Aggression Unfairness

Aggression and Unfairness in an Uncertain Transitory

Environment

Aggression and Unfairness in an Uncertain Transitory

Environment“From Here and From There:

New and Old Members’ Perception on EU Enlargement”

A Joint Workshop of the Dutch- and Hungarian Networks of Institutional Economics 25-26 September 2003, Groningen

“From Here and From There: New and Old Members’ Perception on EU

Enlargement”A Joint Workshop of the Dutch- and Hungarian

Networks of Institutional Economics 25-26 September 2003, Groningen

© Hamori, 2003 Sept. 25-26

Balazs Hamori Professor of Economics,

BUESPA, Budapest, Hungary [email protected]

Balazs Hamori Professor of Economics,

BUESPA, Budapest, Hungary [email protected]

Take television. Cops chase robbers, victims are stalked by hit men (or should I say hit persons?), posses cut off rustlers at the pass, plaintiffs sue defendants, exorcists cast spells against vampires. What is all this but muscular economics? Robbers, rustlers, hit persons, litigants--they're all trying to make a living. Even vampires are making economic choices: sucking blood is presumably the cost-effective way of meeting their unusual nutritional needs."

--Jack Hirshleifer

Take television. Cops chase robbers, victims are stalked by hit men (or should I say hit persons?), posses cut off rustlers at the pass, plaintiffs sue defendants, exorcists cast spells against vampires. What is all this but muscular economics? Robbers, rustlers, hit persons, litigants--they're all trying to make a living. Even vampires are making economic choices: sucking blood is presumably the cost-effective way of meeting their unusual nutritional needs."

--Jack Hirshleifer © Hamori, 2003 Sept. 25-26

• Social scientists often regarded the aggressive or dishonest acquisition of others' property as abnormal and pathological.

• Social scientists often regarded the aggressive or dishonest acquisition of others' property as abnormal and pathological.

• For new institutionalist economists, aggressive and dishonest acquisitions are not necessarily deviationsfrom the norm, but may simply win out as rational choices in a given social context.

• For new institutionalist economists, aggressive and dishonest acquisitions are not necessarily deviationsfrom the norm, but may simply win out as rational choices in a given social context.

• In the emerging markets of countries in transition participants' positions are vulnerable, property rights are obscure and unsettled, and everything is in an uproar.

• In the emerging markets of countries in transition participants' positions are vulnerable, property rights are obscure and unsettled, and everything is in an uproar.

© Hamori, 2003 Sept. 25-26

• Violently aggressive and openly extortive conduct is more than likely to emerge in such an environment.• Violently aggressive and openly extortive conduct is more than likely to emerge in such an environment.

A farmer's market five minutes before closing time.

• A vendor offers a customer a basket of apples at a reduced price, • This is his last and lowest price of the day. • The customer refuses the deal, disparaging the apples.• Neither the vendor nor the customer knows what the other is thinking; each can only guess whether the other is making an empty threat or telling the truth. • If the vendor's price really is firm, the customer who refuses the offer will go home empty-handed. • On the other hand, if the customer simply will not buy the apples at the stated price, an intransigent vendor risks losing his last chance at a sale.

A farmer's market five minutes before closing time.

• A vendor offers a customer a basket of apples at a reduced price, • This is his last and lowest price of the day. • The customer refuses the deal, disparaging the apples.• Neither the vendor nor the customer knows what the other is thinking; each can only guess whether the other is making an empty threat or telling the truth. • If the vendor's price really is firm, the customer who refuses the offer will go home empty-handed. • On the other hand, if the customer simply will not buy the apples at the stated price, an intransigent vendor risks losing his last chance at a sale.

© Hamori, 2003 Sept. 25-26(Denzau - North [1994] revisited)

• The transactions are not visibly influenced by aggression or monopolistic positions, • Both participants act out of their own free will,

• The transactions are not visibly influenced by aggression or monopolistic positions, • Both participants act out of their own free will,

© Hamori, 2003 Sept. 25-26

The outcome depends on which party is more aggressive. The outcome depends on which party is more aggressive. • If the vendor convinces the customer that he would rather just throw the apples away than sell them for a penny less than his price, he wins. • If the customer convinces the vendor that he is prepared to walk away from a bargain, he wins.

• If the vendor convinces the customer that he would rather just throw the apples away than sell them for a penny less than his price, he wins. • If the customer convinces the vendor that he is prepared to walk away from a bargain, he wins.

