The Future of Capitalism

by Paul Collier

  HOW RECIPROCITY EMERGES

  Reciprocal obligations are decisive for well-being, but how do they come about? Any account has to be consistent with evolution, including the cravings and values that undergird reciprocity. It is easy to see why the competition for food would select those with a predisposition to greed, winnowing out the altruists. But why do we also crave belonging and esteem? Why do we value loyalty, fairness and care, or indeed have any values at all? Evolution has been a brutal process of selection by advantageous traits, so selfish materialism looks to be what you needed: you can’t eat esteem and belonging, and values cramp your style. Economic man sounds superficially like an amplified echo of the selfish gene.

  Yet we know that this is wrong: the selfish gene does not produce the selfish man. For many thousands of years, humans could only survive by co-operating in a group: going it alone spelled death. Lacking the craving for belonging and esteem, economic man was too selfish to be allowed to remain in the group; he was banished. Natural selection winnowed out rational economic man in favour of rational social woman: we are hardwired to crave belonging and esteem as well as food. But where did the common values come from?

  Early man lived in groups; networks in which people could interact, spreading common behaviour through imitation. When Homo sapiens came along we also lived in groups, and also imitated each other. We still do. People will unknowingly influence the behaviour not just of their friends, but of their friends, and the friends of their friends.12 But Homo sapiens developed a uniquely powerful vehicle for interaction: language. Why was language such a massive advantage? Because only language can convey narratives. As people talk to each other, the narratives that circulate convey a range of ideas. This is the fundamental activity that distinguishes humans from other species. Descartes’ cogito ergo sum is back to front: we do not deduce our world from ourselves, we deduce ourselves from our world. The atoms of humanity are not reasoning individuals, but the relationships into which we are born. We can learn from the freakishly rare anomalies of ‘babes in the wood’ – children reared by wolves. Do they, as in the Romulus and Remus mythology, grow up to found Rome? Updated from Rome to the present, we might think of it as the logical endpoint of the Ayn Rand hypothesis: if only people could grow up freed of the shackles of society, they would become Atlas-like independent-minded innovators. In fact, they become tragic creatures, unrecognizable as human beings. One celebrated instance was a nine-year-old child found in a French forest in the eighteenth century. Despite intense coaching he never even learned to speak, let alone to function as a normal person. Today’s equivalents are the Romanian babies raised in state hostels in the communist era.

  Through repeated exposure to narratives, children rapidly develop a sense of belonging to a group and a place. We acquire this sense long before we develop the capacity to reason. Family identity is established in the early years, and even something as large as national identity is generally formed by the age of eleven, whereas the capacity to reason develops later, at around fourteen.13 I think of myself as a Yorkshireman. I grew up with a thousand narratives of Yorkshire identity and this narration echoes down the generations: writing this reminds me that each night I read Daft Yorkshire Fairy Tales to Alex, my eleven-year-old, in dialect.

  Sheep lack the capacity for complex language, yet they also develop an awareness of belonging to a group in a place. Once this has developed, the shepherd’s job is much easier because they will not stray from the hillside to which they have become bonded, a process termed hefting. We know that, once a flock is hefted, the knowledge of belonging is passed from ewe to lamb. This happens far too quickly to be genetic, it is learned behaviour. But although the hefting of a flock is far too rapid to be genetic, it still takes many generations to establish. Why are sheep so slow? At this point I offer an explanation that draws on social science, not shepherds.* The sheep in a flock face a co-ordination problem. Sheep imitate other sheep, and so for the flock to stay on the hillside, they all need to understand not to wander off, and not to follow any that do. We know from modern experimental psychology that the key to solving a co-ordination problem is ‘common knowledge’; that is, the move from all knowing the same thing, to all knowing that we know it.14 A group can generate common knowledge either by common observation (everyone watching the same thing at the same time), or by a common narrative. I speculate that it takes sheep hundreds of years to forge common knowledge because they can only use common observation and so face a chicken-and-egg problem. They need to observe that all other sheep choose to remain on the hillside, but until sheep have learned it, the behaviour will not be there to observe; sheep must wait for a rare chance configuration of behaviour to occur in order to learn it. Homo sapiens can build shared belonging far more swiftly by using language to circulate the narrative ‘we belong here’.*

  Narratives not only tell us about belonging, they tell us what we ought to do – they give us the norms of our group. We learn these as children, along with the incentive of esteem we get for complying with them. When we internalize these norms as our own values, by complying we also get self-respect. Breaching a norm costs esteem; as we saw, when people behave like that they come to regret it. Some of our values are pre-linguistic: a group does not need language to evolve the instinct that parents care for their children. But the reciprocal obligations over large groups require co-ordination sufficiently complex to need narratives, and hence language.*

