Marx, Public Choice Theory, and the Utility-Maximizing Consumer

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Karl Marx




Marx, Public Choice Theory, and the Utility-Maximizing Consumer by James Harkin

May 10th, 2013 reset - +

Image: Class Struggle board game, ©1980 Avalon Hill

IT STARTED WITH THE HUSH PUPPIES. Who wouldn’t be impressed when a journalist with bouffant hair like Malcolm Gladwell throws a whole curriculum of ideas at the question of how fashions travel among New York hipsters? Within a few years the craze had spread, virus-like, to a University of Chicago economist named Steven Levitt. His 2005 book Freakonomics and its many successors put everyday life under their microscope and, laid bare by the forensic logic of material incentives, we began to understand how the world really works. How most drug-dealers stay poor. Nooooo! Why part-time prostitutes can earn good money and how much they charge for different things. Naughty! Then there were the internet gurus who promised to upgrade everything by turning it into a giant computer game. LOL! It was as if all the fundamental problems of political economy — what we produce and where the profits go, the role of government and the ebb and flow of the business cycle — had been solved, freeing up the dismal science to put a smile on its face. And if anyone ever piped up to say, “Who the fuck cares?” well, they were probably just jealous. Or a loser. Anyone living in the United States or Britain in the last decade could be forgiven for thinking that economics had become a branch of the entertainment industry.

Then, in 2008, something unexpected happened. The banking industry sprung a leak, and as the rest of the economy followed it on its catastrophic lurch downwards, what we thought was going on in our economies during this period of political quiescence turned out to be an illusion. In the parlance of the funboys, everything suddenly tipped. Financial reengineering, fictitious profits, inflated home prices: we’d been living beyond our economic means, kept afloat on a line of cheap Chinese credit because the rate at which our economies had been growing jobs and productivity had been slowing for decades. If the income of the median American household had continued to grow at its post-war rate it would now be over $90,000. Instead, sometime in the last few decades it got stuck at a paltry $54,061. All that game-like logic of incentivizing and strategizing, together with random tropes drawn from epidemiology and computer networks, wasn’t really how the world worked at all. Instead ordinary people were working longer and for less, and then borrowing money and taking on extra part-time work to make ends meet and buy all those copies of Freakonomics. Truly freaky.

So far, so snarky — but this is hack work. To truly understand our present circumstances, we must examine the intellectual edifice that got us here in the first place — an edifice that can be traced to a distinctive approach to political economy, sometimes known as game theory or public choice theory, pioneered at the end of World War II. It is a history that also requires us to consider where Marxism has gone wrong, and how it can do better.

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The classical political economy which made Karl Marx famous concerned itself with how markets work and for whom; in the period after World War II, after a collapsing capitalist system had been propped up by state intervention and nationalization, Marx’s approach had been utterly discredited and the questions being asked of political economy were somewhat different.

Public choice political economy was born out of American military think tanks in the late 1940s, and set itself the task of dissecting the burgeoning role of government in advanced industrialized economies. Eschewing the classic economic models that focused on production, public choice theory’s foundational idea was the utility-maximizing consumer. Society, insist public choice theorists, is not some amorphous structural glue. Instead, it consists only of individuals who can be said to want things; while the economist is neutral as to their preferences, whatever it is they want we can assume that they want more of it. As public choice theory has spread its influence across the entire social sciences in the last 70 years, this central idea that society is made up of no more than self-interested, strategically aware individuals gave rise to “rational choice theory” and became central to the entire Western social sciences. But public choice theory’s core puzzles — the collective action problem, the theory of public goods and the problem of social cost — were always the most compelling, because their elegant deductive logic demanded a satisfactory answer. These puzzles and logical lacunae are generally considered to be the most distinctive contribution to the Western social sciences since 1945.