To make a "take it or leave it" threat credible, a participant must be prepared to sacrifice a potentially good deal.

To make a "take it or leave it" threat credible, a participant must be prepared to sacrifice a potentially good deal.

Aggression and Capitulation in a Customer-Vendor TransactionAggression and Capitulation in a Customer-Vendor Transaction

VENDOR

backs down holds offer

CUSTOMER backs down 3 , 3 1 , 5

holds offer 5 , 1 0 , 0

Assume that the regular price for the apples was $6, the closing-time offer is $5, and the customer's counter offer is $1. As shown in:

Assume that the regular price for the apples was $6, the closing-time offer is $5, and the customer's counter offer is $1. As shown in:

© Hamori, 2003 Sept. 25-26

Aggression and Capitulation in a

Customer-Vendor Transaction* If the closing price is the vendor's offer

of $5, the vendor wins $5 and the customer wins $1.

* If the closing price is the customer's counteroffer of $1, the vendor wins $1 and the customer wins $5.

* If the closing price is a compromise at $3, then the vendor and the customer both win $3.

* If there is no deal, no one wins.© Hamori, 2003 Sept. 25-26

The maximum gain for an individual player depends on * Taking a dominant, aggressive position, * Refusing to back down--even at the risk of losing the deal entirely. Once one player has established a dominant position, * Both are wise to maintain the status quo. When an aggressive vendor is challenged by an equally aggressive customer, * Both will lose; an unrealized deal is the worst

outcome for both. © Hamori, 2003 Sept. 25-26

Although market economy historically emerged * from the struggle against feudal

aggression and injustice, Came into being with

* principles of equity and * a respect for the law,

The example before proves that * aggression resides not only in the background of the actions of market actors, but * can also be a manifest aspect of their behavioral patterns.

Although market economy historically emerged * from the struggle against feudal

aggression and injustice, Came into being with

* principles of equity and * a respect for the law,

The example before proves that * aggression resides not only in the background of the actions of market actors, but * can also be a manifest aspect of their behavioral patterns.

© Hamori, 2003 Sept. 25-26

Off-listing, „cut-rate prices” and other effective methods of blackmail in

commerce• Aggression is more wide-spread and violent on the

emerging markets of transition countries than in developed market economies.

• Aggression within everyday sale-purchase transactions is visible on those markets

• Through rent seeking and the exploitation of their superior monopolistic positions, retail chains could impose their will upon smaller defenseless suppliers.

• Well known retail chains, like Tengelman, Metro, Tesco, Auchan, etc. can dominate other, equally strong global companies too

© Hamori, 2003 Sept. 25-26

* Retailers with a European presence often place financial demands on their suppliers that are akin to feudal rent from a theoretical viewpoint. * If global companies producing well known brand- names wish to see their products on the shelves of the hyper-markets of large retail chains, they must yield to vehement demands of price reduction from time to time and resign themselves to the fact that 1-2-% of the retail value of their commodities might - even retroactively – be claimed by retailers as a special discount* Rebels, refusing the „requests” for a rebate, have to count with severe retorsions; the retailer will not order from the company in the future

Off-listing and rent seeking

© Hamori, 2003 Sept. 25-26

‘Tricky’ actions of retailers

• Brand names’ defence giant producers capitulate and fulfilling the retailer demands.

• 6O-day or longer time-limit for payment, which effectively means that producers

finance retailers’ stock • Feudal rent European retailers operating in

transition economies have been known to demand rebates on every conceivable occasion. "Every merger, every change in the logistics or internal structure of the company, every anniversary between one and 50 years, occasions a special rebate”-- (Horst Pressnitz of Markenverbrands [Jensen 1997])

© Hamori, 2003 Sept. 25-26

Beware the Small Type!--Contractual Aggression

• Standard contract forms prepared by banks, insurance companies, and publishers or the 70-page leases of the sporadically spreading shopping malls, conspicuously serve – to protect the rights and interests of the companies,– depriving their clients of any chance to assert their

rights. • The standard nature of these forms leaves no room for

negotiation. • Obviously, no contract is obligatory, but that is small

satisfaction when all of the banks, insurance companies, service companies, and publishing firmsoffer similar terms.

© Hamori, 2003 Sept. 25-26

Uncertainty and criminal behavior

Criminal behavior is simply more likely in an uncertain environment. As Scitovsky (1991) points out,

ethical behavior involves a long-term investment in one's reputation;

crime offers immediate profit.

