Does Capitalism Kill Cooperation?

Evidence that innovation and growth isn’t based on economic self-interest.

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By Peter Turchin

One of the chief reasons I became an advocate of the Cultural Multilevel Selection (CMLS) theory is that it wonderfully clarifies the relationship between competition and cooperation.

  • Competition between groups (up to whole societies) fosters within-group cooperation.
  • Competition within groups (between their members) destroys cooperation.

If you wanted a two-sentence summary of Ultrasociety this would be it.

I’ve been applying these principles in my research on the evolution of complex societies (and a lot more is to come, now that the Seshat Databank have come of age and is generating a tremendous volume of empirical results—which you will see in a year or two, as academic publication mill-stones grind sooo slowly).

But I have also felt that the CMLS theory tells us a lot not only about political organizations like the states, but also about economic organizations—firms competing in markets. This goes very much against the grain, especially as far as economists are concerned. Milton Friedman, of course, always argued that economic agents should strictly follow their material interests; there is no place for “extra-rational motives” in business. Most economists today feel the same way, although few are willing to state it as boldly as Friedman did.

Thus, it was very refreshing to receive two years ago an email from Branko Milanovic, an economist whom I greatly admire, in which he was willing to go on record and state this position very forcefully (I published Branko’s letter as a guest blog on Cliodynamica). I also invited two economist friends to comment: Bob Frank and Herb Gintis, as well as writing a response myself. The whole exchange was recently re-published by Evonomics and generated a lot of discussion.

More recently Branko wrote a review of Kate Raworth’s new book Doughnut Economics. A central question in the ensuing debate between him and Kate (see it here) is the same we debated two years ago (see also a good summary on Vulgar Economics). Here’s what Branko wrote about the “human nature under hyper-commercialized global capitalism”:

Here I respectfully decline to be moved by the results of any of the “games” that Kate cites and that are supposed to reveal human nature. These games are indeed games; they are not the way people behave in real life. Games are good in generating publishable papers but they tell us nothing about how the same people would (or do) behave in real life.

Two years ago I wouldn’t know how to respond to Branko on this point, but fortunately recently I finished reading a remarkable book, which provides me all the ammunition I need.

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Before discussing it, let’s define the question more explicitly. I agree that most people much of the time, and some people all of the time, are motivated by very “rational” calculations. When I decide which supermarket I am going to go for food, I try to minimize the amount of money I will pay and the amount of time I will spend, while maximizing produce quality and selection. It’s a very straightforward optimization problem.

But capitalism is not just about buying and selling things—people have been doing commerce for millennia before capitalism. Surely the amazing capacity of capitalism to transform knowledge into innovation, and innovation into economic growth is one of the central of its attributes? So let’s talk about such successful innovation hotspots, as the Silicon Valley. What are the motivations driving successful entrepreneurs within such hotspots?

If you want to find out the answers to these questions, read The Rainforest: The Secret to Building the Next Silicon Valley by Victor Hwang and Greg Horowitt. Now, Hwang and Horowitt are not scientists, and their book is not a rigorous scientific study. But they spent decades bringing together venture capitalists and entrepreneurs, both in their native California and all over the globe—“Japan, Taiwan, Scandinavia, and New Zealand, … Mexico, Egypt, Kazakhstan, Colombia, Saudi Arabia, and the Palestinian Territories.” Given their enormous experience, the empirical base, with which they operate in the book, transcends the dismissive academic characterization as “anecdotal.”

A central theme that recurs throughout the book is that successful entrepreneurs, and the successful innovation systems in which they operate, such as the Silicon Valley or Route 128 in Massachusetts, are the antithesis of the rational businessperson postulated by Branko, one who is solely motivated by money. In fact, “Rainforests [their term for successful innovation systems] depend on people not behaving like rational actors.” “For Rainforests to be sustainable, greed must be restrained.” “Predatory venture capitalists might win a few in the short run, but they do not last long in the business and are unable to build lasting firms.”

The evolutionary logic of entrepreneurship, according to Hwang and Horowitt, is precisely the opposite of that posited by Branko. Predatory, super-competitive individuals and firms are eliminated by natural selection, and only cooperative ones survive. They write:

Extra-rational motivations—those that transcend the classical divide between rational and irrational—are not normally considered critical drivers of economic value-creation. …  These motivations include the thrill of competition, human altruism, a thirst for adventure, a joy of discovery and creativity, a concern for future generations, and a desire for meaning in one’s life, among many others. Our work over the years has led us to conclude that these types of motivations are not just “nice to have.” They are, in fact, “must have” building blocks of the Rainforest.

Many successful entrepreneurs (think Steve Jobs or Elon Musk) clearly were not motivated solely by money. Naturally, they did not give their billions away, and for some other very successful innovators, perhaps, all they wanted was to become filthy rich. But the point that Branko makes, that capitalism “is a system really built on the best use of our vices, including greed” is clearly wrong.

This is why when governments and corporations try to incentivize innovation by focusing on financial mechanisms, the overall result is failure. By the end of the book, Hwang and Horowitt boil down their own recommendations as to what makes successful “Rainforests” thrive. They are four.

First, diversity, which brings people with very different knowledge and skills together, such as a scientist, a venture capitalist, an engineer, a sales specialist, and an administrator (a CEO).

Second, extra-rational motivations, because self-regarding rational actors are simply unable to cooperate to launch a successful innovation enterprise.

Third, social trust, because successful cooperation is the only way to beat the terrible odds against a successful innovation startup, and cooperation requires trust.

Fourth, a set of social norms that regulate the behavior of various cooperating agents, and willingness both to follow them and to enforce these rules by various sanctions.

In other words, Hwang and Horowitt describe a system that uses precisely the same components to bring about cooperation that have been studied in other settings (a foraging group, a military troop, a religious sect, and a state), and in the abstract, by cultural evolutionists.

The Rainforest, then, provides ample empirical material to reject the theory that economic growth, which is based on innovation, is moved by self-interested rational agents. But—and it was one of the real eye-openers for me—it also explains why this is so.

Originally published at Peter Turchin’s Blog.

2019 March 26

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