chapter ten
ONE PARTICULAR KIND OF CHOICE is the decision to exchange or trade one thing for another, such as money for goods. Exchange seems like a straightforward thing, but many of our notions of exchange are based on what happens between relatively equal participants. When the participants are of very different status, exchange becomes a little more complicated.
By definition exchange is a voluntary transaction, and so it would seem that power has little to do with it. Even when consumers buy something from a monopoly, they always have the choice of not buying: there is no compulsion in the act of exchange. But then again, power can be effectively exercised without the need for coercion, and when participants are of very different status the line between what is voluntary and what is involuntary gets blurred, and power enters the equation even when there is no explicit compulsion at work. Indeed, voluntary exchange and exploitation can exist hand in hand.
The word “power” can be used in different ways and different contexts. Here I am concentrating on the idea of power imbalance, or one person’s power over another. In this use of the word, a person cannot be powerful without someone or something being in a corresponding position of powerlessness. In a sexist society, a man who is a bottom-rung employee during the day may still be “head of the household” at night. Is he powerful or powerless? In and of himself, he is neither. In relation to his employer, he is powerless; in relation to his wife, he is powerful. We often speak of giant corporations as “powerful,” but if we are to understand the mechanisms of power we must be more precise. The power of a company with respect to its employees is one thing; that with respect to its suppliers another; that with respect to its competitors another still; and that with respect to its customers yet one more. Power emerges from the interactions between people.
But power is not just a relationship; it is a relationship in a specific context, and in some cases the context can determine what happens as much as the relationship itself, and can lead to surprising outcomes. Just as the prisoner’s dilemma is a situation that muddles the idea of preference by preventing perfectly good individual choices from being turned into happy outcomes, so too do other situations muddle the idea of power by preventing the apparently powerful from exploiting the apparently powerless. We have seen that game theory provides a way of approaching questions in which the structure of the situation is important, and we have seen that the equilibrium of these games is not always what we might expect. We can apply the same kind of thinking to questions of power as we do to questions of preference.
In The Selfish Gene Richard Dawkins describes a particularly dramatic illustration of how context can change power relations.1 He describes an experiment in which two domestic pigs were placed in a large sty where they could get food by pressing a lever with their snout. In this experiment, when the lever was pressed at one end of the sty, a trough at the other end dispensed a serving of food. The pig had to press the lever and then race to the other end of the sty to eat. The experimenters chose their pigs such that one of the pair was “dominant” over the other. The surprising result was that the subordinate pig ended up getting more food than the dominant pig: the power relationships were turned upside down.
To see why this is so, we need to think of the problem from each pig’s point of view. If the subordinate pig pushes the lever and runs to the trough, the dominant pig will already be there and will prevent the weaker pig from eating. As a result, the subordinate pig soon gives up pressing the lever, and neither pig gets any food.
If the dominant pig pushes the lever, the subordinate pig gets to eat until its bigger sty-mate arrives to push it out of the way. The subordinate pig has an incentive to wait by the trough, because it gets at least some food. The dominant pig has an incentive to push the lever, because it also gets at least some food. This arrangement is an equilibrium. The arrangement that the subordinate pig pushes the lever is not an equilibrium, because the pig can improve its outcome unilaterally by not wasting its time pushing the lever.
This surprising equilibrium holds even when the sty is long enough that the subordinate pig gets almost all of the food, as long as there is some left for the dominant pig to eat when it arrives at the trough. So the subordinate pig ends up “reclining idly by the trough” and eating heartily, while the dominant pig does the work of pushing the lever, running back and forth across the sty, and collecting the leftover food. Hardly a picture of dominance.
Power is usually associated with the ability to coerce, but just as the dominant pig may end up eating less than the subordinate pig, so too are there circumstances in which the powerful end up helping those they can coerce, even when the powerful are governed by purely selfish motives.
Until now we have been concerned only with situations in which people or other actors have choices to make. We have not investigated the possibilities of one party forcing the other to take one action rather than another, and yet such coercion is commonplace in the real world. It is time to look at interactions that are coercive.2
Consider a band of bandits roaming from town to town, taking whatever they want. Each time the bandits plunder a town there are two effects: the bandits become richer, and the citizens of the plundered town are made poorer.
Roving bandits have only a short-term relationship, if that is the word, with any town through which they pass. There is no incentive for the bandits to hold back in the extent to which they plunder, because they have no interest in the health or otherwise of the town.