An example: the prisoner’s dilemma collective action problem, the most glittering weapon in public choice theory’s armory — quite simply one of the most important and most intractable logical puzzles of the last 100 years. Modern interest in the collective action problem dates from 1950, when the U.S. government set up and secretly funded the think-tank The RAND Corporation to research games and strategies which might help America defeat the USSR. On hand to help were the 20th century's greatest mathematician and game theorist John Von Neumann, an émigré from Eastern Europe who also found time to invent the digital computer and play a key role in the development of the atom bomb; and John Nash, the polymathic genius whose subsequent battle with mental illness gave rise to the book and film A Beautiful Mind. The idea of the prisoner's dilemma, which subsequently became the collective action problem or the “free rider problem,” was the result of painstaking tests by two Stanford psychologists, Merrill Flood and Melvin Dresher. RAND mathematician Albert Tucker christened it, arguing that the problem could be best modeled by imagining the strategic decision-making of two prisoners held in separate rooms — prisoners prevented from communicating with each other and invited to inform on one another in return for a lesser sentence. The prisoner’s dilemma is when a collective action would benefit everyone in the group, but individuals in that group attempt to “free ride,” or get the benefits which flow from collective action without taking part. Think of what happens in the film The Treasure of the Sierra Madre. The three gold prospectors are engaged in a common endeavor — the hard work of digging out the gold and ensuring its safe passage back into town. They can’t get the job done individually, because of the division of labor involved. Neither could they get the gold back safely if each was working on their own — it would be too heavy to carry. But even though all are better off prospecting for gold together, the problem is that each would be even better off screwing the other two and making off with the gold themselves. The result is inevitable tragedy. The power of the prisoner’s dilemma is said to stem from a simple disjuncture between individual and collective rationality — between what it is rational for a group to want for itself, and what it is rational for each member of that group to do about it.

From its modern origins in mathematics and psychology, the prisoner's dilemma quickly became the property of social scientists. In the last 50 years, it has troubled the best mathematicians and social scientists of the modern era, and has been an ideological plaything and a weapon in the battle of political ideas. Intellectuals of every different stripe have fought over who owns the prisoner dilemma game because within it lies clues as to how to answer key social questions: how to organize society, the role of the market, the role of pressure groups, the purpose and prospects for collective mobilization, when the state should intervene to provide public goods for its citizens. Everyone wants to have the prisoner’s dilemma game on their side, because what it tells us about logic and human nature seems so obviously, brilliantly right.

The logic of the collective action problem is powerful, but its application has also been deeply political. Logical puzzles like this caught the imagination of social scientists because they purported to explain deductively and scientifically how government works and when it doesn’t. Brilliant economists like James Buchanan (who died in January) went on to argue that all kinds of collective action were bound to fall victim to the free rider problem; their conclusion, by and large, was that both politics and government were hardly worth the bother.

Later, a mutant strain of game theory was born. Game theorists insisted that social life could be understood through the lens of the utility-maximizing consumer — we’re all out for what we can get, to put it bluntly, and every conceivable problem can be analyzed via the logic of material incentive, strategic game-playing and rearranging the incentives which face everyone involved. By the 1970s thinkers working within the new discipline of “law and economics” set about raiding game theory to explain the stuff of everyday life. The Chicago economist Gary Becker borrowed this calculus of material self-interest to explain the workings of marriage and the family: we marry in order to maximize our long-term utility, reckoned Becker, and according to strict laws of supply and demand. At its empirical worst this kind of thing became a kind of make-work scheme for social science researchers: the fruitiest bits, with the success of the pop economics genre in the last decade, ended up in Freakonomics.

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Polemic is the easy bit. Marxism is more demanding. If Marxism is to have a future — and even in its cryogenically frozen state, it is still head and shoulders above any of the intellectual alternatives available to leftists  — it needs to have something to say about the only formal political economy around. But what exactly is Marxism, and how does it inform our understanding of public choice theory?

