Living Economics

Naive Darwinism tells us that species survive because they have some selective advantage in a given environment. And the larger the selective advantage, the more abundant the given species. In a normal human society, both dishonest people (defectors) and honest people (cooperators) coexist. Defectors cheat whenever they can get away with it. And cooperators are always honest even when it may be disadvantageous at times to do so. But if defectors can cheat only other defectors, their low-trust deals would result in very low payoffs. The much higher payoffs of high-trust deals among cooperators would have ensured the extinction of defectors. The fact that both defectors and cooperators coexist in a normal society must mean that defectors can get away with preying on cooperators.

Defectors can take advantage of cooperators because it is costly for cooperators to fully investigate the honesty of everyone that they happen to do business with. If every defector is born with a letter D on their forehead, defectors will be forced to deal with their own kind. The resulting selective disadvantage compared to the cooperators will drive defectors out of the evolutionary picture. Thus, the higher the cost of character detection, the higher the proportion of defectors in a society.

In spite of occasional losses resulting from inadvertent dealings with defectors, it still pays cooperators to be known as always honest and unfailingly unforgiving when cheated. Such a reputation would attract beneficial opportunities that are not open to known defectors and discourage defectors from cheating. Indeed, it is the higher payoffs from such consistent behaviors that leave room for defectors to exploit. If people always cheat when they can get away with it, many behaviors would have been unexplainable. For example, charitable institutions that depend on voluntary contributions would not have existed at all due to rampant free-ridership.