Capitalism: It’s as Much About Cooperation as Competition

Categories: Behavioral Finance, Economics, Leadership, Management & Communication Skills
School of fish

We have myopically come to believe that “survival of the fittest” is synonymous with competition and is the highest expression of our nature. Yet survival of the fittest also includes those creatures, including humans, who successfully and continuously cooperate to survive.

Case in point: Lions adorn the flags of many nations as symbols of individual power and unparalleled ferocity — think of King Richard I of England, who was, after all, called Richard the Lionheart. But as we all know, lions actually hunt and cooperate in packs in order to find and secure food.

In fact, the natural world is replete with numerous examples of strength in numbers, from flocks of birds flying together to reduce wind drag during migration, to schools of fish swimming together to increase the chance of survival in the face of predation. In the human world, armies are vast cooperative enterprises in which troops “watch each others backs” when confronting enemies.

Science has acknowledged these possibilities for decades, even though the subject receives little attention from the popular press. One notable exception, however, is a recent Scientific American cover story entitled “Why We Help: The Evolution of Cooperation.” For me, it’s an article that can help bring an overlooked and understudied aspect of capitalism into sharper view: the fact that the capitalist system, like nature itself, depends on cooperation as much as competition.

To be sure, we tend to think of capitalism in the same way that we think of survival of the fittest — that it is one of the ultimate expressions of competition. In fact, it is difficult to find a definition of the word that does not emphasize competition in its description. Consider the following:

  • Investopedia defines capitalism as “an economic system based on a free market, open competition [emphasis mine], profit motive and private ownership of the means of production. Capitalism encourages private investment and business, compared to a government-controlled economy. Investors in these private companies (i.e., shareholders) also own the firms and are known as capitalists.”
  • Meanwhile the Collins English Dictionary defines capitalism as “an economic system based on the private ownership of the means of production, distribution, and exchange, characterized by the freedom of capitalists to operate or manage their property for profit in competitive [emphasis mine] conditions.”

But consider the myriad ways that capitalism depends on cooperation:

  • That ultimate capitalist vehicle, the corporation, is not just a legal business entity but a vehicle of, and for, cooperation. In fact, alongside nation-states, corporations are the largest cooperatives ever imagined by people. What else besides cooperation describes Walmart’s 2.2 million employees working together toward competitive ends? What else besides cooperation describes McDonald’s 1.9 million employees working together toward competitive ends? Or China National Petroleum? Or Carrefour?
  • Philosophically, a key part of what separates capitalism from its economic opposite, communism, is the level at which decision making is undertaken. Communism seeks to equally distribute its resources among economic players — but at the expense of the freedom of choice of buyer and seller. So decisions are usually made by an authoritarian economic entity, like a central planning committee. In contrast, capitalism trusts buyer and seller to both consent to a transaction. Put another way, capitalism allows — in fact, insists — that buyers and sellers cooperate in a transaction rather than just accept a third party’s mandated good and price.
  • Markets are a vast cooperative enterprise in which buyers and sellers work together to set prices and allocate resources. Transactions occur without coercion, and in fact, occur only with cooperation.

Why is any of this important? Because, as the old saying goes, for the person with a hammer every problem looks like a nail. Governments increasingly, and strongly, advocate for business (i.e., “competitive”) solutions to social problems. The argument typically rests on the unswerving belief in the efficiency of business and the superiority of competitive solutions. Yet competition does not always lead to optimal outcomes.

One obvious example for investors is the 2011–2012 debt and budget debate in the United States, where competition — Republican versus Democrat — has not resulted in a workable solution, and the underlying problems associated with high debt continue to fester. Might cooperation yield a better result? We will never know as long as the politicians’ solution sets include only competition as a means to a policy end.

Let me be clear: This is not a defense of bloat and bureaucracy. Instead I am merely arguing that always seeking competitive solutions to problems (by holding up the business world as an example) overlooks the fact that businesses are vast cooperatives. My point is that we need to grow the universe of choices to include cooperative solutions to problems and thus avoid myopia.

So where could this new-found appreciation for cooperation be applied? One can imagine a scenario in which the global financial industry works with, not against regulators, to establish a financial system that balances opportunities for return with minimizing risk. As CFA Institute President and CEO John Rogers has noted elsewhere, every investment professional must “take personal responsibility and act to move our profession and industry onto the higher path.” Such cooperation between industry and government does not run contrary to capitalism or nature’s survival of the fittest, as both need healthy doses of both competition and cooperation.

