Markets are, in general, an invaluable tool for promoting human well-being. It’s very easy to forget that whenever two people enter into an economic … - Joseph Heath

One of my favorite Paul Krugman papers is called “Ricardo’s difficult idea” — on why people have such a hard time understanding the concept of “comparative advantage.” Although the situation is not quite as bad, I’ve been struck recently by how much difficulty many people have trying to understand the concept of a “collective action problem.” Although that idea has a bit more history to it, I don’t think it’s too much of a distortion of the record to call this “Hobbes’s difficult idea.”

Perhaps the most revealing experimental “anomaly” came from a study at Stanford University, where one group of subjects was instructed to play a public goods game called “the community game,” and another asked to play one called “the Wall Street game.” The two problems were in fact identical, but the rates of cooperation in “the community game” were twice as high as in “the Wall Street game.” (Cooperation in the former was around the “normal” rate of two-thirds; in the latter it was abnormally low, at about one-third.) Another version of this study, carried out among Israeli air force trainers, showed approximately the same effect. In that study, however, instructors were asked to predict how their trainees (whom they knew quite well) would behave. Interestingly, not only were the instructors wrong (they did no better than chance at predicting the behavior of their trainees), but they also made the mistake of ignoring the effect that the name of the game might have upon rates of cooperation and defection.
In this respect, the trainers fell victim to the same fallacy that has plagued generations of economists. It is, in fact, a general flaw in our everyday social reasoning, which social psychologists refer to as an extrinsic incentive bias. Simply put, people have a tendency to overestimate the importance of external incentives in motivating human conduct. In particular, we have a natural tendency to overestimate the influence of power, money, and status in motivating other people’s decisions.

From John Locke in the seventeenth century to Robert Nozick in the twentieth, libertarians have appealed to individual enforcement as the frontline mechanism for the defense of individual rights. They have failed to realize that presupposing punishment is as good as presupposing universal brotherly love. While positing either one can solve a lot of social-engineering problems, neither can be the result of self-interest alone. As a result, there is no such thing as “spontaneous order” in human society. The invisible hand of the market cannot do all the work; some type of conscious guidance is also required, to get the invisible hand going in the first place.