Let’s put it like this. Once upon a time an idealistic young German student read Hegel and thought that the grand old man of idealistic philosophy was onto something. By giving Hegel’s theory of human history a more practical, humanistic twist, Marx thought he could preserve some of German philosophy’s dynamic understanding of social change and point it in a much more radical direction. With a subversive understanding of social change drawn from German philosophy, and given practical inspiration by French socialism, Marx went to work on British political economy. In the several decades of political quietude which followed Europe’s failed revolutions of 1848, he deliberately retreated from politics to work up this critique of political economy. His point was to make words into intellectual weapons that the working classes could use in any future revolutionary outburst, whom Marx had come to see as the gravediggers of capitalism. The complex of methods he adapted from German philosophy are still the subject of heated controversy, but at root they weren’t so difficult to understand: Marx’s view of human history was radically relational and historically specific, one in which people and their social surroundings were in a constant, dynamic (“dialectical”) state of tension with each other. What’s special about us humans, Marx came to believe, is that we’re constantly seeking to improve our lot — but no sooner have we done so than the things we’ve built start to glare back at us, and change us in turn.

All this was clear by the time that Marx and Engels wrote The Communist Manifesto in 1848. But as Marx moved further into his study of political economy, he was refining and modifying his arguments all the time. A decade later, he had an original outline and two bulky new concepts: the productive forces, by which he meant the material content of technology and people available in any society, and the production relations, or the particular social form in which they and their tools find themselves wrapped. What was special about Marx’s distinctive contribution was that he illuminated the tension and growing contradiction between the material nature of things and the social form in which they find themselves wrapped; at a certain point in the development of any human society thus far, he speculated, the social relations become a fetter on the further development of the material productive forces — it’s at that point, he wanted us to know, that all hell breaks loose between those who want to protect the old system and those who find themselves harbingers of the new. By the time Marx had published the first volume of his magnum opus, Capital: A Critique of Political Economy, this very broad brush gloss on human history had become something even more ambitious: an attempt to use the same methods to mount a sustained attack on the most advanced political economy around. The point of Capital, it’s worth reminding ourselves, wasn’t to unveil some pre-prepared “theory of value.” Rather it was an attempt, by criticizing and then rearranging the tools made available by formal political economy, to solve some of the problems which were bothering its cleverest practitioners and, in so doing, better explain the workings of 19th-century capitalism.

But Marx wanted to do much more. Like a showy Victorian gymnast, he sought to show that key concepts of the bourgeois political economy were nothing more than rarefied versions of real illusions thrown up by the two-fold nature of the commodity itself — the central distinction, once again, between its natural or material content and its social form. Further, he wanted us to know, the dry problems puzzled over by political economy were being solved not on paper but in practice — within a nightmarish, ever-expanding maze of calcified social relations that grew out of the commodity form itself.

We know all this because of a recovery in Marxist theory which accompanied the student rebellions of the 1960s. Thanks largely to Stalinism, Marx had become associated with a kind of historical determinism; to Marx’s critics it looked like we humans were suffocated by the dead weight of historical inevitability and the chain mail of social relationships over which we had no control. These new leftists wanted to reintroduce the more dynamic interaction between subject and object which had always been at the heart of Marx’s thinking, and the best of them did it with brio. In the following decades the new left gave us Lucio Colletti and Bertell Ollman on social theory; it gave us E.P. Thompson and Marshall Berman on culture and class. On the terrain of formal political economy, however, it gave us next to nothing. That’s partly because Marxists who knew about such things were otherwise occupied in the 1970s and 1980s, busily dissociating Marxism from the Keynesianism that was collapsing around them. But it’s also because academic Marxists — talking to each other on the way to tenure — had grown a little sniffy about going to work on other people’s ideas. Those that did, like the “analytical Marxists” and “rational choice Marxists,” preferred to subject Marx’s actual words to the methods of modern philosophy and social science — a peculiar combination of dogmatism and diffidence, and quite clearly the wrong way around.

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But what should Marxism have to say about public choice theory? Some of that theory’s progressive critics float the flimsy accusation that its assumptions of narrow, material self-interest are too cynical to explain the bulk of human motivation. How, for example, can the assumption of utility-maximizing self-interest explain the irrationalities of love and romance? This is the kind of woolly thinking that might have elicited a hollow laugh from Marx.

