Enlightened Self-Interest September 24, 2008Posted by Eyal Sivan in Producer.
Tags: adam smith, game theory, grameenphone, ikerd, iqbal quadir, nash, objectivism, pareto, pro-social, rand, self-interest, surowiecki, tocqueville
Iqbal Quadir had a dream. He wanted to bring economic prosperity and political freedom to the people of his homeland of Bangladesh. He supported no socialist ideology, and represented no charity. He was sure that, given the chance, the people of his country would empower themselves. Quadir started GrameenPhone to give them that chance, and to make a lot of money in the process.
Since declaring independence from Pakistan in 1971, Bangladesh has had to endure one totalitarian regime after another through a string of military coups. Their poor governance led to famines, widespread poverty, gang violence, and political turmoil. Democracy was restored to Bangladesh in 1991. Since then, the country has achieved relative peace, and an annual growth rate of roughly 5% a year.
One of the main reasons for this turnaround is the rise of microcredit, a mechanism to extend very small loans to poor entrepreneurs, an idea which earned Dr. Muhammad Yunus, founder of Grameen Bank, the Nobel Peace Prize. It was the success of microcredit that inspired Iqbal Quadir to apply the same concepts to information and communication technologies, or ICTs. Empowering the underprivileged is possible with ICTs as opposed to other technologies because they are capital light, have low reproduction costs (after initial investment), steadily decrease in price (as per Moore’s Law), and, perhaps most importantly, are easily owned by individuals. With GrameenPhone, Quadir specifically stuck to cellphones because they had the added benefits of being portable and wireless.
His logic was simple. Political and economic misery was largely a result of authoritarian governments, who’s desire to remain in power overshadowed any social concerns, and invited manipulation from powerful elites. ICTs meant more communication, which meant more diversity of opinion and trade, which in turn would promote democratic politics and spur economic activity, in the end creating a larger potential market. The resulting economic development would create an effective force against authoritarianism. He illustrates his philosophy in his 2002 paper, The Bottleneck Is At the Top of the Bottle:
“If concentration of power has contributed to poor governance, the solution must lie in dispersing power… ICTs empower from below while devolving power from above, resulting in a two-pronged attack on abuse of state power that has left so much of the world’s population languishing in poverty… ICTs can be the means to both freedom and development by blindsiding obstacles to both.”
Quadir is not an altruist. To the contrary, GrameenPhone has been criticized for establishing an effective monopoly in Bangladesh, complete with aggressive competitive practices. It has also made Quadir a very rich man. However, in the process, it has helped countless Bangladeshi individuals to empower themselves, to indulge their entrepreneurial spirit, to pull themselves out of poverty by means of their own sheer will.
Let’s take one of GrameenPhone’s products, Village Phone, as an example. Village Phone works as an owner-operated GSM payphone whereby a borrower takes a BDT 12,000 (USD 200) loan from Grameen Bank to subscribe to Grameenphone and is then trained on how to operate it and how to charge others to use it at a profit. As of September 2006, there are 255,000 Village Phones in operation in 55,000 villages around Bangladesh. GrameenPhone makes a profit, the villager (usually women) makes a profit, and the village becomes more competitive, more prosperous and, as a result, more democratic. Quadir gets to have his cake and eat it too.
On the one hand, Quadir is a model of the irrevocable rule which has formed the foundation of modern capitalism: Adam Smith‘s rational self-interest. He has built a successful company based on an ingenious product offered to an unclaimed market, and has reaped the financial rewards. In his infamous 1776 work The Wealth of Nations, Smith argues:
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”
Ayn Rand extended the concept of rational self-interest into a complete philosophy known as Objectivism, which emphasizes the individual above all else. In Rand’s view, any conception of a collective was no less than evil, an attempt of the many to free-ride on the achievements of the exceptional few. Her influence was instrumental to the Chicago School, the birthplace of modern economics and alma mater of such well-known economists as Alan Greenspan, George Stigler and Milton Friedman.
Over the last half-century, Rand’s brand of rational self-interest has become a mainstay of global capitalism. Her black-and-white emphasis on individualism has been used to justify even extreme interpretations, such as libertarianism. The story of GrameenPhone is assuredly an example of rational self-interest at work.
On the other hand, that is not the whole story. As sure as he is a capitalist, Quadir is just as clearly fostering the public good. GrameenPhone provides a mechanism for the poorest of a nation to better their circumstances, to build a better life for themselves and their loved ones. This communal benefit was not accidental, it was by design, and provides Quadir with a great deal of personal satisfaction.
