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Rationalization of Altruistic Behavior in a Wealth Maximizing Economy

Ellis I. Lee
Politics of International Economic Relations
Young-Bae Hwang
February 10, 1995
Rationalization of Altruistic Behavior in a Wealth Maximizing Economy

“This study focuses on two central but neglected tasks of economic history: to theorize

about the structure of economies, and to account for either stability or change in those

structures” (North, 1981, p. 3). With these words, Douglas C. North not only begins his book

Structure and Change in Economic History, but he also begins to fabricate a structural theory

that addresses the infirmities of the neoclassical theory of economics. These infirmities are

caused by the neoclassical postulates that institutions and the cost of transactions do not exist

(North, 1981). Thus, North “attempts to integrate some structural elements ignored by

neoclassical theory into his explanation of history” (McGuire, 1982, p. 306). However, an

immediate and problematic enigma arises in the neoclassical theory. To understand this enigma,

it becomes paramount to understand the wealth maximizing postulate which assumes that

“individuals prefer more goods (and services) to less” (North, 1981, p. 4); therefore, resources,

whether human, capital, or natural, will be utilized to increase the production potential of the

economy. And this utilization of resources in an environment of scarcity represents the costs and

benefits of the particular transaction. If a transaction incurs more costs than benefits, the rational

decision, as mandated by the wealth maximizing postulate, would be to not undertake that

transaction. Thus, North (1981) argues that the neoclassical theory cannot explain altruistic

behavior or societal stability when “an individualistic calculus of costs and benefits would

suggest that cheating, shirking, stealing, assault, and murder should be everywhere evident” (p.

11). However, an expanded examination and assessment of altruistic behavior from a biological

and mathematical perspective might rationalize such transactions as having greater benefits than

costs from the individual’s perspective.

North’s assumption that the neoclassical theory cannot adequately explain altruistic

behavior is based upon two unstated premises: First, the individual acts without regarding the

transaction’s consequences for others; second, the costs of altruistic behavior is greater than the

benefits. When these premises are examined, it becomes evident that the first premise becomes

unrealistic to maintain and that the second premise is incorrect. To begin with, the assumption
that individuals do not consider the consequences of their actions on other people negates the

fact that human beings are social animals that have evolved through history by interacting with

each other. This has led Wilson (1978) to examine whether or not there might be a genetic

predisposition for people to act in an altruistic manner since there exists numerous example of

other social animals, such as chimpanzees, honeybees, and birds, engaging in altruistic behavior.

Although a definite genetic basis of altruism has not yet been established by biologists, it was

Wilson’s (1978) contention that although there might be more examples of altruistic behavior

among relatives since “during most of mankind’s history the predominant social unit was the

immediate family and a tight network of other close relative” (p. 153), altruistic behavior has

become more ubiquitous since the “perfection of the social contract has broken the ancient

vertebrate constraints imposed by rigid kin selection” (p. 156). Wilson (1978) thus concluded

that “the most elaborate forms of social organization, despite their outward appearance, serve

ultimately as the vehicles of individual welfare” (p. 159). This conclusion seems to contravene

North’s narrow attempt to define an individualistic calculus of costs and benefits without further

examining the individual’s relationship to society since benefits to social organizations could also

return benefits the individual.

North also assumes that altruistic behavior incurs more cost than benefits for the altruist.

But this assessment fails to consider the emotional or religious motivation of the individual. As

Wilson (1978) observed:

No sustained form of human altruism is explicitly and totally self-annihilating. Lives of

the most towering heroism are paid out in the expectation of great reward, not the least of

which is a belief in personal immortality. (p. 154)

