Samuel Bowles introduces Kudunomics

Warning! Professor Bowles’s lecture was rich in economic jargon, and I’m not an economist. And it had an unusally high idea density. It’s quite possible that I missed large swaths of what he was saying and misinterpreted what he did say. If something here seems obviously wrong, please use the comments section to gently correct me.

Yochai Benkler introduces Samuel Bowles of the Santa Fe Institute as his “intellectual hero” referencing his ability to apply a completely different set of intellectual tools to problems, switching tactics each decade. The target of Professor Bowles’s thought is “the weightless economy”, and his talk is titled, “Kudunomics – Property rights for the information-based economy”.

The big idea behind Bowles’s recent research is that some of the fundamental laws of economics – notably Adam Smith’s invisible hand, may not work in the “weightless economy – the economy that can’t be weighed, fenced, or conveniently contracted for.” Rather than being based on material wealth, knowledge-based economies are based on embodied and relational wealth. In these economies, individual-posession based property rights are difficult to enforce, and socially harmful to enforce.

Bowles suggests that we may gain some insight about the evolution of institutions under these conditions by studying the reverse transition: by studying the transition from the late Plioscene forager economy, where weath was difficult to own, to agrarian and industrial economies, based on ownership. We can study this by “running history backwards” with an agent-based model of the weightless economy. We understand the forager economy fairly well due to ethnographic research, and we might gain insights about the governance of this emergent weightless economy from studying governance dynamics in forager economies.

Bowles offers a model of wealth where the wealth of a person is the sum of network wealth, embodied wealth and material wealth. He puts exponential weights on these types of wealth in a Cobb-Douglas production function. He plots different types of economies in a triangular graph, showing their wealth in terms of these three different dynamics – material, network and embodied wealth. Recent economies based on the domestication of plants and animals concentrate in the material corner, while older economies cluster around the network wealth – embodied wealth axis.

Network wealth is the contribution made by your social connections to your well-being. This could be measured by your number of connections, or by your centrality in different networks. A simple way to think about this is the number of people who will share food with you. Embodied wealth is a combination of what you know and how strong you are. It measures factors like hunting prowess and grip strength. Bowles asserts that we’re moving from a history where network and embodied wealth mattered more that material wealth – we briefly (for about eight thousand years) moved into a world of embodied wealth, and now we’re moving back.

Smith’s invisible hand theorem suggests that “good fences make good neighbors”. Smith’s complete markets have certain characteristics:

– The effects of the actions of economic actors take the form of contractual exchanges.
– The cost of contract enforcement is low and handled by a third party.
– Increasing returns to scale are absent and small. This is important because it maintains competition.

Under these assumptions, goods will be priced at their marginal cost, which will equal their true scarcity. Price moves towards marginal cost, which also equals social marginal cost. This isn’t just false in a weighless economy, Bowles tells us – it’s proveably false.

In economies of grain and steel, you could weigh, fence and contract. To find examples of these classic Adam Smith markets, you actually need to go to the developing world and look at grain markets, in which homogenous goods are traded in competition by using simple forms of measurability, weighing grains out in tin cans.

These markets aren’t a good analogy for contemporary economies. Instead, we’re more likely to see economies where first copy costs are extremely high and marginal costs are low. The first copy of Windows 97 cost $50 million. The second copy cost $3… and it can be copied for even less. Generic drugs sell for about half the price of brand name drugs. For some drugs, the ratio is closer to 10 to 1. When copying costs are low, enforcement of property rights is difficult… and ultimately irrational. Intellectual property rights are a way of forcing a violation of the invisible hand theorem. You allow someone to charge $20 for a CD whose marginal cost is $0.85.

The market structure of the economy of grain and steel exhibited a mixture of competition – approximating Smith’s ideal – and stable oligopoly: the emergence of a small set of succesful, competing firms. Network externalities – the economies of scale on the side of demand – tend to lead towards a winner take all dynamic. Take the decisions inherent in deciding to speak a second language – if lots of other people learn how to speak Chinese, there’s a strong incentive for you to learn Chinese.

