Capitalist Economies, Commodification and Cooperation

Branko Milanovic has an interesting post on the topic of commodification and the nature of economic relations in capitalist economies. Milanovic argues that commodification (by which he roughly means the extension of market relations, i.e. price-governed relations, to social activities that were historically outside the realm of markets) works against the development of cooperative behavior based on “repeated games”. Milanovic’s main point is that while non-altruistic cooperative behavior may indeed be rational and optimal when interactions are repeated with a sufficiently high probability, the commodification process makes economic relations more anonymous and ephemeral:

Commodification of what was hitherto a non-commercial resource makes each of us do many jobs and even, as in the renting of apartments, capitalists. But saying that I work many jobs is the same thing as saying that workers do not hold durably individual jobs and that the labor market is fully “flexible” with people getting in and out of jobs at a very high rate. Thus workers indeed become, from the point of view of the employer, fully interchangeable “agents”. Each of then stays in a job a few weeks or months: everyone is equally good or bad as everyone else. We are indeed coming close to the dream world of neoclassical economics where individuals, with their true characteristics, no longer exists because they have been replaced by “agents”.

The problem with this kind of commodification and flexibilization is that it undermines human relations and trust that are needed for the smooth functioning of an economy. When there are repeated games we try to establish relationships of trust with people with whom we interact. But if we move from one place to another with high frequency, change jobs every couple of weeks, and everybody else does the same, then there are no repeated games because we do not interact with the same people. If there are no repeated games, our behavior adjusts to expecting to play just a single game, a single interaction. And this new behavior is very different.

This claim can be seen as a variant of Karl Polanyi’s old “disembeddedness thesis” according to which commodification, through the institutionalization of “fictitious commodities” (land, money, labor), has led to a separation between economic relations and the sociocultural institutions in which they were historically embedded. As it is well-known, Polanyi considered this as the major cause for the rise of totalitarianism in the 20^th century. Though less dramatic, Milanovic’s claim similarly points out that by changing the structure of social relations, commodification leads to less cooperative behavior, especially because it creates opportunity costs that previously do not exist and favors anonymity. Is that completely true? There are two separate issues here according to me: the “monetization” of social relations and the “anonymization” of social relations. Regarding the former, it seems now well established that the introduction of (monetary) opportunity costs may change people’s behavior and their underlying preferences. This is the so-called “crowding-out effects” well-documented by behavioral economists and others. Basically, the fact that opportunity costs can be measured in monetary unit favors economic behaviors based on “extrinsic preferences” (i.e. favoring maximization of monetary gains) and weakens “intrinsic preferences” related, for instance, to a sense of civic duty. It is unclear to what extent this crowding-out effect has had a cultural impact in Western societies from a macrosocial perspective but at a more micro level, the effect seems hard to discard.

I am less convinced regarding the “anonymization thesis”. It is indeed quite usual in sociology and in economics to characterize market relations as being anonymous and ephemeral. This is contrasted with family and other kinds of “communitarian” relations that are assumed to be more personal and durable. To some extent, this is probably the case and it would be absurd to deny that there is no difference between giving the kids some money for them to buy some meal to an anonymous employee and cooking the meal myself. Now, the picture of the anonymous and ephemeral market relationship mostly corresponds to the idealistic Walrassian model of the perfectly competitive market. Such market, as famously argued by the philosopher David Gauthier, is a “morally-free zone”. But actually, every economist will recognize that markets are imperfect and that their functioning leads to many kinds of failures: asymmetric information and externalities are especially the cause of many market suboptimal outcomes. This is at this point that the “anonymization thesis” is unsustainable. Basically, because of market failures and imperfections, market relations cannot be fully anonymous and ephemeral to survive. Quite the contrary, mechanisms favoring the stability of these relations and making them more personal are required. The examples of Uber and AirB&B provide a case to this point: the economic model of these companies is precisely based on the possibility (and indeed the necessity) for their users to provide information to the whole community regarding the quality of the service provided by the other party. Reputation (i.e. the information regarding one’s and others’ “good-standing”), segmentation (i.e. the ability for one to choose his partner) and retaliation (i.e. one’s ability to sanction directly or indirectly uncooperative behavior) are all mechanisms that favor cooperation in market relations and they are indeed central in the kind of social relations promoted by companies like Uber. Moreover, new technologies tend to reduce considerably the cost of these mechanisms for economic agents as giving one’s opinion about the quality of the service is almost free of any opportunity cost (though that may lead to a different problem regarding the quality of information).

Now, once again, the point is not to say that there is no difference between providing a service through the market and within the family. But it is important to recognize that market relations have to be cooperative to be efficient. In this perspective, trust and other kinds of social bonds are quite needed in capitalist economies. Complete anonymity is the enemy, not the constitutive characteristic, of market institutions.