Cooperation and Conflict

Or, why you should study economics generally and price theory specifically

If you ask economists for a definition of economics, they often give you a boring response. They say something like, “economics is the study of how societies allocate scarce resources.” It is amazing that this sort of description attracts even a single economics major.

The thing about this definition is that, in many classes, it is not even complete. Most economics courses — especially those taken by non-majors — study some variation of “how societies allocate scarce resources through cooperative exchange.” In other words, in many courses, economics is about markets and prices and issues related to markets and prices. However, these are only a subset of issues related to the allocation of scarce resources.

For example, suppose that I make a trip to the grocery store to get a gallon of milk when I finish writing this post. There are two ways that I can obtain a gallon of milk from the grocery store. One way is that I could walk back to the cooler where they store the milk, carry the milk to the front of the store, stop at a cash register, give money to the cashier, and obtain a receipt showing proof of the transfer of ownership of the milk from the grocery store to me. Alternatively, I could skip all of this nonsense and just walk out the front door with the milk.

Both of these options are ways to allocate resources. In each case, the milk was re-allocated from the grocery store to my refrigerator. In the first case, this was done peacefully through mutually beneficial exchange, a form of cooperation. In the second case, this was done through theft, which is a form of conflict.

Since economics is about the study of the allocation of scarce resources, it is not only about markets or this or that policy intervention within the market. Economics is also about allocating resources through conflict. The same tools apply. This is why economics branches out into so many different directions.

Consider the example that I just gave. Once we contrast a purchase with theft, there are a number of questions that immediately spring to mind. The milk moves from the grocery store to my refrigerator in either case. Yet, these are very different outcomes. Why?

Well, the property rights to that gallon of milk do not change hands in both scenarios. Thus, we need to ask, what are property rights? Who determines how property rights are defined? What, if any, limits are there to property rights? Who enforces those property rights? How does the enforcement of property rights influence my decision to stop at the cash register or simply walk out the front door? If the store knows that there is a chance that I could just walk out the front door, what actions is the store likely to take to prevent such a thing?

Furthermore, one might wonder why this is a big deal. Isn’t theft just a zero sum activity? Isn’t this just a transfer from the grocery store to me? What harm has really been done by a transfer?

Economics provides the toolkit to answer all of these questions. The tools that one uses to analyze market activity can just as easily be applied to analyze grocery store theft. For example, price theory teaches us that our optimal choice of consumption is associated with the same marginal utility per dollar of every good that we consume. If it wasn’t, we would not be optimizing. The same general principle applies to the issue of cooperation and conflict. If the choice is between cooperative behavior and conflict, then one should expect people to choose the level of cooperation and conflict such that the rate of return from cooperation is the same as the rate of return from conflict.

Price theory also teaches us about the relevant constraints. Thus, one should know that the time and resources used in conflict are time and resources that cannot be used in productive (cooperative) activity. Conflict then becomes a negative sum activity since it changes (perhaps) the distribution of resources, but reduces production.

These two results: (1) that people will equalize the rates of return from cooperation and conflict, and (2) that conflict is a negative sum activity imply that there is a role for societal institutions, or the “rules of the game” for society that are structured to reward productive activity and discourage conflict.

But what should these rules be and who gets to decide? This leads into issues of defining the rules of the game. What are property rights? Who decides the extent of property rights? Who enforces them? Who monitors the enforcer? How are these groups formed that enforce the rules? How do people make decisions in groups? What are the likely outcomes? What about when there is actual monetary or physical harm? How are those disputes settled? Who decides?

The lessons from price theory give us some basic answers with regards to cooperation and conflict, but also pose new questions. Those new questions have spawned entire fields of economics known as Law and Economics and Public Choice; fields that are fundamentally grounded in lessons from price theory. In fact, it should not be surprising to find that price theorists were some of the pioneers in these fields. People like Armen Alchian, Jack Hirshleifer, Harold Demsetz, Earl Thompson, James Buchanan, Gordon Tullock, Gary Becker, and others used the concepts and insights from price theory to address the issues I’ve just raised.

But this also points to something important. Economics is far more interesting than people might think. For example, there aren’t a lot of movies or television shows about markets or tax policy. Billions is about a hedge fund, you might say. However, the show is really about the guy who runs the hedge fund and the prosecutor who is out to get him. This is true of most of the media we consume. Television shows and movies are filled with crime, police officers, lawyers, superheroes, organized crime, and large-scale war. These are the things that people find interesting. These are things that hold their attention. And while it might not seem like it given the typical boring definition of economics, the field of economics has a lot to say about these things! In fact, I am tempted to quote Jack Hirshleifer by saying that the people who are doing good work studying these topics are “doing economics.”