Perfect Cooperation
By: Ndsu Pcpe
Tags: Trade, Capitalism, Blog, Economics, Cooperation

By Jeremy Jackson

You may have learned in your introductory economics course that supply and demand are the results of perfect competition in the marketplace. We frequently discuss economics in terms of competition or lack thereof, but this rhetoric is misleading. Economics is not a discipline primarily concerned with competition; it’s a discipline interested in the science of cooperation.

We see this in the classic exposition of the economic marvel of the pencil in Leonard E. Read’s essay “I, Pencil.” [If you prefer to watch a video, I highly recommend the animated short film “I, Pencil: The Movie” or Milton Friedman’s excellent “Lessons of the Pencil.”]

This classic example shows the importance of market cooperation. People are better off when they are able to benefit from the specialization of labor and trade. This is what allows me to focus my energies on teaching economics, conducting economic research and occasional blog writing. I’m not good at farming, ranching, making clothes, designing automobiles or making coffee grounds. Yet, every day I have food to eat, clothes to wear, a car to drive and a fresh cup of coffee. Through the amazing cooperation made possible by the free market, I am able to transform my labor as an economics professor into the many needs and wants that I cannot produce for myself.

This is how a prosperous, flourishing society is built. It is not the ruthless competition of the marketplace that leads to wealth; it’s the cooperative and voluntary interactions among individuals providing something of value that others are willing to exchange for. Each market exchange is an act of cooperation that makes all parties better off.

Humans are incredibly cooperative creatures. Even amidst situations where cooperation seems impossible (e.g. dictator game, trust game, and ultimatum game), humans find ways to cooperate and trust one another for mutual benefit. This is one of the fundamental truths that Nobel laureate Vernon Smith brought to light with his experimental economics. He explores this idea in-depth in his recent book, Humanomics, with Bart Wilson.

This truth is also foundational to the research of NDSU alumnus and noted economist Mancur Olson. In his seminal works, The Logic of Collective Action (1965) and The Rise and Decline of Nations (1982), Olson describes the conditions necessary for groups of individuals to join together to accomplish a shared objective.

Olson’s work showed that it was easier for small groups to maintain cooperation. He also demonstrated the potential harm this cooperation could unleash on the economy. Small groups, for which the benefit of cooperation is highly concentrated, extract benefits from society by lobbying for favoritism as a special interest group. Even though this behavior undermines the economic growth and prosperity of a country, it persists because the costs are diffuse for the larger group (society), which doesn’t have the ability to organize in opposition. The cooperation exhibited by the small group leads to what Olson referred to as the “exploitation of the great by the small.”

This is just one of the many ways economists are interested in human activity and decision-making. Economics, at a basic level, is about uncovering the conditions necessary for and analyzing the effects of “perfect” cooperation.