Co-operation and Competition

Ed Mayo, ex-head of the New Economics Foundation and now of Co-ops UK, has an interesting blog (read here) on the importance of co-operation in our economic system rather than competition. This is a really challenging and difficult topic.


Co-operation is extremely important to the successful functioning of the market-oriented economies of the West. But this is not because of co-operation as an organisational structure. The dominant form of corporate structure for over 100 years has been the shareholder-based joint stock company, and not organisations based on co-operative lines. But nevertheless, co-operation between firms is essential.

The most important reason for this is very simple. Complex economic systems contain many linkages between the different component parts. In an evolutionary context, we can think of a competitive relationship between two firms being expressed by a negative connection between them. If one does well, the other is likely to lose out, and its fitness is reduced. In contrast, a co=-operative relationship is positive. If one does well, the fitness of the other is increased, and vice versa.

Economic theory focuses exclusively on the competitive links. But these are dominated by the co-oerative ones. The structure of production is the reason why. Most economic activity does not involve the final consumer, the individual. It is business to business. So if a firm learns to produce something more efficiently, or if it innovates successfully, the companies to which it supplies benefit.

More generally, co-operation is needed to agree institutional structures in which economic activity can take place. And it is the basis of most contractual agreements. It is impossible to specify in complete detail most business-to-business contractual relationships – look at the massive difficulties caused by Brownite thinking on this in terms of the relationships between regulators and the regulated in the relevant sectors of the UK economy. A strong element of trust is required.

But all this co-operation, which pervades successful capitalist economies, has nothing to do with the organisational form of companies. It can, and indeed has, shown itself in a system dominated not by co-operative but by joint stock firms.

I have been interested in this for some time, and here is a very technical paper which examines what happens in an evolutionary system when most of the linkages are competitive and not co-operative.

Paul Ormerod, Managing Partner Volterra

Minsky Mania: a Raincheck

The American economist Hyman Minsky is currently very fashionable, especially amongst those who are sympathetic to the idea of more government intervention in the economy.
Minsky argued that financial crises were an inevitable feature of capitalism, unless governments stepped in through regulation and central bank action.
He hypothesised that in prosperous times, when the corporate cash position became strong, exuberance developed which translated into a speculative bubble in asset and property markets. Private sector debt rose as borrowing increased to fuel the speculation, and at the ‘Minsky moment’ a crisis would occur. Following this, banks tighten credit, and even companies which are fundamentally sound may be driven out of business because of an unwillingness to roll over debt.
His theory is very seductive in the light of the experience since 2007.
But the theory does not explain why, over the past 80 years, we have only had two major financial crises, the early 1930s and the recent one from 2007. It is the dog which has not barked which causes fundamental problems for the hypothesis as it stands.
For example, in the United States, private sector debt relative to the size of the economy reached a peak of 2.1 in 1932. From a low point of only 0.4 in 1945, it rose almost without interruption to a new peak of nearly 2.2 in 2001. But there was no crisis. It reached 2.6 in 2006, much higher than its peak in the 1930s Great Depression. But again, no crisis.
The Minsky story is good at telling us after the event what happened in a crisis. It does not tell us why crises do not happen, even when the objective facts suggest they should.

Paul Ormerod

The August Riots: A Network Perspective

What can complex systems and network theory tell us about the summer riots?

There was clearly a great deal of copying going on, of imitating other people’s behaviour. This was both within a given community and across communities. Social network media did not cause this, they facilitated it. The incidents received much wider coverage in the traditional media.

But ex ante, it is extremely difficult to predict which events will give rise to ‘cascades’ across networks in this sort of way. Which events will lead to general riots, which will lead to local disturbances, and which will experience no problem at all.

This is a key insight of network theory. Networks are ‘robust yet fragile’. They are robust in the sense that most shocks, most bits of new information, most events are contained by the network, and their influence does not spread. But they are at the same time fragile, in the sense that an incident similar to others which have not spread, suddenly gets traction and spreads.

There are lots of examples of perceived police insensitivity towards minority communities, real or imagined. But in general these do not lead to widespread looting in British cities. There was nothing unique about the shooting of Mark Duggan, and his immediate family called for calm. But in this instance, the network was fragile. Rioting and looting spread.

Once an event happens, however, whenever copying or imitating the behaviour of others across networks is important, it becomes easier to predict whether it will really take off. The complex network structure which makes ex ante prediction very hard, paradoxically makes it easier to assess the eventual scale of the outcome than it would be if networks were not present. So, for example, early diffusion of activity across different communities is a much more powerful predictor than the initial scale of activity. Sometimes, locally large disturbances remain confined and do not spread.

Finally, although a key insight of network analysis is to break the common sense link between the size of an event and its eventual outcome, it is only broken in part. We now know that in networks, small events can have large consequences. This is where ‘common sense’ breaks down.

But a large event still has large consequences. So when riots and looting spread, you have two strategy options. First, to try lots of different small scale interventions and see if one of them takes off, if it is able to exploit the fragile property of networks. Second, to do something on a dramatic scale. For example, call in the Army and shoot 20 looters dead. But what you do not do is what it appears the police did, which was to be reactive only, not proactive. And if you want to follow the first option, time is of the essence. You want to experiment, so you had better do your experiments very quickly before the looting spreads out of control.

By Paul Ormerod