The Invisible Handshake

A wealth of research evidence points to the importance of ''the invisible handshake'', according to Professors Samuel Bowles and Herbert Gintis, writing in the latest Economic Journal. Mutually beneficial exchanges are often underwritten not simply by contracts and the courts, but by trust, the adherence to a work ethic or other norms, and the willingness to chastise, shun or otherwise punish those who violate norms.

The authors note that if there is a single lesson of the US Congressional investigation into the failure of the many autonomous US intelligence and police services to anticipate the attack on the World Trade Center, it is not that they did not get relevant information. It is that they did not share it. What was lacking, said the Baltimore Commissioner of Police was co-operation: ''It''s not going to be done by databases, its got to be done by us talking
to each other, sitting in a room over coffee, that''s how the work gets done in law enforcement.''

Co-operation is increasingly seen as the missing ingredient in the recipe for good government. Until recently, the key was thought to be some combination of contracts – market exchange – and command – government fiat. Both fiats and contracts are designed to harness individual self interest to socially beneficial ends. In this, they reflect the philosopher David Hume''s advice of 250 years ago: ''In designing any system of government… every man ought to be supposed to be a knave, and to have no other end, in all of his actions, than his private interest.''

But the heroism of so many in the Twin Towers suggests otherwise: many, perhaps even most people are sometimes motivated by duty, civic responsibility or compassion. People can be a lot better than the textbook Economic Man. And a lot worse: the terrorists who flew the planes, no less than the firemen who rushed into the burning towers, had other ends than their ''private interest''.

Empowering the civic-minded, the trustworthy, and the generous, while thwarting the antisocial thus joins Hume''s objective of harnessing selfish ends to social purposes. Recent experiments and field research show that this is not as pie-in-the-sky as it sounds. In some Chicago neighbourhoods, for example, residents speak sternly to youngsters skipping school, creating a disturbance or decorating walls with graffiti. They are also willing to intervene to maintain neighbourhood amenities such as a local firehouse threatened with budget cuts, all examples of ''collective efficacy''. In other neighbourhoods, residents adopt a more hands-off approach. Where neighbours express a high level of collective efficacy, violent crime is markedly lower.

Laboratory experiments in which subjects play sometimes for substantial sums of money provide clues as to how Chicago''s collective efficacy might work. In one experiment, participants have the opportunity to contribute to a common project that benefits all or to ''free-ride'' on others'' contributions. They typically contribute substantial amounts early in the game, but sharply reduce their contributions later on, as they notice that some others are free-riding. But when they are given the opportunity to give up some of their own winnings in order to punish the free-riders, they do so avidly. The result is that even those predisposed to selfish behaviour shape up, and high levels of contribution are sustained over the entire duration of the game.

Like Chicago''s neighbourhoods, producer co-operatives often work when monitoring and social pressure by peers is effective. The Toyama Bay fishing co-operatives in Japan have to cope with variable catches and the risk of losses to their equipment. One co-op, which has been highly successful for 35 years, consists of the crews and skippers of seven shrimp boats. The boats share income and costs, repair damaged nets in common, and pool information about the changing location and availability of shrimp. These activities allow its boats to fish in much riskier and higher return locations. And the transparency of the sharing process prevents opportunistic cheating. As a result, the average incomes of the fishermen are higher.

The experiments and field studies point to the importance of what Brookings Institution economist Arthur Okun called ''the invisible handshake''. Two decades ago, economists expressed disbelief that motives of trust, a work ethic or other norms – foreign to their Economic Man – were sufficiently common to provide a basis for institutional design or public policy. But this year''s Nobel Prize in economics went to two experimentalists – Daniel Kahneman and Vernon Smith – who showed that motives of reciprocity and fairness are the norm, not the exception, at least among the US subjects they studied. Similar studies in Europe and Asia, and even among hunter-gatherers, herders and others in pre-modern societies have shown the same.

Thus, Bowles and Gintis conclude, we need to rewrite Hume: good policies and constitutions are those that support socially valued outcomes by harnessing both selfish and unselfish motives to socially valued ends, and by evoking, cultivating and empowering public-spirited motives. ''We suspect that policy-makers would have been more successful with this mantra – rather than the “citizen as knave” – when they implemented new economic institutions for the ex-Communist nations and when they designed the US war on drugs, to cite just two examples. The revised dictum holds with special force, if we are right, for any attempt to contain terrorism and political violence.''

''Social Capital and Community Governance'' by Samuel Bowles and Herbert Gintis is published in the November 2002 issue of the Economic Journal. The authors are at the Santa Fe Institute and University of Massachusetts.