Formal political economy of any kind needs to simplify human motivation if it’s to explain anything; the real issue is what it has in its sights to explain. In Volume 1 of Capital Marx is adamant that he’s not dealing with living, breathing capitalists but profit-maximizing ciphers; in the same book, in fact, he uses a primitive version of the collective action problem to offer a neat logical explanation for why capitalists need a state to help organize their affairs. With a little more abstraction we could go further. If it’s used properly, for example, the collective action problem makes it easy to explain why a free market has never existed. Imagine two traders in a very simple market, one called Bill who bakes bread, and the other called Bertha who churns out sausages. Bill and Bertha, as soon as they have made enough bread and sausages to feed themselves and their families, make extra for sale to each other. Bill brings his bread to market, and arrives at a deal to exchange a certain amount for the sausages that Bertha brings with her. Both are better off by making the trade. Thus, according to Adam Smith, does the market work its silent magic, ensuring that through enlightened self-interest both baker and butcher are richer and more prosperous than they otherwise would have been.

But Adam Smith forgot about something. In a state of nature without rules or government, taking your goods to market is only one of the available options. If both Bill and Bertha would be better off trading with each other, each would be even better off if they stole each other’s stuff and kept it for themselves. Given that each doesn't know the intentions of the other, and assuming that both are rational and sensible people, it will always be in their best interest to steal from each other rather than to trade — a strategy which has the effect of leaving both worse off. Aware of the dilemma, they could sign up to a voluntary agreement not to steal from each other. The collective action problem, however, says that any such pact is bound to come unstuck, since each trader will conclude that the best thing to do is to back out of the agreement at the last minute and cheat his/her opponent. Once again, the gains from trade envisaged by Adam Smith disappear through a trapdoor of selfishness and the pursuit of strategic interest.

How can we go about solving this anomaly? The answer, it turns out, is not a complex mathematical formula cooked up by cunning social scientists but an agreement between the traders themselves. Precisely because each trader knows that it will always be in his or her trading partner’s best interest to steal, each agrees to give some of their bread and sausages to a third party, one whose job from then on will be to police the agreement not to steal. The existence of this policeman has the effect of changing the incentives of both traders who hired him. Since both no longer wish to be punished for falling foul of the law, each now comes around to the view that it would be better off to trade rather than steal. Thus  — abracadabra  — do we arrive at a simple logical explanation for the development of a modern state whose job it was, at least initially, to watch over and protect the gains from trade. By eliding the simple kind of market failure inherent in the act of theft with the collective action problem, which scuppers any voluntary agreement not to steal, mainstream economists often make it look like the real problem is lack of community spirit rather than the market itself. In reality, and with a little radical investigation, the logic of this collective action problem shows up talk of a free market as hogwash and drivel; there was never any such thing, because a market without policemen to protect it is about as useful as a car with no wheels.

The market failure in the act of exchange is only a simple, prototypical example of how the powerful logic of the public choice theory of political economy can be put to radical use. Another example, from a Marxian perspective: the idea that a wholly new kind of commodity known as a “collective consumption good,” which is both indivisible and non-excludable and which therefore the competitive market can’t provide (see Paul Samuelson’s celebrated 1954 paper “The Pure Theory of Public Expenditures”) speaks directly to the fact that in the same decade, massive programs of public works were put in place to prop up markets and mop up unproductive capital. Then there’s the seriously odd category of market failure the British-American economist Ronald Coase identified in his fascinating 1960 article “The Problem of Social Cost.” Coase theorized about the incidental harmful effects caused by a perpetrator and suffered by a victim, which are an important source of market failure: since these harmful effects prima facie have no price on the market and cannot be bought and sold, there’s nothing the market can do about them. Coase’s contribution was to argue that harmful effects could be resolved by means of a simple logical bargain between its immediate perpetrator and victim and without the intervention of the state or anyone else. If the flowers in your garden are aggravating my hay fever, for example, both of us could come together to find a solution. All that was required, he maintained, was a legal system that allocated rights to each party. After that, it was up to the bargaining parties to trade their rights depending on how much their respective activities were worth to them.