In the weighless economy, positive feedbacks and winner-take-all dynamics are very important. Those who get ahead will tend to stay ahead. They don’t need to be the best, just first and good enough. This dynamic tends to generate significant inequality – whether we’re considering pop stars or dentists. Private firms can’t confirm to the price equals marginal cost theory – marginal costs are much less than average costs because of the increased first copy costs. And property rights become both ambiguous and difficult to enforce.

In other words, the invisible hand isn’t working in a weightless economy. It might be time to look back to the Pleistocene.

Bowles has hunted with the Hadza people in Tanzania – he reassures us that he didn’t actually kill anything. Actually, that’s pretty common. The Hadza hunt kudu, an animal which contains about 160,000 calories. These people have no refrigeration, so it’s hard to eat your kudu over a month. And even very good hunters are lucky to kill a kudu once a month – there’s about a 3% success rate for a hunt. So when you get a kudzu, it needs to be widely shared. Something like 2/3rd of the calories are shared outside the nuclear family – Bowles watched roughly 60 people join a small set of hunters for a feast on the kudu they harvested.

The culture of the foraging band emphasizes generosity and modesty. There are norms of sharing. You depricate what you catch, describing it as “not as big as a mouse”, or “not even worth cooking”, even when you’ve killed a large animal. In the Ache people of Eastern Paraguay, hunters are prohibited from eating their own catch. There’s complex sanctioning of individually assertive behavior, particularly those that disturb or disrupt cooperation and group stability. This makes sense – if hunters can’t expect that they’ll be fed by other hunters – particularly by a hunter who suddenly develops a taste for eating his own catch – the society collapses rapidly.

Mobile foraging bands and accompanying collectivist and egalitarian norms were displaced by a society based around property rights, made possible through the domestication of crops and livestock. Initially, this domestication probably reduced individual human productivity… but it increased land productivity. This led to an idea that you should define a set of resource as yours and invest in those resources. This idea preceded states – they were enforced by interpersonal conflict, not by third parties – but the system became more efficient in a system with strong state actors.

As Smith speculated in “The Wealth of Nations”, the property rights revolution contributed to the wealth of states. It emphasized unambiguous ownership of land and resources. But now the most important resources – information and ideas – are difficult to own, risky to pursue, and wasteful if not shared. Strong property rights might not be the best strategy for allocating resources in this environment.

Bowles references Jared Diamond’s “Guns, Germs and Steel”, where Diamond explores the challenges of domesticating individual plant and animal species. “Is a song or an application more like a cow or like a kudzu – something that will simply cause trouble if you try to tie it up near your house?” This question leads to the phrase “kudunomics”, which has a nice resonance with “kudonomics”, reflecting the fact that the economies of hunter-gatherer societies were reputation economies.

Information, suggests Kenneth Arrow, is a fugitive resource. There are contradictions between private property and information acquisition and retention. In this sense, Arrow is replicating Marx, and his recognition that “information was what allowed us to appropriate nature.”

Studying changes in institutions is hard. In history, we rarely encounter changes as large as the French revolution or the end of Chinese foot binding. Instead, we’d do better to build agent-based simulations. Bowles and his group at Santa Fe are building Markov process models to try to understand the dynamics of this hunter/gatherer-pastoralist transition. It’s a hard problem to solve as a system of equations. There are events outside the model, and a complex interaction of group and individual selection processes. The feedback of a society on individual decisions is non-lineral. Because we can’t easily solve the equations, we build models and watch them instead.

Watching these models, we discover that they’ve got multiple equilibria. In economic terms, what’s goint on is an equilibrium selection process, watching societies transition between multiple equilibria in a system.