Before Adam Smith wrote The Wealth of Nations, he wrote The Theory of Moral Sentiments in 1759. In many ways, the latter offers an antithesis to pure readings of the former, an antithesis that is often ignored. In The Theory of Moral Sentiments he wrote:
“How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it.”
This assumption, that people take voluntary actions intended to help others regardless of personal gain, exists in modern economics. It is usually examined using economic game theory, the most well-known experiment being the Prisoner’s Dilemma. In one test after another, it has been proven that people of all walks of like, from every culture in the world, have a sense of social responsibility and fairness. In a moving segment in The Wisdom of Crowds, James Surowiecki describes an experiment where even capuchin monkeys displayed a sense of fairness:
“The capuchins had been trained to give Brosnan [the primatologist] a granite pebble in exchange for food. The pay, as it were, was a slice of cucumber. The monkeys worked in pairs, and when they were both rewarded with cucumbers, they exchanged rock for food 95% of the time. This idyllic market economy was disrupted, though, when the scientists changed the rules, giving one capuchin a delicious grape as a reward while still giving the other a cucumber slice. Confronted with this injustice, the put-upon capuchins often refused to eat their cucumbers, and 40% of the time stopped trading entirely. Things only got worse when one monkey was given a grape in exchange for doing nothing at all. In that case, the other monkey often tossed away her pebble, and trades took place only 20% of the time.”
Beyond just his capitalist motivations, Quadir is also fulfilling his social motivations. Economic game theorists might refer to Quadir’s actions as pro-social behaviour, specifically what is known as inequality aversion. But even modern game theories usually assume that by helping society, Quadir has to give something up, that he has to exchange one kind of value (material wealth) for another kind of value (positive self-identity). That is simply not the case. He has actually gained both kinds of value and given up neither. More than that, the more material wealth he gains, the more positive self-identity he gains, and vice-versa, creating a positive feedback loop.
Although this scenario is still an uncommon economic model in reality, it is the subject of extensive research. One of the primary goals of game theory is understanding how to create these kinds of win-win scenarios, what are generally called equilibria concepts. The original equilibria concept is the price mechanism, introduced by Smith himself. More modern concepts include Nash equilibriums and Pareto efficiencies, both of which try and arrive at solutions that are optimal for both individuals and society as a whole.
Sociology and socio-economics have another name for what a game theorist might call pro-social behaviour: enlightened self-interest. This term was originally used by Alexis de Tocqueville in his 1835 publication Democracy in America (excerpt available here), with the aim of better explaining the uniqueness of America and its institutions, as compared to the popular philosophical and political notions of his French contemporaries. As a concept, enlightened self-interest was a response to egoism, individualism, and the prohibition of political associations.
The important difference between Rand’s rational self-interest, what some call simple greed, and enlightened self-interest is that the latter acknowledges our social nature. Like the capuchins, we are a social animal who has a some genetic disposition towards fairness and a greater good. This characteristic is not a result of cultural influence, but a result of evolution. Like our primate ancestors, we need a working society in order to survive. As Garret Hardin illustrates in his 1968 article Tragedy of the Commons, purely individualistic self-interest is simply not sustainable.
John Ikerd, Professor Emeritus of Agricultural Economics at the University of Missouri, believes that enlightened self-interest is actually an intricate balance between three separate types of motivations: self-interest, shared-interests, and altruism. He describes the concept in his 1999 paper, Rethinking the Economics of Self-Interests:
“This enlightened self-interest is a product of balance among narrow self-interests, community or shared-interests, and altruistic or other-interests. Enlightened self-interest means that we cannot simply maximize or minimize any one particular aspect or dimension of our lives. We cannot be driven solely by greed, by altruism, or by concern for community. Instead we must pay conscious attention to whether we are adequately meeting our needs as individuals, as members of some larger community or society, and as moral, ethically responsible humans. Quality of life is a consequence of harmony or balance among the three.”
The fact is, we are neither pure individuals, nor are we pure members of a collective. We are not gods and we are not bees. We are both at once. That is the curse and the gift of man, for each one of us to be capable of so much, to be so different from one another, and yet to have those differences mean nothing outside the frame of a greater whole.
Much of the story of civilization is a battle between ideologies that emphasize our individuality versus those that emphasize our role in society. Espousing a narrow view of either extreme is certain destruction.
The key is balance.