Are we hard-wired for capitalism?

When I get back from the Canadian Economics Association meetings this evening, my dog will throw himself on me in a paroxysm of joy. But if, two minutes later, I were to try to take a bone away from him, he would bare his teeth and growl.

Animals – including humans – are instinctively possessive. Economists have names for the human equivalent of growling when someone takes away your bone. Loss aversion theory says that the pain from losing $10 is greater than the happiness from gaining $10. The sunk costs fallacy is (bad) reasoning along the lines of "I paid $500 for these pants that make me look like a hippo, there's no way I'm going to throw them out." I suspect that a typical economist considers these manifestations of possessiveness irrational -- but recognizes that loss aversion and other theories are useful when it comes to explaining the real world.

At the CEA meetings, Mukesh Eswaran and Hugh Neary presented a fascinating paper explaining why, from an evolutionary perspective, it makes sense to be possessive, and to respect others' possessiveness. Unfortunately I can't find a copy of their paper on-line, but this is my interpretation of the basic intuition behind their results.

Suppose a dog manages with super-canine speed and effort to catch a squirrel. Other animals may challenge him for possession of the squirrel. Thinking of this one squirrel in isolation, the effort of defending the squirrel might not be worthwhile (especially if the squirrel-catching poodle is challenged by a rottweiler).

But a dog who gives up his squirrel without a fight suffers a cost: if he's just going to give up his squirrel, there's no point in chasing it in the first place. Committing yourself to defending your squirrel is one way of guaranteeing that you'll put effort into hunting. Being hard-wired for possessiveness gives us an evolutionary advantage.

This explains loss aversion. Getting from loss aversion to property rights needs a few more assumptions. Fighting is costly, so species that work out a way of avoiding fighting have an evolutionary advantage. There are enough squirrels to go around, so dogs can survive by hunting their own squirrels. Fighting is not essential for survival. Assume also that the dog that caught the squirrel has an advantage in any fight - defence is easier than attack. With these assumptions, dogs in general will do best if they all follow the rule "catch your own squirrel and leave other dogs alone" - even if some days it means going hungry. The alternative rule "spend most of your your time trying to take away another dog's squirrels" leads to a lot of wasted energy, that could be more productively used squirrel hunting. Note: this paragraph was added in response to earlier comments.

What does this have to do with capitalism? The first principle of capitalism is private ownership of the means of production. And private ownership is basically a state-enforced guarantee that no one will take away your bone or your hard-earned squirrel. 

Why is an evolutionary theory of loss aversion and property rights better than saying "we have done 1000 psychological studies and have found that people's behaviour exhibits loss aversion"? 

Loss aversion aversion matters for public policy. It explains why the self-employed might favour tax cuts more than salaried employees. The self-employed pay their own taxes - they experience the loss of income directly - so they feel the loss. Most employed people have their taxes deducted from their pay cheques. That hurts, but not as much as writing a cheque [changed in response to comment from "a" below]. And I'm willing to bet that politicians will face enormous pressure to provide special tax breaks for RRSP withdrawals in the coming decades. Just think how angry all those retirees will be when they discover money withdrawn from an RRSP will be taken away through income taxes. Perhaps if we understand where loss aversion comes from we'll be able to understand what triggers our tendency towards loss aversion and overcome it when we need to.

Understanding the evolution of property rights is important too. The evolutionary story says the basis of property rights is production or creation - a dog earns his property right by catching a squirrel. Note: I've added this paragraph and the rest in response to reader comments.

But there are other, competing, evolutionary stories. There are evolutionary stories that explain altruism - societies where people support others in times of need do better than societies that leave everyone to fend for themselves. Production often requires team work, which explains why my dog spends more time chasing his toy squirrel and dropping it at my feet than growling possessively.

And then there's sex. From a survival point of view, catching squirrels is more productive than fighting over squirrels. But when it comes to reproduction, fighting has some survival value. If men compete so that only the fittest are able to reproduce, the resulting off-spring will on average have better genes. Any theory of property rights has to explain why, for most of history, women haven't had rights to property, women have been property.

Because there are so many possible evolutionary stories about property rights, one can explain almost anything - a Scandinavian type welfare state or hard-core libertarianism - through a evolutionary story. I like hearing and telling them. But I don't know if that's because of the intrinsic value of evolutionary stories, or because there's a hard-wired human desire to explain things.