In fact, seminal research by Robert Axelrod and William D. Hamilton published in Science in March 1981, entitled “The Evolution of Cooperation,” triggered hundreds of subsequent papers that have demonstrated that, even in that most cutthroat of environments — the prisoner’s dilemma from game theory — cooperation trumps competition! In this groundbreaking research, Axelrod and Hamilton initially held a computer tournament and asked theorists from economics, sociology, political science, and mathematics to submit potential winning strategies. This first tournament had 200 rounds and included some extremely intricate strategies. So what were the surprising results?

A strategy called TIT FOR TAT (TFT) involved the following attributes: it was the simplest strategy submitted, on average it was the winningest strategy, and it was based on cooperation. So what were the two decision rules for TFT? First, in round one of the simulation cooperate with your ‘opponent;’ and second, that on all subsequent rounds the player does what the other player did in the preceding round. In subsequent tournaments (i.e., rounds), with many more entrants and 3 million choices, the TFT strategy won again.

How can this be? After all, as any student of game theory well knows, years of testing have demonstrated that the way to win the prisoner’s dilemma is to betray your collaborator. Yet the key lesson from Axelrod and Hamilton — the lesson that is often lost — is that this iron-clad result only holds under one unique circumstance: if both participants know this is the last time they will ever encounter each other. In the real world, most economic participants have multiple and frequent interactions with fellow economic participants. If this is the case, then the winning strategy for us as individuals is TFT, which in fact holds several important lessons that can mirror real-world behaviors:

  1. Be nice. That is, cooperate and never be the first person to betray others.
  2. Reciprocity. If someone betrays you, then you betray them back. Likewise, if someone cooperates, then you cooperate back.
  3. Avoid covetousness. In other words, be fair with your partner.
  4. Simplicity. Do not be overly complex or tricky in your strategies.

Despite the obvious successes of cooperation as a mode of power and a vehicle for driving successful exchanges, it gets short shrift in the modern world. Yet cooperation just might be the “not-so-secret, secret weapon” that is readily available to us all. Cooperation is hiding in plain sight. It only requires that we actively choose to cooperate.


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Humpback-snapper photo from Shutterstock.

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17 comments on “Capitalism: It’s as Much About Cooperation as Competition

  1. Great post Jason! One more aspect about the Axelrod and Hamilton experiment I would like to highlight in this context is that the TFT algos, and almost all the top 10 winning algos first chose to co-operate with their competitor, they also took into account what their competitor did in the last move. Whenever history is involved, and there are going to be future transactions, co-operation always wins out. Not only because it enables the transaction, but also it synergizes the transactions after as well! This will become apparent if you take a look at the pay-off matrix in that experiment. It was paying less to co-operate, but the summation of co-operating games over 50 odd transactions was always more than win-lose kind of transactions.

    In real life, I think this synergy is the relationship between two parties. When one party does not co-operate, it impacts all future transaction with that party.

  2. Hi Prasad,

    Thanks for adding your rich knowledge to the piece – much appreciated. This is an issue that I have been talking about and writing about for years. I hope that this piece finds a wider audience as the dialogue about capitalism is skewed toward competition.

    Again, thanks!

    Jason

  3. tyc said:

    I’m not too familiar with TFT algos, but I’m guessing this is very similar to the movie the “Hunger Games” or one of my favor “Battle Royal”. In any event, let’s assume every business people holds a CFA charter, would this dilemma still exists? I’ll take the stand that it will.

    How about applying this concept to a single firm, would we still see more cooperation or competition upon the employees that work for that company? I believe both qualities exist, but my next question would be “why?”. If we believe cooperation benefits everyone, why would anyone wants to destroy this benefit?

    In my opinion, life works like a pyramid. The base starts off with cooperation but as we ascend to the top of the triangle, our motivate changes to competition.

    • Wingnut said:

      Hi tyc!

      Its not that ‘life’ is a pyramid, but CAPITALISM is. The parental policy is share share share until about 18 years old, and then it reverses to fight fight fight when the kids are forced into the competer’s church called capitalism (forced to get a job)… and that’s done with OR STARVE, OR DIE, OR ELSE felony extortion. Nations/societies who are bought-into rat-racing get-a-leg-up pyramid schemes such as capitalism… do not offer their 18 yr olds a cooperators church.

