Bart Wilson  

The We in Wealth

Free Market Schizophrenia... Four Readings from Frederic Ba...

The first economic experiment in our Humanomics class is based upon my research article with Sean Crockett and Vernon Smith. The idea for the project came from an honors course that Vernon and I have co-taught using experiments to teach the classic primary texts of Hume, Smith, Marx, Jevons, Walras, and Hayek. One initial gap in the course was that we didn't have an experiment to cover Adam Smith's fundamental proposition that exchange makes specialization possible. So I set out to design one.

In the traditional market experiment, the experimenters explain to the participants how to trade. For this experiment that seemed more than a little heavy handed if the question is, what is the process by which exchange "gives occasion," as Adam Smith says, to discovering the "division of labour"? OK, we're supposed to trade. What else is there to do in this experiment? Choose production? Hmmm, I guess I'll produce the most I can to trade.

Thus the first requirement in building the design was that participants would have to discover specialization and exchange. Since designing experiments is more fun when playing with others, I invited Sean Crockett, a pre-doctoral visitor at the time with expertise in general equilibrium analysis, to brainstorm how we might design an experiment in which the participants would have to discover exchange and specialization and build their own market institutions to create wealth. When we had something, we discussed the platform with Vernon, and it now serves as the foundation for Humanomics and for how I think about Humanomics.

In the experiment the participants are endowed with a house and a field displayed as icons on a computer screen. The participants choose how much of their daily production time they would like to allocate to producing red and blue items in their field. They are then told, deliberately in the passive voice, that "you earn cash based upon the number of red and blue items that have been moved to your house." What they have to discover is that not only can they move items to their own house, but that they can move items to other people's houses.

There are two types of people in this world, odds and evens. Evens (Person 2, 4, 6, and 8) earn two cents for each two blue units that are consumed with one red unit. Odds (Person 1, 3, 5, and 7) earn three cents for each three red units consumed with one blue unit.

This figure summarizes the environment for one even and one odd person:

Given her ability to produce and her preferences to consume, a self-sufficient odd person can maximize her consumption by producing 30 red and 10 blue. Similarly, a loner even can maximize his profit by producing 13 red and 26 blue. Summed together, this outcome is represented by the point labeled as "autarky" or (43, 36).

Unbeknownst to the participants, evens have an absolute and comparative advantage in producing blue, and odds an absolute and comparative advantage in producing red. If an odd person spends her entire production time producing red, she can produce 130 units, shown as the red dot on the horizontal axis. If an even person spends his entire time production time producing blue, he can produce 110 units, shown as the blue dot on the vertical axis.

Suppose that an odd person produces 130 red units, and an even person 110 blue units. An odd person can then trade 40 red to an even person for 30 blue. An odd person would then consume 90 red and 30 blue, and an even person would consume 40 red and 80 blue. This point is labeled as "competitive equilibrium". The black lines are a frontier for what an odd and an even person together can produce (a production possibilities frontier).

The last details are that the middle of the screen contains a chat room in which the students are free to discuss "any and all aspects of the experiment" anytime during the experiment, though they cannot reveal their name. The research experiments lasted 40 days of 100 seconds, but our classroom economies only lasted 27 days of 90 seconds. For the first 13 days the participants are in pairs. On day 14, the software merges the pairs into two groups of 4, and on day 21, all 8 houses and fields appear on everyone's screen. Finally, because this world can be frenetic and hence tiring, every 7th day is a day of rest in which there is no production but the chat room is still open.

Now, what do people do? There were two economies of eight people in both sections of the course. Below I present the results for the two extreme groups.

At one extreme, the economy achieves 88% of the possible wealth above self-sufficiency by the last day:

And at the other extreme, only 6% of the possible wealth above autarky is realized:

Why the disparity? (We see the same variance in the research experiments.) All of the students are Chapman freshman undergrads. All have read and discussed the prologue and first two chapters of The Rational Optimist. The geographic, physical, and economic settings are identical. Why is group 4 wallowing in poverty and group 2 more than twice as rich by the end?

Over the first 14 days, group 2 exchanges 533 words and group 4 some 430, but the content of the discussions is rather different. In group 2, Person 8 asks on day 2, "what are we trying to accomplish?\" and Person 4 on day 7, "lets work together to make a profit yall". These students are immediately engaging their counterparts as part of an inclusive "we". The same is not true in group 4. At best any "we" is a question on day 7: "Are we supposed to be sharing information as a team or is this an individual competition?" Over the course of the first 14 days, the word "we" is used 16 times to engage another field owner in group 2. In group 4, there are just 5 instances of "we".

You may think that these are mere anecdotes from a classroom experiment, but the "we" in creating wealth comes up in this experimental platform over and over, again and again.

For the students in this Humanomics class, experiencing this world and discussing alternate realizations of it illustrate what Matt Ridley cleverly calls "The Manufacture of Virtue" in trade, albeit with much less on the line: "Taking the first step to proffer the hand of cooperation to a homicidal enemy must have been momentous and almost impossibly difficult, which is perhaps why it is such a rare trick in the animal kingdom" (p. 88). Even with stakes of a grade, this experiment demonstrates that the values of a particular community can accelerate or retard the creation of wealth.