Successful bandits can effectively conquer a territory, graduating from bandits to warlords. Instead of stealing from a town once only, they become entrenched in some geographic area and extort money from it on a regular basis, as a tax or perhaps as a protection fee. At this stage there is a change in the dynamic of the relationship between the warlords and the citizens of the area. An impoverished and starving citizenry can provide little in the way of taxes, so the warlords now have an interest in the continuing prosperity of the area they rule. Even purely self-interested warlords may cut back on the rate at which they extort the citizens of their territory so as to maximize their long-term income. Just as in the repeated prisoner’s dilemma, there is a tension between the short term (take as much as possible right now) and the long term (restrain the takings in order to get more later). The shadow of the future plays a role here as well, and it forces a more co-operative relationship than if things were seen only in the short term.
Feng Yu-hsiang was a roving bandit in 1920s China who made the move to stationary warlord. As Mancur Olson describes him, he “was noted for the exceptional extent to which he used his army for suppressing thievery and for his defeat of a notorious roving bandit called White Wolf. Apparently, most people in Feng’s domain wanted him to stay as warlord and greatly preferred him to the roving bandits.”3
Here again it is the structure of the situation that gives rise to the outcome, rather than the nature of the warlord or of the citizenry.
Once the shadow of the future comes into play, the outcome improves for both warlord and population. As Olson says, warlords have an incentive to “use their power, at least to some degree, in accord with the social interest, even when serving the public good was not part of the intention.” Olson calls this unintended consequence the “second invisible hand,” complementing Adam Smith’s “invisible hand” of the market.
Individual thieves have no influence over the area in which they ply their profession, while organized crime, aspiring to a monopoly on crime in an area, would prefer a prosperous neighbourhood with more money available for the taking. As a result individual thieves engage in burglary, while organized crime relies on protection rackets. Individual thieves will add to the level of lawlessness in an area, by definition, while organized crime will exert efforts to crack down on crime other than their own in order to provide fertile grounds for their own activities.
Olson’s recognition of the “second invisible hand” blurs the line between coercive and voluntary acts. We have seen that, properly framed, supposedly free individual choices can lead to inequality (that is, to one set of people gaining considerable wealth while others gain nothing) and that the free-rider problem can mean that many people are saddled with unfavourable laws even under democracy. Here we see that even when the members of one party have the ability to take whatever they want from others, circumstances exist in which that ability will not be exercised and autocrats will, purely out of self-interest, provide public goods. The stability that ruthless autocrats rely on to maximize their own wealth is something that may be valued by their subjects.
To point out that autocracies can provide public goods for their people is not to claim that autocracies are fine societies to live in; just that we must not be too surprised if people appreciate the benefits of stability. Mussolini may have been a dictator, but he famously made the trains run on time. Saddam Hussein ruled brutally, but the rate of violent death has increased during the lawless years following his overthrow.
Choices have costs, which are commonly called transaction costs. If a pig farm sets up at the end of your street, you have the right to move house, but making that choice comes with a cost: moving house is an expensive proposition. If your employer treats you unfairly you can always move to another job, but a job search is often a lengthy and uncertain process.
The popular renditions of MarketThink usually gloss over the issue of transaction costs. If you are unhappy in your job, you should get a new one. If you are unhappy with a purchase, you should return it and buy somewhere else. If you are unhappy with your apartment, you should just move. Still, the nugget of truth at the heart of Market-Think is that the ability of consumers to walk away is a valuable one. In a competitive market in which transaction costs are close to zero, consumers do have a source of real power.
But as transaction costs increase, so too does the power associated with the ability to walk away decrease. If companies can find a way of imposing a cost on the decision of a consumer to switch to another product or service, the balance of power in that relationship also switches. Even small transaction costs can lead to a significant power imbalance.
To take this further, it could be argued that there is a continuum of choices, from free exchange to compulsion, that carry different transaction costs. If you are imprisoned it is because you have chosen not to pay the cost of escaping (bribing the guard, perhaps). If you live in a cruel dictatorship it is because you have chosen to remain rather than to pay the cost of fleeing into exile: after all, refugees who do flee dictatorships are plentiful, so the choice does exist even if it is risky. Regional barons or warlords who persecute their populace more than they do their neighbours will face an exodus to surrounding domains. At the other end of the spectrum, if you choose to go and buy something at a neighbouring store, it still costs you time and effort to go there.
The MarketThink worldview divides society into two components: the market and the state. In this view, the market is the world of choices and voluntary exchange, while the state has a monopoly in force. The existence of transaction costs shows that such a black-and-white picture is oversimplified. There is a continuum of transaction costs from freedom to dictatorship, from free choice to coerced acquiescence. Even powerful states have limits on their ability to compel – as illustrated by the existence of pervasive black markets in the Eastern bloc countries during the time of the Soviet government – while we are all subject to some forms of compulsion by private industry, from workplace rules to security guards at the shopping mall. We can, then, speak of power in modern industrial societies, despite the apparent lack of coercion, in just the same way we can speak of power in autocracies.
