WHEN THE RULE OF LAW IS NOT WORKING

Right now I’m in the middle of a big change in gear. I’ve been thinking for the last four or five years about the history and philosophy of science, including the Vienna Circle, the influence of Albert Einstein, etc. Now, I’m getting back to evolutionary game theory, the theory of evolution of cooperation and the social contract, and how the social contract can be subverted by corruption. That’s what interests me most currently. Of course, that is not a new story. I believe it explains a lot of what I see happening in my field and in related fields. The ideas that survive are the ideas that are fruitful in the sense of quickly producing a lot of publications, and that’s not necessarily correlated with these ideas being important to advancing science.

Corruption is a wicked problem, wicked in the technical sense of sociology, and it’s not something that will go away. You can reduce it, but as soon as you stop your efforts, it comes back again. Of course, there are many sides to corruption, but everybody seems now to agree that it is a very important problem. In fact, there was a Gallop Poll recently in which people were asked what the number one problem in today’s world is. You would think it would be climate change or overpopulation, but it turned out the majority said "corruption." So, it’s a problem that is affecting us deeply.

There are so many different types of corruption, but the official definition is "a misuse of public trust for private means." And this need not be by state officials; it could be also by CEOs, or by managers of non-governmental organizations, or by a soccer referee for that matter. It is always the misuse of public trust for private means, which of course takes many different forms; for instance, you have something called pork barreling, which is a wonderful expression in the United States, or embezzlement of funds, and so on.

I am mostly interested in the effect of bribery upon the judiciary system. If the trust in contracts breaks down, then the economy breaks down, because trust is at the root of the economy. There are staggering statistics which illustrate that the economic welfare of a state is closely related to the corruption perception index. Every year there are statistics about corruption published by organizations such as Transparency International or other such non-governmental organizations. It is truly astonishing how close this gradient between the different countries on the corruption level aligns with the gradient in welfare, in household income and things like this.

The paralyzing effect of this type of corruption upon the economy is something that is extremely interesting. Lots of economists are now turning their interest to that, which is new. In the 1970s, there was a Nobel Prize-winning economist, Gunnar Myrdal, who said that corruption is practically taboo as a research topic among economists. This has well changed in the decades since. It has become a very interesting topic for law students, for students of economy, sociology, and historians, of course, because corruption has always been with us. This is now a booming field, and I would like to approach this with evolutionary game theory.

Evolutionary game theory has a long tradition, and I have witnessed its development practically from the beginning. Some of the most important pioneers were Robert Axelrod and John Maynard Smith. In particular, Axelrod who in the late ‘70s wrote a truly seminal book called The Evolution of Cooperation, which iterated the prisoner’s dilemma. He showed that there is a way out of the social dilemma, which is based on reciprocity. This surprised economists, particularly, game theoreticians. He showed that by viewing social dilemmas in the context of a population where people learn from each other, where the social learning imitates whatever type of behavior is currently the best, you can place it into a context where cooperative strategies, like tit for tat, based on reciprocation can evolve.

This was the first impetus for a huge amount of work by many other people, such as Martin Nowak, for instance, on the evolution of game theory. After some time of theorizing and playing with computer models, economists started creating experiments with real live agents, usually undergraduate students, playing for real money. This type of experimental economics was also something that has developed in the last two or three decades. Tremendously, it is now the booming field of behavioral economics. It’s extremely interesting to watch this and to see the connection between the theoretical models in evolutionary game, which are essentially mathematical or sometimes agent-based modeling models, and between the experiments which are closer and closer to anthropological studies of the cultural effects upon economic behavior.

~ ~ ~ ~

I was a mathematician from the University of Vienna, and the first topics that interested me were in the tradition of Ludwig Boltzmann on statistical mechanics—mass action kinetics and physical problems. Very soon, I found extremely interesting problems involving ensembles of beings in population biology, whether it was population ecology, population genetics, or even animal behavior, it always concerns large populations of interacting agents. In biology, particularly, interesting questions arose because these interacting agents could change their behavior, in contrast to what physical entities are doing.