What became known as the “Coaseian bargain” was as simple as it became influential. But as the 1960s gave way to the 1970s its logic took new shape. A new generation of consumer activists on both sides of the Atlantic — linked neither to industrial labor nor to the business world — began to appear on the political stage to demand protection from the harmful effects of industrial activities, and a broad flurry of rights were issued to consumers to help them bargain for compensation. The consequence of this peculiar transformation of harmful effects into commodities to be traded by their owners was entirely consistent with Coase’s logic, and does much to help us understand the logical origins of what we now call “victim culture” or “compensation culture.” More and more social and personal problems are now being recast as problems of social cost — as a fetishistic dance between perpetrator and victim in which everything has a price, and in which the object is to maximize the amount of compensation which can be had in exchange in injury or hurt.

The problem of social cost should make uncomfortable reading for progressives, too. When environmentalists and radicals talk about “internalizing the social costs” of capitalism’s harmful effects, for example, what they’re really doing is extending the logic of commodity exchange — and throwing whole new illusions about how to solve social problems.

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Large-scale social movements have largely disappeared in the United States and Britain, which might leave most people pessimistic about what politics and collective action can achieve. Of course, when we heeded the advice of the public choice theorists, social problems didn’t go away. With nothing else at their disposal, managers of all kinds turned to the same gamey logic of material incentives in order to galvanize us into action and put society back together again. It didn’t help that they became in thrall to a new breed of idea salesmen who, like duplicitous fitness instructors, think they can use gimmicks and sweeteners to motivate, nudge and corral us back into being good citizens.

The promise of public choice theory was not to prescribe what we might want, but to usher us into a world in which we would have as much of it as we wanted. But instead of sovereign individuals in control of our own destiny, we utility-maximizing consumers have ended up as characters in a game: tantalized, prodded, and relentlessly managed into doing things that those in charge want us to do. In putting a price on everything, seeing everything through the lens of carrots and sticks — tax breaks for marriage, penalties and permits for pollution — corporations and governments have also been robbing politics of its content. The upshot is a state which spends a great deal of time trying, like Humpty Dumpty, to put society back again — to bribe, bully or subtly browbeat citizens in an attempt to motivate them to action or to get them to do the right thing. The end result is government which is both weak and intrusive: weak, because the gamey tools available to it mean that it only ever sets out to manage social problems rather than to solve them; intrusive, because it treats its citizens as problems to be managed.

But don’t just agree with me. In 1941, at the end of a previous cataclysm which shook Western economies to their core, the economic philosopher (and former Marxist) James Burnham published a book called The Managerial Revolution. Burnham’s point was that the reins of power were quietly passing to public managers whose job it was to use government money to solve social problems and keep the economy under control. He was angry with the kind of economics that had come before, the sort which craves “‘mathematical laws,’ any precise dates, any rules for calculating stock prices next Tuesday” — but which, in the end, explained nothing at all.

If Marxism is to inspire millions of people once again, rather than the flaccid hand-wiggling of the Occupy movement or the academics who spend their time picking over the corpse of what Marx actually wrote, it needs to fight for the commanding heights of intellectual life — in this case, to present a radical interpretation of the best formal political economy which has come our way since Marx’s time. Its aim would be to show how, via a logic traceable through those very concepts, we arrived into a world where we began to think of ourselves as utility-maximizing consumers — and how, having got there, the promise of the public choice theorists came unstuck. The tools are all there, and if the frat-boy juvenilia tell us anything, it’s that there’s no lack of thirst for bold ideas. Read books: get started. 

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James Harkin's latest book is Niche: The Missing Middle and Why Business Needs to Specialize to Survive (Little, Brown).

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