MarketThink claims that in the absence of coercion, interactions in our society are mutually beneficial exchanges that need no external enforcing mechanisms or regulations. If these exchanges were not mutually beneficial, the argument goes, then one or the other of the parties would walk away and the exchange would not happen; therefore the exchanges that do happen must be mutually beneficial.
The prototype exchange is that of the consumer purchase, but the idea of a free exchange goes beyond consumer transactions. According to MarketThink, the employer and employee are equal participants in an exchange. Landlord and tenant, insurer and insured, contractor and contractee, bank and loan applicant: all, according to the theory, are relationships based on an exchange that is of more or less equal benefit to both parties. Internationally, arrangements between nations, companies and governments, and the IMF and debtor nations are all relations of exchange. What keeps the otherwise powerful in check is not good intentions, but the market – the ability of either party to walk away.
Many cases exist in which economies of scale or other factors such as network economics or fashion-driven purchases guarantee that an industry will be dominated by one player or a few major players. In such a situation the option to buy somewhere else is limited: think of buying cable-TV, airline tickets, or word-processing software; or think of working in a mining town or an oil town in which a single employer dominates the labour market. These examples involve choices that as consumers we are most likely to make with a feeling of resentment: we grumble as we accept the cable-TV bundle, we grumble about the price of gasoline, but we pay up anyway. And Market-Think argues that even exchanges with monopolists (with the exception of the government) are still mutually beneficial: that while we may not have the option of buying elsewhere, we do still have the option of not buying at all. Gary S. Becker and Guity Nashat Becker describe exchange as “the bedrock of the market system – that shop-keepers and consumers, workers and management, or suppliers and customers do not voluntarily make a deal unless both sides expect to benefit.” 4
Increasing returns may make it difficult for us to find alternatives to Microsoft Windows, but it is still true that no one makes you buy a computer. By entering into the exchange we have demonstrated that we gain by it, and so there is clearly no coercion happening, and therefore we have nothing to complain about. Yet others would argue that to buy Microsoft Windows is to come under the sway of Microsoft’s evil empire. So which is it? When we enter into deals with oligopolies and monopolies, are we exploited or are we partners in a mutually beneficial exchange?
The answer is, both and neither. It is a false dichotomy. We have seen how limitations to choice are not on/off switches, but are a gradual restriction as a function of increasing transaction costs. In a similar fashion, as the partners in an exchange move along an axis from equality to inequality, the exchange itself moves from equal bargaining to exploitation, even when no explicit coercion takes place.
This is a bit abstract, so let’s get concrete. Let’s look at a dramatic example of individual choice in the face of a monopoly.
One of the characters in Stephen Frears’s film Dirty Pretty Things trades fake passports and immigration papers to illegal immigrants in exchange for one of their organs – a kidney, perhaps. He then sells the organ so that it can be used in transplant operations. When accused of exploiting immigrants, the character defends his actions:
You give me your kidney, I give you a new identity. I sell the kidney for ten grand, so I’m happy. The person who needs the kidney gets cured. So, he’s happy. The person who sold his kidney gets to stay in this beautiful country, so he’s happy. My whole business is based on happiness.5
From the organ-trader’s point of view, there is no coercion here, simply free exchange that makes each participant better off. Granted, in his presentation the organ-trader glosses over the danger of the operation, but he also has power even in the absence of compulsion. The source of his power is that he has a monopoly on something that the illegal immigrants desperately want.
This kind of story prompts us to ask about the boundary between choice and coercion, and about the boundary between legitimate bargaining and illegitimate exploitation. Most of us would agree that there is something wrong in the exchange of bodily organs for immigration papers, and that there would still be something wrong even if the organ-trader speaks the truth when he says that the operation is as safe as a visit to the dentist: and yet the argument of the organ-trader is hard to dismiss. It is true that the immigrant could simply opt not to make the trade. The exchange is what economists call “Pareto efficient”: both players are made better off by it, and the exchange could not be improved without making at least one of them worse off.
Dirty Pretty Things is a fictional film, but decisions such as these are not merely fictional. Poor people make desperate decisions every day, and some of these become subjects for debate. Is prostitution a free exchange? What about surrogate motherhood? Child labour in Third World countries? Immigrant workers leaving their families to find jobs? Addicts buying drugs on the street? Taking a high-interest loan to tide you over to your next paycheque? Poor countries accepting toxic waste from rich countries? All, we could argue, are free exchanges. All, we could argue, are exploitative. The answer is that they are both.