I started applying mathematical models to population ecology and genetics, and just when I gave my very first talk—on Robert Axelrod’s book, The Evolution of Cooperation—I noticed a student sitting in the front row who was starting to glow. His eyes were getting larger and larger and I found I was talking only to him. This was my first introduction to Martin Nowak, who has a magnetic personality. I hijacked him from his former thesis advisor, and he wrote his thesis on the iterated prisoner’s dilemma with me. He was not the only brilliant student I had, but he was the one who was the most mind-opening for me. He then went as a post doc to Bob May in Oxford, and then he went to Princeton, and then to Harvard, where he still is.

He was applying the methods he had learned to more and more diverse topics, and they usually had to do with cooperation. He applied it, for instance, to the evolution of language. Communication is of course a phenomenon of cooperation. He wrote many important papers on the theory of signaling and the evolution of language. Fairly early on, he hit upon the evolution of cancer. If you talk and think about cooperation, the one big problem is always the problem of free riders, which cause social dilemmas because selfish free riders are subverting cooperation.

Everyone would agree that cooperating is usually a good thing, but it's even better to exploit the other guy to free ride on his efforts. How can you curb this tendency? This is a huge problem in all types of societies, particularly in human societies, but also in societies of cells within an organism. The cells have to synchronize as they multiply, and when there are suddenly mutant cells that do not care about the synchronization and just reproduce as fast as they “selfishly" can, then the organism has a problem. Cancer is a phenomenon of free-riding cells that subvert the welfare of whole organisms, so this is also a particularly interesting application.

Martin Nowak works a lot with biologists and people in medical research. There is a huge amount of papers published on this work. I was unable to follow him into this world because too much is going on there. The basic ideas are still the same ones that we picked up from Axelrod’s book, ideas about cooperation and how to get rid, or at least how to reduce, the importance of free riders, of defectors, or exploiters.

Cooperation is so obviously the secret to success of the human species, and one of the reasons why is reciprocation—tit for tat—and other strategies for sustaining cooperation in a repeated interaction between two players. If you do not have these repeated interactions, you have to look for different mechanisms to support cooperation. One of them would be indirect reciprocity. This works even if the two players meet only once provided that they can have some information about each other. In other words, it works if the players have a reputation that can be assessed by the other players. Then it’s quite obvious that you are inclined to trust someone with a good reputation and to collaborate with them versus someone who has a bad reputation.

This direct and indirect reciprocation is hugely important. EBay, for instance, is based on reputation. The feedback forum of eBay is the secret of its success, and it means essentially that everyone who wants to interact via eBay has a record, which can be laid open to everyone who is interested in collaborating.

Nowadays, of course, all these Internet interactions are based on reputation. Reputation plays a very important role for economic studies. Reputation studies are now a field by itself. Darwin, for instance, knew very well about effect of reputation. He said that humans cooperate with each other not only because of a blind instinct—like when ants cooperate with each other—but because they are guided by the praise and blame of their fellow men. This was already singling out praise and blame, the moral evaluation of a being, through the reputation of that being.

The next one to pick this up was Robert Trivers. He wrote a lot about tit for tat and other reciprocation strategies, but he stressed that this had to be seen in a more general way, not only in a long or repeated interaction between the same two players, but also a more general reciprocation between players from one population who meet just once and have a one-off interaction. This is based on the reputation of these players.

Trivers had this idea, but it was further specified by the biologist Richard Alexander who coined the term "indirect reciprocity," and who thought that this was the basis of moral systems. He wrote a very influential book on the biological basis of moral systems, and he had this indirect reciprocity as a basis. Then Martin Nowak and I worked out the first simple mathematical model about indirect reciprocation, which was a remarkable success, if I may say so. There are now many scientists who have worked out the many subtleties of this idea of indirect reciprocity.