Bowles’s model (which you can download and run on a Window machine) looks at three different strategies for coping in an economy:

– Bourgeois – if you’re in posession of an item, defend it
– Share – Share and don’t punish those who don’t share
– Civic – share and jointly punish those who don’t share

The civic strategy succeeds if there are lots of civic members in a group. If there are very few, they tend to fail. This is one of the dynamics which leads to multiple equilibria in a system. The bourgeois strategy is stable (an asymptotically stable symmetric Nash equilibrium) if property rights are well defined. But if property rights are ill-defined, the bourgeois stragegy is no longer evolutionarily stable.

The simulation introduces costs for conflicts between “firms”, groups of individuals which share a strategy. Because there’s a cost to conflict, firms that resolve conflicts without much expenditure of energy are going to outlast those that spend resources on conflict. Individuals within these firms are paired with cultural models drawn from a group of possibilities, conveye by “conformist transmission”. Individuals might simply draw from neighbors, or might compare how others are doing and change strategy. Losing groups are not eliminated – instead, they lose resources and tend to adopt the cultural model of the winning group. Individuals who are in losing firms will have a strong tendency to adopt the strategy of winning firms.

In these simulations, some fraction of the time, a bourgeois player will challenge someone over a resource he doesn’t own – i.e., he’ll attempt to steal it. Because of this, if there are very few bourgeois, civics will do well, and vice versa.

It turns out that simulations where all actors are bourgeois are stable. The two strategies where sharing is involved are equivalent if there are no bourgeois actors. A smiluation might drift between sharing and civic strategies without outside influences. As a result, All C (civic) is not a stable equilibrium – it’s subject to drift. And all B (bourgeois) is not stable if property rights are not well defined.

With Jung-Kyoo Choi, Bowles built models with 25 firms of 20 individuals. They were randomly seeded with S,B,C actors and run with different levels of property rights. The property rights are varied by changing how often bourgeois actors challenge ownership incorrectly – to simulate high ambiguity in property rights, bourgeois actors challenge property rights incorrectly quite often. Actors in the simulation go through a cultural learning process – someone in a minority could choose a model in the majority.

If you run the simulation with no ambiguity in property rights, there is rapid consolidation around B as a strategy. We watch a live simulation, and Bowles points out that “the ‘equilibrium’ is actually pretty volatile – we watch societies cluster around b-heavy strategies. As ambiguity increases, we see an emergence of strategies that orbit between the civic and shared poles – societies appear to go through rapid revolutions, shifting from one set of societal rules to another. An all-shared equilibrium is more efficient because there’s no cost for enforcement, but it’s not a stable state, as previously discussed.

Bowles points out that the evolutionary success of the bourgeois equilibrium depends on property rights being unambiguous – he shows a curve of experimental data where stability tracks ambiguity in a cubic relationship.

As we consider evolution of institutions in the weightless economy, we know of at least three forms of economic governance: communities, states and markets. Markets allocate resources well in conditions where the individual hand applies. States have superior powers of enforcement, which allow for powerful civic strategies. And as Elinor Ostrom has pointed out, communities can handle ambiguity of property rights, but tend to fail where inequalities between members are large.

Hayek’s work questioned the efficiency of central planning versus that of the market. At the center of that question is information – in societies where information is easily available, central planning might be very efficient. If it’s harder to acquire information, markets can act to aggregate that information. To govern in these systems, you can either adjust prices to get an equilibrium or collect sufficient information to engage in efficient central planning. Ostrom suggests that we need different mechanisms to govern by communities.

Bowles closes by reminding us that societies need to support high levels of information creation. We need incentives to provide these resources in the first place. But there’s a paradox: Why do hunters hunt if they have to give it away? In the Ache society, hunters aren’t allowed any of what they catch – they could spend their hunting time harvesting fruit and tubers. Why don’t they? This question has important implications for the creation of information resources in a weightless economy.

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David Weinberger has a good accounting of the questions and answers that followed Professor Bowles’s talk – I largely missed the Q&A, desperately trying to catch up with the substance of the talk!