Thus, it cannot be maintained that altruistic behavior lacks more benefits than costs if an

individual’s decision also considers the possible reciprocation of a grateful society, which may

provide more compensation than costs for that individual. If this understanding of altruistic

behavior is maintained, then altruism may not actually exists, especially in context of the

neoclassical viewpoint since there would be benefits to be gained; for example, recipients of the
United States Congressional Medal of Honor receive a monthly lifetime monetary stipend if they

are able to survive their selfless acts of heroism, but, unfortunately, most Congressional Medals

of Honor are awarded posthumously. Suicide for the benefit of others seems to be the ultimate

form of altruism since there seems to exist no goods or services which can be reciprocated to the

individual. However, if an expanded definition of benefits can be implemented, then suicide can

be rationalized in terms of a cost-benefit analysis that results in the conclusion that the benefits of

suicide outweigh the costs. For example, according to the teachings of the Koran, if a person dies

for the cause of Islam, then their souls are immediately taken to Heaven where eternal happiness

and contentment is assured; these heavenly conditions provide far more benefits then the current

standards of living in the Palestinian controlled Gaza Strip and provide Islamic fundamentalists

with the necessary incentive to engage in activities that would most likely result in their deaths

(National Public Radio, 1995).

By rewarding altruistic behavior with emotional or civic praise, society hopes to

“promote its recurrence in others” (Wilson, 1978, p. 149). However, in contrast to altruists, “the

cheat, the turncoat, the apostate, and the traitor are objects of universal hatred” (Wilson, 1978, p.

162). From this framework of rewarding behavior that benefits the cohesion of society and by

punishing behavior that tends to undermine that cohesion, an explanation to Mancur Olson’s free

rider dilemma might be forthcoming. North (1981) asserts that “rational individuals will not

incur the costs of participating in large group action when the individual benefits can still be

received by being a free rider” (p. 10). But by participating in a large group action even when the

individual would receive the benefits without participation, an individual would have the added

advantage or benefit of being recognized as someone who promotes either societal cohesion or a

specific agenda. This might be useful for politicians in establishing credentials or for patriots

who need to demonstrate ideological loyalty, as with the citizens of either North Korea or the

former Soviet Union where there existed only one legal political party which, contrary to the free

rider assumption, had high rates of participation.

By extending the reasoning of why the neoclassical model cannot adequately explain
altruistic behavior, North (1981) also asserts that the neoclassical model is deficient is explaining

societal stability:

The neoclassical model has an asymmetrical dilemma built into its behavioral function

because it assumes both wealth maximization and the Hobbesian model of the state,

which will constrain behavior to produce a viable political system. If individuals are

acting rationally with respect to the first assumption then they are acting irrationally with

respect to the second. It is certainly in the interests of a neoclassical actor to agree to

constrain behavior by setting up a group of rules to govern individual action...[b]ut it is

also in the interests of the neoclassical actor to disobey those rules whenever an

individualistic calculus of benefits and costs dictates such action. That action would,

however, result in the non-viability of any state, since enforcement costs of the rules

would be, if not infinite, at least so large as to make the system unworkable. (p. 45)

However, a mathematical game known as prisoner’s dilemma might be able to provide an

explanation of how it might be more beneficial for people to cooperate with each other in an

environment of uncertainty. Bass (1993) explained the parameters of the game:

Imagine two prisoners facing life in the slammer for a crime they committed together.

They are questioned separately by the authorities. If they resist the temptation to rat on

each other, their alibi will hold and they’ll both be released after a few months in jail.

(Let’s assign this outcome a value of 3 points each, with the object of the game being to

score the most points.) If both prisoners chicken out and rat on each other, they’ll each

get a longer sentence (albeit less than the maximum because they get time off for turning

state’s witness); this lower payoff is worth 1 point each. But the highest payoff goes to

the prisoner who rats while his buddy remains silent; then the ratter goes scott-free, for 5

points, while the silent sucker gets the maximum sentence, for 0 points. (p. 64)
From Bass’s (1993) description of the game, the following scoring table can be formulated:

Table: Scoring Patterns in Prisoner’s Dilemma

Prisoner B

Defect Cooperate

Prisoner A Defect 1/1* 5/0*


Cooperate 0/5* 3/3*

*Scores: Prisoner A / Prisoner B

If an individual would have only one transaction with another person, then that individual’s best

strategy would be to defect and not to cooperate with the other person since, if the other person

cooperates, the individual would have the most to gain while protecting against a possible

defection by the other person (Bass, 1993). North (1981) also conceded that if Morris, his orange

retailer, never expected to see him again, then Morris might be tempted to place rotten oranges in

the bottom of North’s orange sack in order to minimize his losses of unmarketable oranges while

maximizing his profits. But since Morris does expect to see North again, he does not place rotten

oranges in North’s sack since North is more valuable as a repeat customer. Thus, North (1981)

concludes that “opportunism...is constrained by repetitive dealings” (p. 35). In the same fashion,

when prisoner’s dilemma is repeated, it lacks an optimal strategy since the strategy becomes

contingent on the actions of the other person. As Bass (1993) explained:

