I’ve been mulling over the question I posed a few days ago, about how to reconcile Andy Haldane’s superb Jackson Hole paper (The Dog and the Frisbee) arguing the case for simpler financial regulation with Cesar Hidalgo‘s equally persuasive arguments for using the capacity of Big Data to give us much more useful detail. It sent me back to one of my all-time favourite economics books, Thomas Schelling’s Micromotives and Macrobehaviour, which is all about the aggregation of individual decisions. (Coincidentally, Sebastian Mallaby wrote about the same question in the FT yesterday.)
It hasn’t answered my question, but what struck me this time was how difficult it is to come up with the compelling reasons for individuals to align their behaviour in the common interest. There is the traffic light example, but Chapter 3 gives a few examples of effective rules and norms, and many other examples of problems – free-riding, collective action problems, lemons etc. I conclude that simple is difficult – you have to find the right simple rule for the context and it has to create strong self-interest in abiding by it. Still, Schelling is optimistic. He writes:
“These problems often do have solutions. The solutions depend on some kind of social organization, whether that organization is contrived or spontaneous, permanent or ad hoc, voluntary or disciplined….. What we are dealing with is the frequent divergence between what people are individually motivated to do and what they might like to accomplish together.”
And there are many ways to make the collective bargain stick, he argues. I’m in an optimistic mood this morning, and will go with the argument that between social norms, morals, institutions and even regulations can change, and make a big difference to collective outcomes.