Pure Competition and the Soup Pot of the Enemy

Last Updated Jul 7, 2010 1:56 PM EDT

In economic models, the pursuit of self-interest by agents operating in competitive markets results in the greatest gains for society as a whole. This is the individual hand metaphor used by economists to explain how the the maximization of gains by each individual also maximizes gains for society more generally.

Is it true that the pursuit of self-interest always leads to a socially optimum outcome?:

Nsikoism & The Soup Pot of the Enemy: A Nigerian description of a political culture in which individuals act in blind self interest â€" thwarting the efforts of others â€" just as crabs attempt to escape a basket. (Nsiko = crabs)

In 2008, the governor of Imo state Nigeria, Ikedi Ohakim, attributed the problems facing the Niger Delta to a nsiko mentality â€" as Ochereome Nnanna explained in Vanguard:

According to [Ohakim], the nsiko (crabs) once they find themselves in a basket, act foolishly. Every one of them wants to escape from the basket to freedom.

But rather than each of them concentrating on their individual escape bids they engage in pulling each other down. In the end no one escapes and each crab ends in the soup pot of the enemy. This is unlike snails, which are slower but wiser in that they concentrate in escaping rather than fighting each other.

There's actually a good lesson here about when competition leads to a socially optimal outcome and when it doesn't. What is the difference in these two cases? One of the assumptions that makes the pursuit of individual interests coincident with maximizing societal gains is that there are no externalities. That is, the actions of one agent does not impose costs or benefits on other agents. When the snails attempt to get out of the basket, their individual paths do not interfere with the paths of other snails. The escape attempt by one snail does not impost costs (or benefits) on other snails. If they had hands or claws to grab other snails ahead of them to try to lift themselves out it might be different, but they don't.

Not so with crabs. The attempt by one crab to escape by grabbing the one above it pulls the crab above it down and imposes an externality. That is, the attempt to escape imposes a cost on other crabs and makes them all worse off (very much so in this case since they end up in the soup).

This is equivalent to a firm that is able to pollute without paying the costs. The pollution imposes costs on other agents, and in doing so drives the economy away from its socially optimal position. The solution for humans is to make the polluting entity pay the full costs of their actions, e.g. impose a tax on the pollution they cause or enact a prohibition against it. For crabs that would mean, say, the death penalty for grabbing a crab above you (if there is no grabbing, all will escape). Unfortunately, however, crabs have a bit of difficulty looking into the future, evaluating the costs and benefits of their actions, and making a rational choice, so this wouldn't work. Some humans have this trouble too, but for the most part we expect people to respond to well-constructed incentives in a way that redirects individual behavior toward what's best for all. That's the rationale behind proposals for a carbon tax or its functional equivalent, cap-and-trade. It's an attempt to prevent some agents in the economy from pulling the rest of us down into the globally warming pot of soup.