Most of us feel uneasy about such exchanges, even when faced with the argument that the alternative (no exchange) would be worse for both participants. The root cause of our uneasiness is that the exchanges are made between manifestly unequal participants, and in such exchanges the distribution of the benefits conforms to the so-called Matthew effect: those that are already rich get most (see chapter 8). In game theory this result is called the Nash bargaining solution – referring to the John Nash who developed the concept of equilibrium that is the basis of modern game theory and whose life is described in Sylvia Nasar’s A Beautiful Mind (later made into a movie).6 Nash showed that the outcome of bargaining between two people (or, of course, other players such as corporations) depends on their “disagreement point,” or the ease with which they can walk away from the situation: that is, on exactly that ability to walk away that consumers are supposed to have in a competitive market. The player who can walk away more easily is in the stronger bargaining position, and gets most of the benefit: the weaker player gets the scraps.
The Nash bargaining solution suggests that when a wealthy company hires a poor labourer, the position of both may be improved, but the already wealthy company will gain almost all of the benefit of this trade, while the poor labourer will find his or her own situation improved by just a small amount.
In the case of Dirty Pretty Things, the organ-trader likes his £10,000, but he doesn’t need the money nearly as badly as the illegal immigrants need their papers, so he is in a position to turn his back on them if they refuse his offer. In the case of buying addictive drugs, the cost to the consumer of choosing not to buy is high, and it is widely accepted that the exchange is not free. In the case of customers buying Microsoft Windows or a cable-TV contract, the deal similarly carries a cost of walking away that leaves the customer open to exploitation.
The reason that we are dismayed by the outcomes of so-called “free exchanges” between unequal actors is that at some point we come to believe that the situation is no longer one that calls for bargaining. It is instead a situation that calls for altruistic action. And here the MarketThink picture of free exchange falls down: whether we acknowledge it or not, almost all of us at some point turn away from the idea and reject it.
Imagine, for example, that Jill sets out from Whimsley for a long walk one day, and at dusk she is out on the hills far from anywhere. Then she stumbles, not just down a hill but down an abandoned mineshaft. Fortunately she is not harmed, but she cannot get out by herself. She calls out, but no one hears her. Her predicament is dire. Night falls, and the next day dawns. Still no one hears her.
But the next day Jack also sets out for a walk, and takes a route that Jill showed him when they lived together; the same route Jill took the day before. Jack passes by the mineshaft. He hears the calls from within the mine, and stops. He could help Jill out, but he doesn’t have to do it for free. He offers to help her out for a price of $10,000 and sends down a contract to that effect. Jill signs, reckoning that she would rather pay $10,000 than be left to die. Jack helps her out and ultimately collects the money.
What is wrong here, most of us would agree, is that Jill’s predicament becomes a matter for bargaining. Given a situation of desperate straits, we tend to believe that the appropriate response is to help, not to bargain. Free exchange with someone as vulnerable as Jill is in this case is tantamount to robbery, a way of thinking that has been recognized for centuries – indeed, built into laws that protect people in positions of vulnerability from high-interest money lenders, for instance – but that is now becoming questionable again in the atmosphere of free-market logic.
Why we hold this belief is complicated and bound up in ethics, and this is not a book on ethics. Part of it, however, is surely that we believe a society in which vulnerable people are treated the way Jack treats Jill is not a society we want to live in. We can all imagine being in Jill’s place, and we know that we would like to be helped rather than having to become indebted because of an accident. Also, we recognize that a society that treats its weakest members in the way that Jack treated Jill is likely to end up in a bad way, with a large class of irrevocably poor and desperate people who have no prospect of any but the slightest improvement in their state. Morality in this situation becomes a cultural norm that helps to maintain a healthy society.
So there is a transition here, somewhere along the spectrum, in which free exchange becomes exploitation. Although MarketThink purists could argue that Jack has not taken anything from Jill, and that the organ-trader has not taken anything from the immigrants, most of us would agree that what has happened is a form of theft.
The dynamics of bargaining, or of exchange among unequals, shows how exploitation can take place even within a framework of what is apparently free choice. Then again, we know too about the possibility of collective action among the more cohesive groups in society – which are also the groups with the most resources and the most access to the corridors of power – and how this possibility lets them fix the rules of the game itself. It is only to be expected that they will use this ability to move choices into the realm of “free exchange,” knowing that they will benefit most. What looks like free exchange, individual choice, and the market is instead plunder. And that is what the trends in inequality suggest: almost all the gains in wealth during the last two decades have gone to those at the top.
Free exchange is entirely compatible with exploitation and plunder. Meanwhile, autocracy is compatible with stability and even the provision of public goods. How, then, to distinguish one from the other? This is not just a question of tricky wording, it is a question of what kind of society we actually live in. It suggests that the formal structure of democracy and free markets is not enough to rule out exploitation and plunder – characteristics usually associated with repressive regimes.