Informal Economies

The Prisoner’s Dilemma of Development

Cooperation is the hallmark to modern economic success, but someone must think of the idea to organize first. Once organization becomes the norm of a society, the idea to organize is easily copied and applied to new scenarios.

Cooperation is the hallmark to modern economic success, but someone must think of the idea to organize first. Once organization becomes the norm of a society, the idea to organize is easily copied and applied to new scenarios.

Cooperation is a hallmark of modern economic success. Specialization has allowed mankind to produce more efficiently and at a higher rate than ever before. As people have joined together, working collaboratively instead of side by side, our productivity has moved from a paradigm of additive value to one of multiplied value. In India, employees working for companies that employ greater than 200 people are ten times more productive than those working for companies that employ only ten. It isn’t the employees themselves, but their organization that allows such notable increases in productivity. Cooperation pays.

Dr. Alfred Kieser traced the genesis of formal organizations in Europe back to medieval craft guilds, highly organized, society-based economic networks and precursors to modern institutions. Today most European workers are employees and reaping the benefits of multiplied economic productivity. Most Indian workers are self-employed. Their productivity is added, leaving the country comparatively poor.

How have some countries evolved systems of integration and organization without a centralized authority, while other have not?

One answer relies on game theory. Game theory is a branch of economics that explains individual behavior between two rational, self-interested individuals. One famous example of why individuals may choose to cooperate based on mutual self-interest is referred to as the Prisoner’s Dilemma. The concept is quite simple: if there is a long-term benefit of cooperation and the players expect to play again in the future, cooperation will naturally emerge.

In The Evolution of Cooperation, Robert Axelrod applies this theory more broadly than an economist might. Businesses, he explains, may evolve from this very mechanism. What this still doesn’t explain is why some places evolved while others places haven’t.

Sometimes the answer is deceptively simple.

Edarkundram is a small village in India. It is located eleven kilometers from the highway. The villagers are subsistence farmers, not businessmen. They each farm a small piece of land, producing enough to eat themselves and trading amongst themselves. Every once in a while a middleman with a tempo, a small three-wheeled vehicle, will cruise into the village to buy surplus goods. The little tempo will leave with whatever the villagers are willing to part with, paying significantly less than the food is worth at market. He will then sell the goods, making a good profit.

When asked why they didn’t take their excess goods and sell them at the market themselves, the farmers explained that they didn’t own a tempo. The cost to rent one, each reasoned, would not be worth the price one small bag of surplus rice would fetch at market. When asked why they hadn’t pooled their money and sold all of their goods on one trip, much as the visiting middleman does, their answer is both obvious and surprising: they just hadn’t thought of it.

The Prisoner’s Dilemma assumes that the benefits of cooperation are obvious, but are they?

Someone has to come up with the idea to organize. Someone has to recognize that organization is useful. The precursors to medieval craft guilds were large before they were organized. As more people become involved, the likelihood that someone will recognize the importance of organization increases. Once organization becomes the norm of a society, the idea to organize is easily copied and applied to new scenarios. To be the original creator of organization, however, requires a spark of brilliance. In some places, we are still waiting for the spark.

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