  Narratives have a third function: we learn how our world works through stories that link actions to outcomes. Our actions become purposive. Experiments show that we rely more on stories than on direct observation or tuition. By joining them up into a causal chain, actions that are not in our immediate self-interest may then look rational, creating enlightened self-interest. At its best, this expands our knowledge. At its worst, it creates a rupture between reality and what we believe – narratives as ‘fake news’.15 True or false, stories are powerful. In their devastating analysis of the financial crisis, two Nobel Laureates, George Akerlof and Robert Shiller, conclude that ‘stories no longer merely explain the facts, they are the facts’.16 What is true of financial crises turns out also to apply to the outbreak of mass violence. New research finds that the best way of predicting such outbreaks is to monitor the narratives circulating in the media.17

  The three types of narrative – belonging, obligation and causality – fit together to forge a web of reciprocal obligations. Our narratives of obligation instil fairness and loyalty to tell us why we ought to meet those that are reciprocal. Our narratives of shared belonging tell us who is taking part: reciprocal obligations apply only over a defined group of people who accept them. Our narratives of causality tell us why the action we are obliged to take is purposive. In combination, they are a belief system, changing our behaviour. Belief systems can turn the hell of anarchy into community; from ‘nasty, brutish and short’ into ‘flourishing’. Narratives are unique to Homo sapiens: we are not just apes.

  People in the same network will hear the same narratives, and have the common knowledge that they all have heard them. Within a network, specific narratives of belonging, obligation and causality will tend to fit harmoniously. Those that are potentially disruptive may be kept out of circulation by a taboo, or squeezed out by being discredited.18 Ideas get shuffled around so that they reinforce each other. Together, they link a shared identity to a goal and a proposition of how to reach it. ‘The faithful’ seek ‘paradise’ by ‘praying often’; or ‘Oxford professors’ aspire to ‘be a great university’ by ‘paying attention to teaching’.19

  Belief systems can have some horrible consequences that are most apparent in nationalism, something I will tackle in the next chapter. But they also have an invaluable upside: the move from the selfishness of economic man to the obligation-driven person who recognizes herself as part of a ‘we’, and a community in which people view each other not with fear or indifference, but with a presumption of mutual regard. A world filled
only by economic man would not be the triumphantly functional paradise envisaged by simple economics textbooks, where selfishness is apparently all that is needed. Those textbooks presuppose a society in which rules have already been agreed and are respected. ECON 101 starts where SOC PSY 999 and POL SCI 999 finish. Economists are belatedly recognizing this: the pioneers have been George Akerlof and his co-author Rachel Kranton.20 But as it catches up, economics also brings some useful insights.

  One such recent insight, with huge implications, concerns the evolution of ethical norms. It comes from Tim Besley, who takes his inspiration from biology: norms, like genes, get transmitted from parents to children.21 But the process looks very different. Tim starts from an imagined society in which some people hold one norm, and others a different one. When people choose marriage partners they tend to hook up with those who share their norms, but Cupid occasionally messes up and the children grow up with parents whose norms differ. Whose norms do they adopt? Tim postulates a simple process that is an instance of ideas being shuffled around so as to avoid the mental stress of an awkward fit: children will tend to pick up the ideas of the happier parent. As to which parent is the happier, in a political system in which the majority gets its way, it tends to be the one whose ideas are the more widespread.22 From this, two remarkable punchlines follow.

  In natural selection, if an island has white cliffs, the birds that live on it will evolve to become white, no matter what range of colours they have when they arrive from other islands. An organism evolves to fit a habitat. In contrast, norms can evolve to be very different even in two identical habitats, driven by small initial differences in their incidence. The environment is the population, and people evolve to fit each other.* Where a society starts determines where it ends up, with initial differences being amplified. This clearly corresponds with the reality we observe in the world: different societies have very different prevailing norms, each of which is persistent in its own society. But it is the second punchline that is the killer. In natural selection, the population ends up with those characteristics that are ‘best fitted’ to the habitat. Given the white cliffs, birds do better by being white. But with norms there is absolutely no such presumption. They can end up being awful for everyone, despite being good for each individual, given the norms held by everyone else. To see how bizarre this is relative to natural selection, it is equivalent to all birds evolving to be blue because most birds were initially blue, even though, against the white cliffs, they are all more easily eaten by predators.* In combination, the two punchlines imply that a network of people may well end up in some stable configuration of norms that is nevertheless dysfunctional. It is stable (i.e. it doesn’t undergo further change) just because each person is trapped by the norms held by everyone else.

  These results have a potent implication: conservative political philosophy cannot be entirely right. Conservative philosophers revere the accumulated institutions of a society as encapsulating the wisdom of experience. But the institutions may have formalized norms that are highly dysfunctional. But this does not license the rule of reason: motivated reasoning can lead to disaster.

  THE STRATEGIC USE OF NORMS IN ORGANIZATIONS

  For the past few thousand years, most of us have not lived in small bands of foragers. Modern life is only materially possible because people work together in large organizations where we can reap the efficiencies of scale and specialization.