If you meet a relentless defector, you should always defect. If you meet an all-out-

cooperator, you should also [italics theirs] always defect. But if you meet a grim

retaliator—someone who cooperates until his opponent defects and from that moment on

never cooperates again—you should cooperate.

Political scientist Robert Axelrod decided to hold a series tournaments for computer

programs to determine what strategies would gain the most points in the prisoner’s dilemma
paradigm. In the 1980 tournament, Axelrod wanted to “simulate natural selection by modeling

ecological encounters in nature” (Bass, 1993, p. 65) by rewarding successful strategies with

offsprings that would participate in the subsequent rounds while using the same strategy as their

parents’. Under these conditions, it was discovered that the most successful strategy was when a

prisoner would cooperate with cooperation and who would cooperate with a defection on an

average of one in three times (Bass, 1993). The logic of this strategy manifested itself if a

prisoner accidentally defected against a grim retaliator. This would result in an infinite number of

subsequent defections which would force the prisoner to also defect continuously with the net

result of achieving only one point each during a round. But by cooperating with a defection on

average of one in three times, then the effect of an accidental defection can be negated since if

another forgiving prisoners would reciprocate the cooperation of the prisoner, then they would

both earn three points each during a round. This would result in their continued cooperation and

reproduction. This strategy seems to suggest that it is more beneficial for people to cooperate

with each other.

North (1981) contends that the neoclassical model is faulty and deficient in explaining

stability since it does not consider the existence of uncertainty. Since uncertainty does exist in the

real world of human beings, mathematician Karl Sigmund made a poignant assertion:

“Generosity pays off under conditions of uncertainty...Never forget a good turn, but try

occasionally to forgive a bad one. We benefit from cultivating a keen sense of gratitude dosed

with a small amount of generosity” (Bass, 1993, p. 62). And from this perspective, with the

realization that it would indeed benefit people more to maintain societal stability by promoting

cooperation and adherence to social norms or laws, it would be logical for people to have an

expanded view of the individualistic calculus of costs and benefits that would include a temporal

progression of continued uncertain interaction with other individuals. This expanded

understanding of the cost-benefit calculus might explain why nation-states observe international

law more often than not, despite the fact that there does not exist any effective authority that

forces compliance from nation-states. Gerhard von Glahn (1986) noted that “credibility is
promoted by observing international laws and hurt badly by disregarding them” (p. 7).

Furthermore, “such credibility is necessary for a successful foreign policy” (von Glahn, 1986, p.

7).

In contradiction to North’s beliefs, altruistic behavior and societal stability can be

explained in a manner that does not contradict an individualistic calculus of the wealth

maximizing postulate if biological and mathematical considerations are taken into account. A

person may consider the emotional or religious benefits of altruistic behavior to be of greater

value than to use limited resources to increase the production potential, and a person would also

realize that the long-term benefits of cooperation in an environment of continued uncertain

interactions would offset the limited gains of an individualistic calculus of costs and benefits for

just one transaction. Thus, the neoclassical theory need not disparage individuals as being

irrational.
References

Bass, T. A. (1993, May). Forgiveness math. Discover, p. 62-67.

McGuire, J. M. (1982, April 17). Structure and change in economic history. America, p. 306-307.

National Public Radio. (1995, February 9). All Things Considered [Radio] . WUGA: Athens,

GA.

North, D. C. (1981). Structure and change in economic history. New York: W. W. Norton.

von Glahn, G. (1986). Law among nations: An introduction to public international law. New

York: Macmillan.

Wilson, E. 0. (1978). On human nature. Cambridge: Harvard University.