To choose honesty implies confidence in a stable and relatively predictable future.

© Hamori, 2003 Sept. 25-26

Definition of mafia

* When state institutions fail to guarantee security or at least moderate the risks of transactions, substitutes for the state naturally step in and take control. Gambetta (1988) defines a Mafia as an organization that specifically sells protection. Not all organized crime consortia are Mafias

* Mafia fulfill the same role as the state. They perform the task of guaranteeing contracts, protecting one citizen from another, curbing dishonesty, and controlling competition. As Handelman (1994) notes, "In the absence of government regulation, criminal cartels have infiltrated banks, real-estate markets, stock exchanges, even the rock music industry."

© Hamori, 2003 Sept. 25-26

Mafia as a geographic phenomenon

• As a rough generalization, mafia tend to be stronger to the east and the south, weaker to the west and the north.

• In fact, Mafias are present in Hungary, very strong in Bulgaria, and almost absent in Romania

© Hamori, 2003 Sept. 25-26

The particular characteristics of Eastern mafias in comparison with their Western counterpart

Eastern Western

Field of more diversified concentrate on some activity as a consequence of selected area: protection,

economic uncertainty drug, prostitution Aggression drastic, unlimited, sophisticatedand terror bloodyOrigin from the top, from the bottom

from the former nomenclature

Relationship intertwining, separated, with the state close contacts hostileInfiltration whole branches, limited segments of

regions, the economy even countries

The particular characteristics of Eastern mafias in comparison with their Western counterpart

Eastern Western

Field of more diversified concentrate on some activity as a consequence of selected area: protection,

economic uncertainty drug, prostitution Aggression drastic, unlimited, sophisticatedand terror bloodyOrigin from the top, from the bottom

from the former nomenclature

Relationship intertwining, separated, with the state close contacts hostileInfiltration whole branches, limited segments of

regions, the economy even countries © Hamori, 2003 Sept. 25-26

The Four “A”s for Businesses: Anytime, Anywhere, Anything For Anybody

Δ Two equally valid interpretations: "I will do anything for the customer" or" I will do anything for profit."

Δ Questionable practices are rarely the exclusiveprovince of "criminals."

Δ According to Grefe (1994), 34 million tons of Western waste destined for dumping in Russia over the past five years.

More than 80 percent of the waste came from Germany, but the countries of origin also included the U.S.,Belgium,Spain, and Switzerland.

Dozens of Western companies endanger the lives and health of Eastern European people and

citizens of former Soviet Union. © Hamori, 2003 Sept. 25-26

Other illegal practices of „normal” businesses

• A company that generously rewards its employees in developed countries arranges special "commandos" at its Eastern European sites to beat up aspiring union organizers.

• A global company dealing with renowned electronic products delivers state-of-the-art technology to some destinations but transports empty paper boxes across dozens of borders so it can claim a poor Eastern European country’s export subventions

• The legal and the illegal, the virtuous and the immoral are inseparably entwined in the economy of acquisition.

© Hamori, 2003 Sept. 25-26

Self-healing market mechanism

• In developed market economies, enduring traditions and institutions moderate the threat of self-interested behavior.

• In hyper-competition, even the largest corporations cannot think themselves secure exclusively by rent-seeking on the basis of their strength and power

• No form of aggression is efficient when it comes to knowledge. As the saying goes, "All forms of aggression stop at the wall of the human forehead." © Hamori, 2003 Sept. 25-26

Janus-facedness of market

• Economists of the former socialist countries did not prepare for the Janus facedness of a free market economy. Many ignored the simple fact that while fairness is an inherent feature of voluntary exchanges, so are threats and aggression too.

• The uglier face of market tends to appear in Eastern Europe's unstable, constantly changing conditions.

© Hamori, 2003 Sept. 25-26

The balance of two sides of market turn out positively for Eastern Europe too

• We must not confuse the characteristics of transitory markets with the characteristics of a developed one.

• Homo economicus can’t be identified with thugs, dummies, and Mafiosi.

• After the stabilizing the region positive version of Homo economicus will certainly be more frequent than nowadays.

• An increasing number of actor became "an impeccable gentleman who only serves his own interests within the boundaries of honor and seemliness”-as Tibor Scitovsky described the Homo economicus

© Hamori, 2003 Sept. 25-26