The Coordination Economy
Coordination vs Satisfaction, not Capital vs Labour or Industry vs Services, is the key lens to view the economic system
The Aligned Utopia
Imagine that all humans are a single hive mind. Imagine a world where all people have fully aligned goals - like a beehive, or an ant colony, or a set of NPCs simulated by one computer game engine. All people are single-mindedly working towards one set of aspirations. How would the economy of this world differ from ours?
In the Aligned Utopia the police and the law enforcement are obsolete, as there is no need to prevent harm between people. The entire criminal code is unnecessary. Attorneys, judges, and prisons disappear. International conflict is impossible, so the military and the diplomatic service cease to exist. With little sorrow, all arms manufacturing vanishes. There is no need to pass laws and execute state decisions. Gone is then the government itself. Money perishes too, as no price signal is needed to manage the scarce resources. Banking, the stock market, and the insurance sector close in due course. Since every person knows exactly what to do, large swaths of corporate occupations become obsolete. All levels of management and human resources are removed. Marketing and advertising must go as well, as the hive mind does not need to convince itself about product quality. The skyscrapers to house the offices of these industries disappear as well, alongside office supplies, janitors, cleaners, and guards.
What sectors of the economy remain? Sectors that work to satisfy the appetites of humanity. The value chains of agriculture, energy, construction, garment, medicine, education, entertainment, personal transportation, travel, and art remain. Some of these sectors grow rapidly, using the labour freed up from the perished industries. However, since there is no need for status signaling the fashion industry, the automotive sector, art galleries, higher education, and health care likely shrink. Many personal services however remain. The numbers of chefs, personal trainers, and hairdressers swells.
The point of this thought experiment is definitely not that we should try to bring about the Aligned Utopia, a new version of communism. Instead, it is to illustrate that are two parts of the economy. Rather than looking at the economy as a combination of labour and capital, or aggregation of agriculture, industry and services I propose we focus on the “coordination economy” and the “satisfaction economy”.
The satisfaction economy is the set of activities directly concerned with bringing about the goods and services that satisfy individual needs and wants. The coordination economy is concerned with coordinating people’s activities in the face of game-theoretic challenges. The sectors in the coordination economy include the government, the military-industrial complex, the legal system, the law enforcement, the financial and banking systems, the corporate management hierarchies, and the marketing and advertising segments. Each of them addresses a game-theoretic problem. They exist to overcome a problem of how to align incentives of people who do not necessarily want the same things. These sectors are a deadweight to the economy in the sense that they do not produce a good that anyone desires when they wake up in the morning. But they are essential. For the satisfaction economy to exist at all the coordination economy needs to efficiently overcome the failures of human coordination.
Solving sub-optimal equilibria
Each of the great sectors of the coordination economy addresses a fundamental game theoretic failure, a suboptimal Nash equilibrium.
The criminal code and the criminal justice system address the problem of physical violence and property theft and destruction. Unchecked physical violence degenerates into a social equilibrium of a gang war – which is strictly suboptimal for the satisfaction economy. Crimes against property if not prevented result in low private investment, as investors are uncertain that they will enjoy the returns. The government solves these problems by usurping the monopoly on violence. It adjusts the payoff matrix of each agent so that crime is not an attractive option for any of them.
In the international system the problem of violence (prisoner’s dilemma where defection is an attack on one’s neighbor) is either solved by a hegemonic empire imposing order or by a balance of powers keeping every state in check. Both solutions can be relatively stable equilibria. But both require large investment in armaments. They also require sporadic demonstrations of the readiness to use violence, to credibly deter those actors that may want to upset the system. The military industrial complex is the solution (partial) to the anarchic conditions of international relations.
Other functions of government should also be thought of as solutions to suboptimal Nash equilibria. Unification of weights and measures is a solution to a coordination problem of setting the standards of contracts in commerce. Public education is an intervention to address the problem of market’s underprovision of a good – educated public - that generates positive externalities. The contract law is mostly a solution to the problem of time inconsistency, i.e., temptation to renege in the future on the promises made today.
The financial market and the banking industry, fundamentally, exists to decide which projects the society should be working on at any given time. The banking system, the bond market, and the stock market, work to efficiently allocate and re-allocate money to different projects in the economy, depending on where the capital will generate most profit, at lowest risk. Money is a measure of how much society can do for you. Therefore, by extending credit or purchasing equity, the financial industry shifts the limited supply of effort and resources of the society between various projects.
The modern corporation is a solution to several coordination problems. The most important is the principle-agent problem, i.e., making sure that the incentives of the person ordering the job are aligned with the person doing the job. Much of the office life boils down to this. Layers of corporate bureaucracy - general management, project management, HR, payrolls, consultants – are involved in making sure that the few people who physically build the final product do it well and on time. Therefore, corporations building products in the satisfaction economy, say mobile phones, have large parts that belong to the coordination economy.
In the grey zone of the satisfaction / coordination split, are the many segments of the satisfaction economy, where large part of demand is driven by signaling. Status signaling is a coordination technology which solves a problem of one agent not knowing a certain quality of another agent. A diamond ring is a credible signal of romantic commitment, a sports car is a credible proof of wealth. The industries that help people signal are not just limited to luxury goods and conspicuous consumption, but as has been brilliantly argued by Robin Hanson and Kevin Simler [Add link], they extend to much of health care and education. For example, much of higher education is acquired not to gain skills, but to signal conscientiousness and talent to employers. Therefore, universities serve a game-theoretic purpose. They solve the problem of asymmetry of information where employers do not know beforehand who is hard working, obedient, and talented. As such, portions of sectors which produce signaling goods should be accounted for as parts of the coordination economy.
Finally, many practices, norms, and abstract concepts are technologies that evolved or have been invented to serve the coordination economy. These include language, gossip, propaganda, religion, economics, rituals, trust, status, prestige, public morals, and the concept of nation. These innovations have been adopted to lower the social cost of solving the coordination problems. Occupations that work on developing and refining these technologies should also be considered a part of the coordination economy. These include much of journalism, clergy, activism, and academia. But, these professions also play part in the satisfaction economy - they provide entertainment, spiritual products, and scientific and technical understanding, among others.
Coordination vs Satisfaction new questions
The coordination / satisfaction economy distinction allows us to ask a few interesting questions:
How much countries spend on the coordination economy? Is there an optimal level?
How did the share of coordination change in different periods of history? Is there a general historic trend towards increasing or decreasing expense of coordination?
Which coordination problems are currently taking most effort to address?
Is work in coordination better paid?
What are the emerging coordination technologies?
And finally: What is the coordination singularity?
We will look into these topics in the future installments of this newsletter.