Comments

[a]

"Most employed people have their taxes deducted from their pay cheques, so they never directly experience the loss of income imposed by taxes."

good grief; you must be joking

[Frances Woolley]

They both hurt, but writing a cheque hurts more than never seeing the money in the first place.

[tomslee]

Very convincing explanation of why dogs are hard-wired for capitalism. But what about humans?

[cadp]

What is your gripe, a?

[Guillaume]

I'm a bit skeptical of the equation between capitalism and private property. Capitalism cannot exist without property rights, but the opposite isn't true. Private property has existed for millenia but capitalism hasn't, at least not in the way we mean it now. The nobility and bourgeoisie always had more or less strong property rights but I'm not sure we can call the feodal system 'capitalist'.

I think capitalism came from the inventions of limited liability and the bankruptcy process, where the state protects company owners from losing more than pledged capital. This reduces the cost of risk-taking for society's benefit (at least when negative externalities don't outweight the benefits).

In your dog case that would mean that your dog is safe from persecution if he happened to borrow dog capital from other dogs to finance his squirrel-hunting expedition and didn't bring back a squirrel. Of course, the risks would be much higher if his right to the squirrel weren't protected in the first place. Is that metaphor falling apart?

[Frances Woolley]

Guillaume - to clarify - Eswaran and Neary's paper is on the evolution of property rights, I made the wildly speculative leap to capitalism - yes, it's a deliberately provocative title, but it got you to comment!

If there is some innate tendency for people to want property rights, why were they so restricted for so long, e.g. to the nobility and the bourgeoisie?

[jh]

I'm confused. Is this paper about loss aversion or property rights?

By the way, that's an aggressive dog you have. Most I know would merely whimper.

[Frances Woolley]

jh - I'm confused about that too - the title of the Eswaran and Neary paper is "An evolutionary theory of the evolution of property rights." But the argument that I remember from their 20 minute conference presentation - which I'm sure doesn't do full justice to the paper - explains loss aversion.

There's another recent paper that also tries to explain property rights from an evolutionary perspective using a similar argument - but that one's written by a legal scholar.

On the dog - it would have to be a pretty special bone, e.g. from a leg of lamb, to provoke the reaction. But, yes, it is a concern.

[Frances Woolley]

jh - another paper that uses evolutionary theory to explain property rights. Maynard Smith apparently came up with this idea - because fighting is costly, there's an evolutionary advantage to not fighting. So a rule such as "the bone belongs to the dog who found it" is an evolutionarily stable strategy - but presumably only under certain conditions.

[reason]

"The first principle of capitalism is private ownership of the means of production. And private ownership is basically a state-enforced guarantee that no one will take away your bone or your hard-earned squirrel. "

That private ownership (in your example) is ownership of the results of production NOT of the means of production. Ownership of the means of production would perhaps be ownership of the territory including the squirrels.

[Kuri]

Oh man, this is taking all the nonsense, dubious assumptions and unfounded leaps of logic that is evolutionary psychology and applying them to economics. Natalie Angier does a good job of debunking traditional evolutionary psych in language accessable to non-scientists and scientists alike. I see we need someone to do that same for this meta-leap.

[Nick Rowe]

I wasted (part of) my youth trying to explain property rights, and the pre-commitment to defend them, without resorting to evolutionary psych and loss-aversion. It's very hard. You need something to explain why focal points (what's mine is mine and what's thine is thine) are where they are. As soon as you look at such things, you realise that bygones are definitely not treated as bygones. If we awoke tomorrow morning, with full memory of everything, except who owned what the night before, there is no way we would ever reproduce the existing allocation of endowments. Yet the fact that we confidently expect that nobody will treat bygones as bygones is essential.

This stuff is absolutely fundamental.

[jh]

@FW -- I'd seen the Maynard Smith idea before, but as interesting as it is, I don't know that it constitutes what I would call property rights. I think of these as essentially social. It can't just be that a newcomer will back down -- other members of the society have to be willing to enforce the interest of the propertyholder, even when it doesn't directly interest them. I don't know if anyone's checked that sort of a condition in a similar model.

@Kuri -- "Natalie Angier does a good job of debunking traditional evolutionary psych in language accessable to non-scientists and scientists alike."