  Three types of organization dominate our lives, each best suited for a different range of activities. The smallest, yet most fundamental, is the family: 86 per cent of Europeans share a household with others, and families are the crucible for most children. Although families are the norm, some ideologies are hostile to them. The socialist kibbutzim completely abolished them; communist Romania similarly detached many thousands of children from their parents, rearing them collectively. Both Stalinist Marxism and the leaders of fundamentalist sects encourage children to denounce their parents. Nor, as we will see, is capitalism currently helping families: in swathes of society families are disintegrating. Yet families dominate child-rearing for good reason. Nowhere has any alternative way of raising children proved successful.

  When people work, they are usually organized into firms: scale is essential for modern levels of productivity. In the USA 94 per cent of people work in a group, and in Britain 86 per cent.* As with families, some ideologies are hostile to companies. Old romantics advocate a return to a society of artisans, peasants and communes. New romantics hyperventilate about the new e-platforms such as Amazon, Airbnb, Uber, and eBay that enable people to transact with each other directly. But Amazon and Uber have themselves become huge employers. In African societies most people work solo, as artisans or smallholders. It has its virtues, but in consequence productivity is chronically low, and so people are achingly poor. We need modern firms, and so do Africans: Africa is not only the least prosperous region, it is the least happy region.23

  At the grandest level, many activities, such as regulation, the provision of public goods and services, and the redistribution of income, are best organized by the state. Here the numbers are even more dramatic: all prosperous societies are organized into states, and all stateless societies are extremely impoverished.* Again, some ideologies are hostile to the state. Marxists, who in practice imposed the most state-centric organization of society ever attempted, have a very different ostensible goal: the state is supposed to ‘wither away’. But the anti-state ideology currently most influential is that of the Libertarians of Silicon Valley. According to them, bitcoin will supplant the state provision of money as users walk away from official currencies. The supermen who own the new e-utilities will each individually determine how best they are used, ignoring or defeating state-imposed regulation. Globally enabled person-to-person connectivity will supplant the spatially bounded society of the nation state. ‘Governments of the Industrial World, you weary giants of flesh and steel, leave us alone.’ Liberated from government, we will all blend into one gigantic whole: ‘privacy is no longer a social norm’.24 The outcome will be both morally and practically superior. Alas, I fear not.

  The Silicon Valley titans who have connected the world imagine that in doing so they are ushering in a global society that unites around their own Libertarian values. This is highly unlikely. The new technologies of person-to-person connectivity are displacing the networked groups that were driven by the chance of shared location, whether a local community or a nation. Membership of the new e-networked groups is by choice not chance: people prefer to network with others who share their views within ‘echo chambers’.25 They embody the process by which narratives generate our beliefs, increasingly detached from sharing the place we live in. Yet our political units are still defined by where we live. Our votes are counted place-by-place, and the public services and policies arising from our politics are provided and applied place-by-place. So, due to digital connectivity, the same process that previously produced wide variations in norms between polities is now producing wide variations within them. The ideas within our polities are becoming more polarized; the disagreements are becoming nastier; the hatreds that in earlier centuries pitched polity against polity are now pitching belief system against belief system within each polity. Hatreds between polities turned into mass organized violence. Hatreds within polities will have different consequences, but they could be grim.

  Families, firms and states are the essential arenas in which our lives are shaped. The quickest way of building them is as hierarchies in which those at the top issue commands to those lower down. While quick to build, they are seldom efficient to run: people only obey orders if commanders monitor what subordinates are doing. Gradually, many organizations learned that it was more effective to soften hierarchy, creating interdependent roles that had a clear sense of purpose, and giving people the autonomy and responsibility to perform them. The change from hierarchy run through power, to interdependence run through purpose, implies a corresponding change i
n leadership. Instead of being the commander-in-chief, the leader became the communicator-in-chief. Carrots and sticks evolved into narratives.

  In modern families, the parents are equals, and coax children into responsibilities. In firms and governments, hierarchies have radically flattened; for example, the Bank of England used to have six different dining rooms, a degree of differentiation now inconceivable. Leadership has not been abolished, but its role has changed. There is a good reason for the retention of leadership – the utopian alternatives invariably fall apart.

  The people at the top of organizations in families, firms and states are more powerful than those beneath them, but usually they have responsibilities that far exceed their powers. To meet their responsibilities, they need other people in the group to comply, but have only limited means of enforcement. In my role as father, I try to insist that Alex goes to sleep at night. But raw power is hard work and not very effective: Alex reads under the bedclothes. In all successful organizations, whether families, firms or states, leaders discover that they can radically increase compliance by creating a sense of obligation. Alex wants to stay awake and read, but if I can persuade him that he ought to go to sleep, the challenge of enforcement is reduced. As this happens, my power is transformed into authority. More grandly expressed, this is the construction of moral norms for strategic purposes. The crucial power of leaders is not that of command: it is that they are positioned at the hub of a network. They have the power to persuade.* That leaders are using morality strategically to shape our lives sounds sinister. Yet it is usually the opposite: it is the healthy process that has enabled modern societies to be better places than all previous societies. They could be even better.