      And if any reader believes that the cooperation seen in everyone rat-racing and doing nation-unto-self capitalism… is ANYWHAT similar to the cooperation seen in all-on-the-same-team communes such as that seen in the US military members, they are sadly mistaken. Actually, the only cooperation seen in capitalism… is a cooperation with the programming that insists that everyone should join capitalism… and a SINGLE kind of currency in THAT, as well. Offering multiple kinds of survival coupons (money) is a competition that capitalism just does not allow… and if you join capitalism, be it forced-in or volunteer joiner, you WILL cooperate with that ‘one kind of coupon from one org’ policy… and do something called cope’n’deal. Pretty sad.

      Truth is, you find a pertinent kind of cooperating in capitalism. Even ‘teams’ bill each other cross-department these days… so its dog-eat-dog even within capitalism’s so-called team, and pyramid climbing get-a-leg-up is rampant within capitalism’s teams (mini pyramids called businesses who try to wipe out competing businesses). Capitalism is CYA (cover your axles) all the way. Even the love sometimes seen for clients… its just sales schmooze, of course.

      Its all caused by using economies… (money, owership, price tags) which is a rat-racing/tug-o-warring device… not used by ANY other living creatures on the entire planet. Its a man-made-up thing… and a society killer. Racing doesn’t work… and neither does get-a-leg-up pyramiding, as was/is blatantly seen by the sure-to-collapse ones tried (and failed-at) in the playgrounds as kids. Capitalism’s pyramid is sure to collapse as well… too much weight of the world on the bottom layers, and to much lack of taking notice by the heads-in-the-clouds upper layers. Take care, and good luck in pyramid land…. not life… man made.

  4. Sitaraman V Iyer said:

    Mostly disagree with the article.
    Corporation should have ideally a very minor role to play in capitalism.
    Because corporation invariably leads to a very dangerous form of capitalism viz crony capitalism.Price collusion, hoarding of resources, insider trading are generally the results of corporation.

    Your article suggests that in communism, a committee of government officials ends up taking decisions for buyers. Something similar happens when corporation enters capitalism. For eg OPEC committee.

    America is a great example where all forms of capitalism coexists together.

    Think of the tech industry where the clear rule of the game is survival of the fittest. Apple, Google, Microsoft and some ordinary tech start up all fighting to make the next big thing which would change the world. A clear case of creative capitalism. One of the primary reason that the best technology( be it the PC, Tablets ) invariably comes out of America is because of the encouragement of this culture.

    I think of the entire financial industry as examples of crony capitalism .The industry seems to have lost its entire identity in the race to make big bucks. Insider trading, Leveraged bets, Changing the rules of the game seems to have become the norm.

    They caused the entire meltdown with leveraged bets on the housing sector. How were they allowed to take these leveraged bets in the first place. Well the industry changed the rules by lobbying with regulators.I find it funny that there is still a lot of resistance out there from big banks to separate the investment banking and the normal lending divisions of the bank .

    My overall view is that corporation has its place in capitalism but should definitely not be encouraged.

  5. Pingback: Co-operation in Capitalism
  6. muhammad gamal said:

    magnificent article Jason , keep it up , I wish to be CFA one day :D :D , my favorite career for ever

  7. I like to point out that tit-for-tat is not the fittest strategy under all circumstances, but only in tournaments where strategy can’t be tailored to asymmetrical information (called communication in the real world).

    The dilemma is that the line between cooperate/shirk is not that clear and aren’t signaled during the game alone.

    Make sure your competitor knows you are cooperating, and that you will be irrationally glad to punish shirking, and are commited to keep on punishing with brutal intensity.

    Thanks for the post.

  8. Hello Jakus,

    Thank you so much for your comment. You have made the piece even stronger by describing the special circumstances in which tit-for-tat works.

    I apologize for taking so long to respond to your comment.

    Last, I am happy that you liked the post. I hope that an intelligent conversation about capitalism’s cooperative elements may eventually happen in the business community.

    With smiles!

    Jason

      • I mean to say that instead of competing, if companies start cooperating with each other in everything it’ll increase lobbying in any sector.

        So, few company will hold control over pricing and supply. Even govt policy and regulations might be influenced or molded as per their need.

        Well, no doubt some times cooperation helps in fighting for the right.

        • Hello Pravin,

          Thank you for clarifying what you meant; it is much appreciated.

          I am sorry to give the impression that I think businesses ought to cooperate with one another. That is illegal due to anti-trust regulations. What I was intending by my post was to point out that cooperative solutions are just as valid as competitive ones. In other words, I see capitalism as having equal parts cooperative and competitive aspects, but capitalism is instead thought of as solely about competition. When capitalism is then held up as a model of social policy, or worse it shapes the minds of how newly minted business people think about the world, then I think it is a problem. I hope this clarifies my point of view.

          With smiles,

          Jason

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