III.: Temporal Interdependence
• IV.: An Illustration
• V.: Moral Rules And/or Constitutional Commitment
• 6.: Politics Without Rules, I: Time and Nonconstrained Collective Action
• I.: Introduction
• II.: The Social Discount Rate
• III.: The High-tax Trap
• IV.: The Inflation Trap
• V.: The Public-debt Trap
• VI.: Other Examples
• VII.: Conclusions
• 7.: Rules and Justice
• I.: Introduction
• II.: Just Conduct and the Notion of Desert
• III.: Justice and Promise Keeping
• IV.: Justice Among Rules
• V.: Just Rules, Agreed-on Rules, and Just Conduct
• VI.: Conclusions
• 8.: Politics Without Rules, II: Distributive Justice and Distributive Politics
• I.: Introduction
• II.: Distributive Justice: the Conventional View
• III.: The Constitutional Perspective and Institutional Incidence
• IV.: The Incidence of Unrestricted Majoritarianism
• V.: Tax Rules and Distribution Under Majority Rule
• VI.: Direct Constitutionalism and Distributive Justice
• VII.: Summary
• 9.: Is Constitutional Revolution Possible In Democracy?
• I.: Introduction
• II.: Pareto-superior Change and Wicksellian Unanimity
• III.: Distributional Limits and Prospective Rules
• IV.: Status Quo Entitlements and Distributional Envy
• V.: Constitutional Change and Free Riders
• VI.: The Role of Norms
• VII.: Toward a Civic Religion

VI.

Gresham’s Law in Politics

Our final argument in defense of the Homo economicus model is at least as old as Thomas Hobbes. It embodies the notion that when many persons are involved in a social interaction, the narrow pursuit of self-interest by a subset will induce all persons to behave similarly, simply in order to protect themselves against members of the subset. As Hobbes stated, “Though the wicked were fewer in number than the righteous, yet because we cannot distinguish them, there is a necessity of suspecting, heeding, anticipating, subjugating, self-defending, ever incident to the most honest and fair-conditioned.”11

Hobbes might well be interpreted here as presenting a version of the risk-aversion argument similar to that elaborated in the previous section. But he might also be interpreted as claiming that there is what we would call a sort of Gresham’s law in social interactions such that bad behavior drives out good and that all persons will be led themselves by the presence of even a few self-seekers to adopt self-interested behavior.12

One way of constructing the relevant analytics would be to follow the obverse of Gary Becker’s theory of social altruism.13 In Becker’s theory, if an agent, A, acts benevolently toward a person, B, and B then has the opportunity to undertake some activity (at small cost) that will in turn benefit A, then B can be induced to take such action out of self-interest. For example, suppose A gives B one-quarter of each dollar that A receives at the margin. Suppose, furthermore, that B can, at the cost of one dollar, undertake some act that secures a benefit to A worth more than four dollars (or equally prevents a harm to A worth more than four dollars). Then B will rationally undertake that act and secure the benefit for A: A’s initial altruism toward B stimulates a reciprocal altruism on the part of B, despite the fact that B does not really care about A at all. For the more inclusive social group, the argument suggests that a critical mass of altruists may tend to create an apparently altruistic society, one in which some share of mutual gains is exploited through reciprocal nonexchange behavior.

Suppose that in such a society, the number of altruists declines or that the directly reciprocal relationships required for Becker’s model to work become blurred and ambiguous. The incentives for nonaltruists to behave altruistically may then dissipate rapidly; the structure of expected reciprocation unravels. The rational person, facing choice at the constitutional level, may seek to select institutions that depend only minimally on altruistic behavior as a protection against any erosion of reciprocation that might be present.

The Hobbes argument could, therefore, be made consistent with the Beckerian vision of social interaction. But a more direct, though related, interpretation may be more relevant. We might think of a situation directly contrary to that analyzed by Becker, one in which some person, say M, enjoys the imposition of harm on another, N. Suppose that it costs M one dollar to impose a dollar’s worth of harm on N and that M spends one-fifth of his income indulging in this sort of malice. Suppose, furthermore, that N does not care about M, one way or the other. Nonetheless, if N can act so as to reduce M’s income by one dollar, he has saved himself twenty cents worth of harm. Hence, N will be led to act to damage M, despite his total disinterest. That is to say, M’s malice is contagious. Moreover, if, as Hobbes suggests, the M’s in the community are ex ante undetectable, the N’s may be led to act in part maliciously toward everyone on the chance that anyone encountered may be an M, at least to the extent that such behavior is not excessively costly.

Consider a more plausible situation in which some persons in the community are mildly altruistic and some are truly selfish. Suppose that individuals are linked together through some interactions that are prisoners’ dilemma settings of the sort depicted in Matrix 4.1. (The construction of a matrix of this type was discussed in Chapter 1.) In this case, the numbers in the cells of the matrix represent money returns (in dollars) to the players. If each player acts so as to maximize his own money payoff, the socially disastrous outcome emerges.