No, she doesn't. She may do a good job of debunking her cartoonish version of evo psych, but not the more careful versions that people actually believe.

[Jon]

The sunk costs fallacy is (bad) reasoning along the lines of "I paid $500 for these pants that make me look like a hippo, there's no way I'm going to throw them out."

The sunk cost fallacy would be, "I paid $500, I'm going to wear them". Its quite rational to not discard something ($500 book-value loss) that at a minimum is worth $10--tax deduction!

[Alex Martelli]

Guillaume, """I think capitalism came from the inventions of limited liability and the bankruptcy process, where the state protects company owners from losing more than pledged capital.""" -- I think you have history (and therefore causality) backwards: the Limited Liability Act was passed in 1855 (in Britain, the cradle of capitalism), and it's impossible to claim that capitalism "came from" that, when it had been well underway (in Britain) for at least a century by then (even Polanyi, who stubbornly refuses to call "capitalism" the system Smith and Ricardo were writing about (!), dates "industrial capitalism" from 1834...). (Even under the Joint Stock Companies Act of 1844, investors still had unlimited liability; indeed, for insurance specifically, unlimited liability remained the law until the Companies Act of 1862). France, the US, and many other European countries followed slightly later.

I agree that capitalism is not the same thing as private property, but you cannot claim that the "missing link", capitalism's "cause", was limited liability -- rather, limited liability was introduced as part of the growth process of already mature capitalism, to call up more capital into enterprise from middle classes, in good part in professional callings, that were starting to have interesting amounts of it.

Me, I see capitalism born in many late-medieval Italian towns (Florence, Venice and Genoa perhaps the clearest, best-known examples), but I understand many think this identification premature, and it's a reasonable disagreement; but surely, starting when the Amsterdam Bourse opened in 1602, trading stocks and bonds, rejecting the name "capitalism" for that evolving system takes less and less reasonableness;-).

[tjfxh]

The latest hot thing is neuro-economics. Check out the work of Ernst Fehr, for example. Looks like we are hardwired for altruism. Sorry to disappoint.

http://www.iew.uzh.ch/institute/people/fehr/publications.html

[hosertohoosier]

I'm not sure that individual characteristics of humans are sufficient or necessary to explain the evolution of capitalism, a collective institution. Indeed, something like loss aversion can explain the resistance to markets just as well as their emergence. A free market system is dynamic, and while markets tend to yield higher growth, they also are riskier (ie. growth patterns are more volatile) than socialist or traditional economic systems.

[hosertohoosier]

"The latest hot thing is neuro-economics. Check out the work of Ernst Fehr, for example. Looks like we are hardwired for altruism. Sorry to disappoint."

The real question, however, is that of who we are altruistic towards. Individual humans are probably not the best unit of analysis if one wants to look at real world events. We work for firms, live within states and are members of families. It is through those organizations that capitalism, international relations, etc. take place. Our altruism may well be directed towards organizations of which we are members - organizations that may not necessarily strive for goodwill to all men.

[Panayotis]

It is time that we differentiate between a)the private domain of proprietary attributes/rights traded in markets by shelfish units persuing their private interest subject to competition and synergy; and b)the public domain of common attributes/rights shared in communities by civic units pursuing their public duty subject to solidarity and cooperation. These result in different models and dynamics of behavior that is time economists realize that they exist! Of course an actual economic unit is the joint manifestation of the shelfish and civic orientation and therelative intensity is conditioned by the situation (environment) they operate in.

[chrismealy]

Good lord, the last thing economics needs is evo-psych just so stories. It could do with fewer parables of selfishness, not more.

[Declan]

Panayotis - you might like, 'Community and Market Economy' a short essay by Hans Ritschl, if you can track down a copy. It can be found in 'Classics in the Theory of Public Finance'. It's quite brief but I found it quite interesting.

And of course, if you haven't read, 'Systems of Survival' by Jane Jacobs, I'd recommend that too.

At any rate, I second your comments, and also those of Guillaume above that there's a big difference between property rights and trade which have been around in various forms off and on for millennia, and capitalism which only ever (seems to have) happened once, in a particular context, and which goes well beyond simple property rights. The distinction Weber made between a 'traditional' economy and a 'capitalist' economy in 'The Spirit of Capitalism' is the best explication of the difference that I've read. I'd guess that people not liking it when someone takes their stuff (regardless of whichever story you choose to explain this behaviour) is a necessary but nowhere near sufficient condition for the development of capitalism.

