There’s a nice headline in the Times today:
Make us sell healthy food, supermarkets implore May.
This invites the obvious reply: if you want to sell healthy food, why don’t you just do so?
The answer lies in competitive pressures. If any individual supermarket tries to cut salt in its products or refrains from special offers on unhealthy foods, it would lose market share to rivals.
Each individual supermarket’s rational attempts to maximize profits thus leads to an outcome which none of them really wants – the over-marketing of unhealthy food. This is an example of an arms race, a process whereby individually rational behaviour has results which are collectively undesirable. Here are some other examples:
- If all companies try to pay above-average wages to attract the best CEO, the result is no better quality of management but ever-rising salaries. The same thing is true for football transfer fees.
- If everybody works long hours in the hope of promotion nobody’s chances improve, but everybody ends up working (pdf) longer than they’d like.
- If everyone buys a flash car to impress the neighbours, nobody’s impressed but everyone’s in more debt.
Arms races are a counter-example to free marketeers’ claims that, via the invisible hand, individual choices within a free market lead to optimal behaviour. This isn’t to say that such claims are wrong; they are often right. Instead it’s just to corroborate Jon Elster’s point that in the social sciences there are no (or very few) iron laws but rather different mechanisms that work or not depending upon particular contexts.
When there are arms races, it’s reasonable for the parties to make the appeal that supermarkets are making: “save me from myself.”
This, of course, should be the essence of politics. Politics is – or should be – the art of solving problems of collective action. If individually rational actions always led to outcomes which were optimal in aggregate there wouldn’t be a role for the state.
However, one feature of David Cameron’s governments was that they didn't see this. The most egregious example of this was of course the failure to see that attempts to pay off “the nation’s credit card” would fail because of the paradox of thrift. But there were others, such as encouraging panic-buying of petrol during the threatened lorry-drivers strike of 2012, or demanding that shareholders take more control of companies without seeing the obvious free-rider problem in doing so.