The distinguishing feature of the game depicted in Matrix 4.1 is that the gain to each player from the selection of strategy 2 is much smaller when the other player selects strategy 1 than when the other player selects strategy 2. Note that the incremental gain to A from playing a₂ is only one dollar if B plays b₁, but the gain to A from playing a₂ is twenty dollars if B plays b₂. Suppose, now, that A is indeed mildly altruistic and derives some value from B’s receipt of payoffs, say ten cents on the dollar. This altruism is not sufficient to induce A to make direct transfers to B, since such transfers would cost A one dollar for each dollar receipt for B. But A may well refrain from inflicting harm on B to secure a gain for himself, provided that the “terms of trade” are within certain limits. If we depict the payoffs to A in Matrix 4.1 in terms of their utility equivalents, rather than as money payoffs, then under the assumption of the mild altruism postulated, we get Matrix 4.2. Note that in this setting, there is no dominant strategy for A. His preferred strategy now depends on what B is predicted to do. If A knows that B is symmetrically altruistic, A will then play a₁ confident that B will respond by playing b₁. If, on the other hand, A knows that B is a narrow maximizer of self-interest, then A also will be induced to play as a narrow maximizer. In this game, A’s mild altruism becomes behaviorally relevant only if A believes B to be mildly altruistic; otherwise, the socially disastrous outcome emerges as before.

We shall return to the Hobbesian citation and postulate that A does not really know whether or not B is a maximizer. In this case, A would need to have an expectation that among the various B’s he encounters in the prisoners’ dilemma setting, 90 percent would behave symmetrically in order to induce A to play a₁. There is a threshold number of “righteous” altruists below which all will behave as if purely selfish, simply to protect themselves against the prospect of playing against a narrow dollar maximizer. Consequently, even if the “virtuous” are more numerous than the “wicked,” all may be induced to behave “nonvirtuously,” with predicted consequences.

This result is reinforced if we model social interactions in many-person terms. If each person finds himself in prisoners’ dilemma settings in which many other persons are involved—in which there are many B’s and not just one, as in the simple matrix illustration—then predictions must be made about the behavior of all other persons in the interaction. For example, suppose that A faces ten B’s in a setting like that shown. Most of the B’s can be predicted to behave reciprocally in response to altruistic action by A, but so long as one person in the B group does not, the gains from this mode of behavior on the part of A may well be dissipated.

An additional element emerges, particularly in the many-person interaction, that may prevent voluntary altruism from exerting much behavioral influence on social outcomes. Consider the setting just discussed, in which a single person, A, faces ten B’s. Suppose that A continues to act altruistically, within limits, despite his prediction that at least one B will try to exploit the situation and to secure differential gains. The remaining B’s, initially, will respond symmetrically to A’s gestures of goodwill. But as these B’s observe the single defector to be securing differentially high gains, their inherent sense of unfairness may induce them to act nonreciprocally toward A. The attribute of fairness summarized in the phrase “getting my share” may be an important motivation that prevents the spread of other-regarding behavior.

In summary, the spirit of Hobbes’s analysis is that although altruistic and public-spirited motivations may be widespread among the population, these are delicate flowers, and crucial to their blooming may be the existence of institutions that do not make social order critically dependent on their effectiveness. To this extent, the implications of the Hobbesian argument are that institutions should be designed with Homo economicus in mind, and that altruism, like good manners, can be appreciated but not “presumed upon.”14

There is, finally, a quite different, non-Hobbesian sense in which something like Gresham’s law may apply in social interactions. Lord Acton’s famous dictum that power tends to corrupt, and absolute power corrupts absolutely was, no doubt, based on some predicted psychological destruction of the moral fiber of the despot. Such considerations are beyond our purview in this book, but there is a related, if quite different, point to be made. If institutions are such as to permit a selected number of persons to exercise discretionary powers over others, what sort of persons should be predicted to occupy these positions?

In yet another market analogy, suppose that a monopoly right is to be auctioned; whom will we predict to be the highest bidder? Surely we can presume that the person who intends to exploit the monopoly power most fully, the one for whom the expected profit is highest, will be among the highest bidders for the franchise. In the same way, positions of political power will tend to attract those persons who place higher values on the possession of such power. These persons will tend to be the highest bidders in the allocation of political offices. Economists have only recently become interested in the welfare properties of the political bidding process, under the rubric of “rent seeking.”15 In the rent-seeking literature, the focus of attention has been on the net resource wastage involved. Here we voice a different concern. Is there any presumption that political rent seeking will ultimately allocate offices to the “best” persons? Is there not the overwhelming presumption that offices will be secured by those who value power most highly and who seek to use such power of discretion in the furtherance of their personal projects, be these moral or otherwise? Genuine public-interest motivations may exist and may even be widespread, but are these motivations sufficiently passionate to stimulate people to fight for political office, to compete with those whose passions include the desire to wield power over others? If procedures are such that power is allocated to those who value it most highly, then there is some presumption that those who might want the values of all to weigh in political decisions will be driven out. Since the demand for discretionary power is highest for those individuals who desire social outcomes different from outcomes that perhaps most others would choose, political institutions will be populated by individuals whose interests will conflict with those of ordinary citizens. Citizens will need to plan for their institutional life accordingly.

[11. ]Thomas Hobbes, De Cive (1642) (New York: Appleton-Century-Crofts, 1949), p. 12.

[12. ]See, for example, J. Roland Pennock, Democratic Political Theory (Princeton University Press, 1979), pp. 521-24.

[13. ]Gary Becker, “Altruism, Egoism, and Genetic Fitness,” Journal of Economic Literature 14 (September 1976): 817-26.

[14. ]The Hobbesian argument seems to be the same as that implicit in the admonition of D. H. Robertson when he advised all economists to issue warning barks when they saw proposals depending on “love” for their effectiveness. See D. H. Robertson, Economic Commentaries (London: Staples Press, 1956).

[15. ]For a collection of the relevant papers, see James M. Buchanan, Robert D. Tollison, and Gordon Tullock (eds.), Toward a Theory of the Rent-Seeking Society (College Station: Texas A&M University Press, 1981).