[Frances Woolley]

Panayotis writes:
"Of course an actual economic unit is the joint manifestation of the shelfish and civic orientation and therelative intensity is conditioned by the situation (environment) they operate in."

This what appeals to me about this particular research agenda - is it possible to understand *why* and *when* people will be altruistic? selfish? Not just a set of observable rules (people are more altruistic after lunch than before say) but an explanation. Or is any explanation of fundamental social structures inevitably a "just so" story?

[jh]

On these added paragraphs:

"But there are other, competing, evolutionary stories. There are evolutionary stories that explain altruism - societies where people support others in times of need do better than societies that leave everyone to fend for themselves. Production often requires team work, which explains why my dog spends more time chasing his toy squirrel and dropping it at my feet than growling possessively.

And then there's sex. From a survival point of view, catching squirrels is more productive than fighting over squirrels. But when it comes to reproduction, fighting has some survival value. If men compete so that only the fittest are able to reproduce, the resulting off-spring will on average have better genes. Any theory of property rights has to explain why, for most of history, women haven't had rights to property, women have been property."

It's not that "societies" do better, it's that individuals do better. That is ALWAYS the test. Even when it is true that a group does better because of cooperation, the behavior will not persist unless an individual in this society can not do better by cheating. And that can be true of altruism (Axelrod's work is the classic example). Be extremely careful when arguing group selection.

The dog doesn't care about teamwork. It's just that humans are much stronger than dogs, and we killed/ignored/threw out any dogs that weren't obedient.

Note that fighting does NOT have "survival value" for the loser. I'm not sure if this is another group selectionist argument or not, but it sounds perilously close (it sounds like you're saying that fighting has value because it improves the gene pool from the group's perspective -- not a valid argument, because a weakling will not sacrifice himself for the group's benefit). It must be that the prize for winning is so great that the risks are worth it.

Finally, the last sentence -- there are still a lot of questions about the concept of property in hunter-gatherer societies, the importance of hunter-gatherer societies in understanding humans today, and the role of women throughout prehistory. I think this last sentence is overreaching in many directions.

[Min]

We evolved in small groups, less than about 150 people. Such tribes that exist today combine personal property rights with tribal sharing of important necessities. The agricultural revolution produced ownership of land, kings, aristocrats, and poverty. Capitalism is a new experiment. Who knows what the future holds?

[Panayotis]

Mclean,

Thank you for the references. I have reviewed the second and is interesting although I am not saying the same thing.My work involves the analysis of these seperate paradigms and see how they develop in a public and a private domain of attributes/rights. To each phenomenon/presentation the collision of parts and units reveals a force of symbiosis and a force of osmosis. The first attaches commonality upon attributes/rights of the phenomenon/presentation and the second attaches proprietary elements.

Frances Woolley,
yes we need an analysis of the "when and Why". In my work I try to offer such an explanation by interacting the properties of attribute/rights of units with the incentives of reaction that they require. As far as the shelfishness and civic concepts are different. I avoid the concept of altruism because it is an alternative expression of shelfishness in the pursuit of private interest!

[q]

Joel Sobel can help us out here.

from http://www.ecares.org/ecaresdocuments/ws/summerschool2009/papers/sobel1.pdf

"Naive Argument: A strategy that is good for a group can survive."

"Sophisticated Argument: A strategy that is good for a group can
survive if there are many groups with (in a precise sense) greater
heterogeneity across groups than within them."

"Loose logic: An “altruistic” strategy can be costly inside a group
but make the group sufficiently successful that it can still maintain
(or increase) representation within the population."

[westslope]

Did Mukesh Eswaran and Hugh Neary use a Hawk-Dove game or a Stag Hunt game to illustrate their argument? Just curious.

A really good theory of economic property rights should explain not only the emergence of private property rights but common property rights, and bizarre phenomena like voluntary enforcers.

Speaking of E. Fehr, this article might be of interest to some:

de Quervain, D. J. F., Fischbacher, U., Treyer, V., Schellhammer, M., Schnyder, U., Buck, A., and Fehr, E. (2004) ``The Neural Basis of Altruistic Punishment", Science 305, pp. 1254-1258.