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Exchange and Politics

The discussion of the prisoner's dilemma and the distinction between small groups and large groups suggests that economists are likely to have little to say about small-group situations. In fact, they have written very little, for example, about nomadic tribes or the interactions within the family. The realm of the economist has been large-group situations in which individuals interact with others who they do not know well or at all. In these situations, the assumption of self-interest seems to serve quite well even if it is not literally true. The area in which the analytical tools of economics have been most useful has been the area of exchange.

In small groups, the role of exchange is replaced with gift-giving. A member of a family who has no food will be given food by those who do. But gift-giving usually has strings attached. People who receive gifts are expected to reciprocate, to give back something in the future. This reciprocity helps bind small groups together.

Exchange does not bind people together in the same way. Two people exchange only when both benefit. Neither incurs a social obligation as a result. In fact, where social obligations exist, exchange may not work well. Most people are uncomfortable negotiating a purchase from or sale to a close friend.

Exchange allows for extremely complex interactions among strangers. When you use a pencil, for example, you benefit from efforts of many thousands of people who in some way contributed to getting that pencil to you. Wood had to be grown, cut, and shaped. Graphite had to be mined, transported, and processed. Iron had to be mined, refined, and molded. The paint and eraser each required their own processes. All of the many people involved are probably total strangers to you.

Most of economics is devoted to discussing exchange, but economists also spend time examining other topics. Of those other topics, the one that has drawn the most research is the study of government. However, the economic theory of government is less advanced than the theory of exchange for at least three reasons. First, specific individuals are often very important in government, and economics does not deal well with specific individuals. In monarchies and dictatorships, for example, the decisions of one individual may outweigh the decisions of all others. Economics seeks regularities in social life, and those regularities are more likely to occur when no one individual has appreciable effects on the group.

A second reason is that only fairly recently did economists realize that their analytical tools could be used to explain behavior in government. Economists usually assume that people are motivated by self-interest, but for many years they implicitly assumed that once the government employed a person, his motivations changed to unselfish and his knowledge became infinite. No economist ever stated this assumption; rather, this was a hidden assumption in discussing the role of the government. This assumption allowed economists to treat the government as a solution to problems. If, for example, the private market did not perform well, the government could remedy the problem. It was only in the 1960s and 1970s that economists fully realized that they had made what was for them a most unusual assumption about behavior. Some of the most interesting and informative research undertaken in the 1970s was that which asked what would one expect if one assumes that those who work for the government are in fact no different from the rest of us, and that they seek only their own self-interest. This research suggested that the government might often make a bad situation worse.

A third reason is that the assumption of self-interest may not work as well in politics as in exchange. Politicians can and do make use of people's small-group responses. For example, many people feel loyalty to nation, party, or political personality. This loyalty can alter behavior from what it would be if based only on self-interest. (It may be good that these other motives are important because, unlike in the market, there is no invisible hand at work in government to bring the common good from private interest.)

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Copyright Robert Schenk