On day 14, Person 7 in group 4 asks, "what is the best way to go about this? there is some trick to obtain a ton of one color and manipulate the other color to increase your profit substantially." The trick is not to manipulate for one's own gain. The uniquely human trick is to integrate strangers into a "we" for voluntary mutual gain.

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COMMENTS (15 to date)
Tracy W writes:

This is really interesting, thanks for describing it. The disparity is striking, I wonder what more experimentation would indicate about the personalities in generating the different results.

And a more specific question - so there were 4 experimental runs in total? The two extreme cases you've shown here and two in between?

Brian writes:

This is a fascinating and inspired pedagogical example. Great job!

You do understand, however, that this offically marks you as evil. See how you're propagating the structures of income inequality? Shame on you! The 88%'ers don't deserve that wealth. They must have cheated. Let's take it and give it to the 6%'ers. And while were at it, take points away from their grade and give them to the others. We can't have people getting an unfair advantage by spontaneously cooperating like that. ;)

MG writes:

This may be one of the most fascinating posts I have seen on this site. (At a minimum, it shows that we all could use more exposure to this kind of behavior economics.)

Like Tracy, I would love to see a lot more experimentation, repeatable results, examination of controls, and then a bold philosophical distillation of the more robust conclusions. Contra Brian's tease, it appears that this type of study would be "politically constructive". It appears to show that wealth creaton is inextricably linked to having the freedom to explore cooperation, not the obligation to compete (or to share). This sounds like a great way to "sell" the essence of freedom to a broader range of the individualistic-collectivist spectrum.

Bart writes:

Yes, my co-instructors and I conducted a total of four groups with our two sections of the course. For replications with actual cash on the line and various treatments, I would direct you to the second link above and then the four other related papers linked to in the third to last paragraph.

Mr. Econotarian writes:

Is this software available for other instructors to use?

It also would be interesting to have this continuously running with a web interface and open it up to the public.

Peter writes:

Is the program available somewhere?

I'd love to run this experiment in my class, but there is exactly zero chance that I'll be able to put together the program myself.

Graham Peterson writes:


Great post, and I like your new addition of the chat analysis that I hadn't seen in the original working paper last year. Are you going to do another post on how the participants frame trade in terms of "giving?" I saw Smith point that out in a video of a conference once. Important detail -- trade is an extension of a much broader range of social transactions across which reciprocal giving and Maussian reciprocity are the guiding light.

Really excited to see you out here doing this work. Keep it up!


Chris H writes:

A fascinating bit of research! The result that cooperation leads to greater wealth isn't surprising of course, but still a good thing to confirm (and a potentially interesting counter to the idea that being a jerk is how you get rich).

But I wonder if this thinking in "we" terms also has other implications? Does anyone know if a linguistic analysis like this has been done in a game trying to simulate cartel or collusive behavior? Perhaps those we people who work together rather well in this game also work together well to keep a cartel going against third parties?

MingoV writes:

Some people "get" the "We" concept without economic training. I know of four sci-fi novelists* who wrote books that heavily focus on trading. The four writers give the same lesson in their books: traders who communicate and cooperate do best.

*Frederik Pohl
C. J. Cherryh
Elizabeth Moon
Sharon Lee

Tom West writes:

This is a fascinating experiment and a beautiful learning experience, but I would caution against it being interpreted as a "willingness to cooperate" on the part of the students.

It's probably a far better measure of the maximum personal initiative of a student in the group. Most students will expect that the professor will provide everything necessary to "successfully" run the experiment (and thus the absence of instruction means the students shouldn't do anything.)

To assume that the professor might not even give you the metric for success would be unthinkable for most. Not to mention that unsanctioned co-operation might result in academic penalties like failure or expulsion.

BC writes:

Interesting experiment. In the conventional economic view, social welfare is maximized when individuals act in their own interest by engaging in mutually beneficial transactions with others. However, as Brian and MG allude to, in recent years some have focused attention on income inequality: the idea that, in addition to increasing our own wealth, we must also devote at least some effort to preventing others from accumulating "too much" wealth. It would be interesting to conduct an experiment where individuals earn cash not only based on the number of blue and red items placed in their house but also based in part on how few blue and red items are placed in the houses of those with the most items. Everyone's red and blue item accumulation would be published so that individuals could avoid trading with the "wealthiest", even if engaging in those trades would have increased their own red and blue item accumulation. That would allow us to measure the impact of the income-inequality principle that one person's gain must be everyone else's loss. We could then observe whether application of that principle led to higher or lower red and blue unit production.

Bart writes:

The software is getting old (it was written in VB6), so I would suggest contacting Kyle Hampton at University of Alaska Anchorage for a hand run version that he has developed with 3 goods.

Robert Nielsen writes:

Very interesting experiment, particularly how it goes beyond the typical individual v community divide. I am particularly interested in how co-operation and awareness of others was more productive than solely individual profit maximisation.

Julien Couvreur writes:

I love such games, especially as learning tools.
But I suspect this experiment highlights the importance of purposeful collaboration ("we", working as one team, etc) more than division of labor in the real world.

First, the experiment uses a small group. The real world is often about producing and trading with strangers. We don't all sit together to come up with a global strategy to arrive at a division of labor.

Second, the money each participant gets comes from somewhere outside of the interaction. But in the real-world, what you get is the direct result of production and trade.

Kristen writes:

The outcome of this experiment provides excellent proof that increasing income inequality represents a destructive breakdown of the social contract in U.S. society.

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