In addition to this reciprocal interaction, there is collaboration in larger groups of five or ten or 100 individuals. This cannot be based on reciprocation because if you find yourself in a group of three persons and one of your co-players cooperates and the other doesn’t, whom should you reciprocate with in the next round? This doesn’t work. There must be an additional idea to this. This has been studied in the context of public good games or mutual aid games, where you have groups of, say, five players who play several rounds in which they can invest some effort, some money, or some resources into a common good, and this common good will then be shared by all of them irrespective of whether they have contributed or not.   

The idea is that you have to collaborate if you want to hunt a mammoth. You cannot do it all by yourself. You have to work in a group. But if there are free riders in this group whose main idea is not to be the first in line, so to speak, then you will not get the mammoth. However, if you get it, then the free rider will be able to get his part of the stake, so to speak. In these larger group interactions, the public good interactions, the problem of free riding occurs again. The way to sustain cooperation in larger groups is to punish the free riders. The public good of the public bus is an instance: If you are free riding on these buses and you are caught, you're supposed to get punished so you don’t free ride. But this punishment can be meted out either by the co-players—those who participated in the game and feel that they have been cheated—or else it can be meted out by an institution which is set up beforehand.

These are two very different ways of punishing free riders, and they have a certain historical interest. Maybe twenty years ago, game theorists started to create experiments showing that this punishing of free riders works very well. They set up the experiment in such a way that the players were punishing each other, which is called peer punishment. It was shown that it is very effective. After a few rounds, everyone notices that if you exploit the others you are likely to get punished and therefore you stop exploiting the others. It is a costly system, however, because punishing the co-player is a costly endeavor. Therefore, there is a temptation not to do the punishing yourself, but to let other guys in your group do the punishing. This sets up a free riding of second order, so to speak. This type of peer punishing, which is a kind of self-justice, is quite likely to erode and to collapse.

There is a much more stable situation that occurs when the players beforehand set up a contract, or hire a sheriff, or make a kind of institution whose aim it is to punish those who eventually will free ride. This is a different thing. You set up a kind of police force beforehand. Nowadays, this happens all the time. Whenever you make a collaborative enterprise, you go first of all to a lawyer, you set up some contracts, and if you break these contracts, you are punished. But the interesting thing is that this happens also in situations that are much more elementary.

The Nobel Prize-winning American economist Elinor Ostrom made a career out of studying small-scale societies, showing how herders or hunter-gatherers spontaneously, without any effect of the state, set up some kind of very elementary institution whose task it is to uphold public good and to punish those who are free riding and trying to exploit it. So, this idea has taken over.

Nowadays, it happens only rarely that people use self-justice to punish those who exploited them. It happened in the Wild West when there was no sheriff around and you had to do it by yourself. In general, it is frowned upon as a very primitive mechanism for upholding cooperation because it can lead to blood feuds and vendettas.

This honor system, this self-justice, must have played an important role in earlier times, but in modern civilization it is frowned upon because it can so easily lead to a war of all against all. If you think that the other guy will exploit you and you punish him, and then he retaliates or even anticipates this by striking first, you fall into a trap of escalating conflict, which can be very harmful. It is much better to set up an institution that is above the players, stronger than the players, and whose task it is to punish those who are free riding and breaking the contract. This idea of the social contract goes back to Hobbes, Kant, and Rousseau, even in Plato's Republic he was already explaining this idea very clearly and concisely.

This idea that institutions can be spontaneously set up by the village elders or by some groups of players engaged in collaborative enterprise is very rich and has attracted a lot of attention from anthropologists and economists, also from experimental economists. It has been shown that this works very well, despite the fact that there is a paradoxical aspect in it because, in ideal world where everyone eventually cooperates, you still have to pay the police because they have to live on something, and it seems needless and inefficient. Whereas with peer punishment, it only takes the effort of punishing someone if that someone has done some bad thing and has been free riding, so it's less inefficient in this sense.

