Dynamic Yet Consistent

I have always struggled with the idea of capitalism even from an early age.  I guess I took my teachers seriously when I was told we should share our things.  It never seemed fair that some should have so much while other have so little.

But where did my deep seated disgust with the whole system develop?  I have traced it back to my first year of college at WKU.  I took a Micro Economics class as part of my Gen-ed requirements.  Overall I liked the class, and enjoyed the teacher (we are even friends), but there was one day that I found particularly disturbing.

We were learning about oligopolies and collusion; to demonstrate the effects, we performed a class exercise.  We were divided into two teams, each of which were responsible for selling similar widgets.  Each “day” one representative from each team would meet together and determine the cost of widgets for that day.  The first day we could either sell them for $10 or $12.  If we both decided to sell for $10 we would get $100 each, if we both decided to sell for $12, we would get $120 each.  However, if one of us sold for $10 and the other for $12, then the lower priced seller would earn $150 and the higher priced seller would earn $50.  This was intended to mimic the increased sales that would occur due to lower prices.

Of course there is a catch.  After the “representatives” met they would go back their teams and then determine what their prices would be.  It was at this point that teams could decide if they wanted to be honest or if they wanted to scheme and undercut their competitor.  We did this for five “days” and each day the prices would increase so by the end of experiment the widgets could sell for either $50 or $60 and the profits would be $500|$500 or $600|$600 or $750|$250.  Oh, and at the end of the game, the teams would be rewarded with bonus points on their next test.

If you follow the game it makes sense that at every meeting between teams you would both agree to set the higher cost.  If both teams are trustworthy you can earn 20% more that if both teams are dishonest.  However, if you can get the other team to trust you and you undercut them you earn 50% more (and the other team only earns 50% of what they would have). The game ended up being so disturbing to me I still remember exactly how it played out:

• Round 1 – The stakes were low and both teams trusted each other.  Both teams charged the higher price and everyone profits
• Round 2 – Both teams continued to trust each other, but my team thought that the only way to get ahead would be to strike early so we chose to undercut them and made the big profits.
• Round 3 – (This was the round I was the negotiator for my team) – I was able to convinced the other team that the reason we went low was because we thought they were going to undercut us.  They believed me that our motives were defensive and not offensive (lies!).  We both agreed to trust each other and go with the higher price,  Then my team saw another opportunity to maximize their profits and intentionally uncut them again.
• Round 4 – No one trust each other after being burned two rounds in a row and both teams charged the lower price
• Round 5 – Again, both teams had no trust for each other and charged the lower price.

Here were the scores:

• Round 1: $120 | $120
• Round 2: $300 | $100
• Round 3: $450 | $150
• Round 4: $400 | $400
• Round 5: $500 | $500

If we had all been honest all the time, everyone in the class would have received 14.4 bonus points (Both teams would have earned $1440).  If we had all be dishonest/untrusting we would have all earned 12 bonus points ($1200 each).  As it played out, my team won 17.7 bonus points and our competitors only got 12.7.

The experience still makes me uneasy when I think about.  It was the dishonesty and selfishness built into the system that really bothered me.  I was able to be better off because someone else wasn’t as fortunate.  On the other hand, the losing team received less because they were trusting and desired the best for everyone.

Obviously this is not how the system practically works in the real world, but the principles are right.  Everyone has to look out for their best interests and the only way you can do that is by hurting others.  If you are a buyer you are trying to get something for the lowest price possible, regardless of how much time, effort, or money the seller might have invested in the widgets; if you are the seller, you are going to try and extract the most money out of your product regardless of how much you have invested and what the buyers circumstances may be.

The system works and everyone benefits if people are honest, but once that trust is lost, everyone is worse off.

So… if you boil it down… the real reason I hate capitalism is because of a game I played once in a class where I was lucky enough to get extra bonus points because I was shrewd and dishonest.