Despite the fact that it possibly costs more, institutional punishment is far more stable and cannot lead to this war of all against all. However, this institutional punishment can in turn be subverted, because those who are enforcing the law—the sheriffs, the referees, the police officers, the law officers, judges—can also be bribed. They are also humans, so they too have a selfish aspect to their nature and, therefore, there is a temptation for the free riders to bribe them in order to avoid punishment. This, in my view, is the biggest problem with this institutional punishment.  

Peer punishment, the self-justice punishment, faces the problem of self-justice and war of all against all. Institutional punishment faces the problem of corruption. And this problem of corruption is all around us. Let me stress that there are several aspects of corruption, but the one that is most nefarious for economic life is corruption of the judiciary system, or the corruption of the institutions whose purpose it is to punish the free riders. This is by no means the only form of corruption, but it is the one that is, in my view, most harmful for economic development.

I was so struck by simple graphs of maps of Europe showing the corruption perception index of the different countries and the mean household income of the different countries and how closely correlated they are. It is truly an amazing thing. I was also struck by the fact that international companies, for instance, can very well refuse to set up stores in some country for the reason that these countries have such massive corruption that the rule of law is not working. This is an example of how multi-billion-dollar businesses actively shun certain countries because they cannot trust the judiciary system, because they know that there is remarkable risk that the law will turn in favor of those who exploited them, and therefore they do not dare set up contracts with the people on the spot. This is the type of corruption that I have in mind.

Amongst the huge amount of studies on corruption, the corruption of Southeast Asia is a very special topic, but it is a world that I have not penetrated yet. In Europe, for instance, you have this gradient of corruption index between the Scandinavian countries and Switzerland on one hand, and the countries towards the East and the South on the other hand, which is quite a remarkable gradient that you can see. It’s the same gradient in the average income in these economies.

This type of corruption is to a large extent corruption of the judiciary system. At the very basic level, an example of this would be if a policeman stops you for speeding and you give him something to drop the fine. Though this is a matter of a few dollars, it is still a type of corruption. In some countries, it is very widespread. This disregard for the use of law makes it plausible that on a higher level, when it comes to setting up big stores and joint enterprises, the same mechanisms could work.

It could well be that my interest has been stimulated by what is going on in my own country, Austria. It is a disagreeable truth that we are definitely faring worse on this corruption perception index than the Swiss, and even a bit worse than the Germans. This is maybe stimulating my interest in this corruption.

Still, there is a difference between the corruption of a minister who makes a contract with some aviation company to buy some jet fighters and the corruption of the judiciary system. This corruption of the judiciary system is the one that is more deleterious to the average economic success in the country than the enrichment of a few ministers, which, in general, after ten years or so are brought to law. It does not last long.

Corruption in general has a deleterious effect on the readiness of economic agents to invest. In the long run, it leads to a paralysis of economic life. But very often it is not that economic agents themselves have had the bad experience of being cheated and ruined, they just know that in this country, or in this part of the economy, or this building scene, there is a high likelihood that you will get cheated and that free riders can get away with it. Here again, reputation is absolutely essential, which is why transparency is so important. Trust can only be engendered by transparency. It's no coincidence that the name of the most influential non-governmental organization dealing with corruption is Transparency International.

Of course, it is well known that transparency is through the freedom of the press. The Soviet system, at the end, introduced Glasnost, which is just another word for transparency. This led to a huge revolution. It was the overcoming of the Soviet system. Other mechanisms of reputation, like naming and shaming, are also playing a big role. The cost of acquiring information about the likelihood of corruption here or there, about reputation of law officers, must be sufficiently low. If it is too high, if you cannot learn about this, then you will more or less automatically distrust the system and be disinclined to invest there. Therefore, transparency is a most important factor to fight this type of corruption, the corruption of the judiciary system. Every effort of reducing this transparency, for instance, by campaigns against whistleblowers, is something that should let alarm bells ring.