The Company of Strangers: A Natural History of Economic Life - Revised Edition

The Company of Strangers

The Company of Strangers

A NATURAL HISTORY OF ECONOMIC LIFE

REVISED EDITION

Paul Seabright

Foreword by Daniel C. Dennett

PRINCETON UNIVERSITY PRESS

PRINCETON AND OXFORD

Copyright © 2010 by Princeton University Press

Published by Princeton University Press,

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In the United Kingdom: Princeton University Press,

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Library of Congress Cataloging-in-Publication Data

Seabright, Paul.

The company of strangers : a natural history of

economic life / Paul Seabright. – rev. ed.

p. cm.

Includes bibliographical references and index.

ISBN 978-0-691-14646-1 (pb.: alk. paper)

1. Social capital (Sociology). 2. Economics–Sociological aspects. 3. Sociobiology. 4. Strangers. 5. Trust. I. Title.

HM708.S43 2010

306.3–dc22               2009049522

A catalogue record for this book is available from the British Library

This book has been composed in Lucida using TEX

Typeset and copyedited by T&T Productions Ltd, London

press.princeton.edu

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

To Alice, Edmond, and Luke

Contents

Foreword

A smoothly running automobile is one of life’s delights; it enables you to get where you need to get, on time, with great reliability, and for the most part, you get there in style, with music playing, air conditioning keeping you comfortable, and GPS guiding your path. We tend to take cars for granted in the developed world, treating them as one of life’s constants, a resource that is always available. We plan our life’s projects with the assumption that of course a car will be part of our environment. But when your car breaks down, your life is seriously disrupted. Unless you are a car buff with technical training you confront your dependence on a web of tow-truck operators, mechanics, car dealers, and much more. At some point, you decide to trade in your increasingly unreliable car and start afresh with a brand new model. Life goes on, with hardly a ripple.

But what about the huge system that makes this all possible: the highways, the oil refineries, the auto makers, the insurance companies, the banks, the stock market, the government? Our civilization has been running smoothly—with some serious disruptions—for thousands of years, growing in complexity and power. Could it break down? Yes, it could, and to whom could we then turn to help us get back on the road? You can’t buy a new civilization if yours collapses, so we had better keep the civilization we have running in good repair. Who, though, are the reliable mechanics? The politicians, the judges, the bankers, the industrialists, the journalists, the professors—the leaders of our society, in short, are much more like the average motorist than you might like to think: doing their local bit to steer their part of the whole contraption, while blissfully ignorant of the complexities on which the whole system depends. The optimistic tunnel vision with which they operate is not, Paul Seabright argues, a deplorable and correctable flaw in the system but an enabling condition. The edifices of social construction that shape our lives in so many regards depend on our myopic confidence that their structure is sound and needs no attention from us.

At one point Seabright compares our civilization with a termite castle. Both are artifacts, marvels of ingenious design piled on ingenious design, towering over the supporting terrain, the work of vastly many individuals acting in concert. Both are thus byproducts of the evolutionary processes that created and shaped those individuals, and in both cases, the design innovations that account for the remarkable resiliency and efficiency observable were not the brainchildren of individuals, but happy outcomes of the largely unwitting, myopic endeavors of those individuals, over many generations. But there are profound differences as well. Human cooperation is a delicate and remarkable phenomenon, quite unlike the almost mindless cooperation of termites, and indeed quite unprecedented in the natural world, a unique feature with a unique ancestry in evolution.

Much has been written about the social construction of reality and (much better) the construction of social reality, but most of it is written by thinkers who—like naive car owners—are full of admiration for the marvel they are describing but haven’t a clue about how this construction actually has taken place, and why the parts intermesh the way they do. These life-enhancing institutions are made of interacting, interlocking systems of beliefs—about what to expect, what not to expect, what to worry about, what to take for granted, what is possible, and what is (almost) unthinkable. We tend to take this structure as given, a permanent fact of life, but it is in fact a quite recent development, biologically speaking, and although it has some remarkable powers of self-stabilization, it is not as invulnerable as common sense typically supposes. As the biologist D’Arcy Thompson said, many years ago, everything is the way it is because it got that way, and the deep idea behind this truism is that a keen appreciation of the compromises and tensions that have gone into this largely unwitting construction is a prerequisite for understanding both the strengths and fragilities of the social vehicle on which our life as human beings now depends. Seabright constructs our economic world piece by piece, showing why there is money, and banks, and firms, and marketing, and insurance, and government regulation, and poverty, and political insecurity, and also showing how information is generated, used, ignored, exploited in this complicated social fabric.

Like other recent authors, Seabright sees the emergence of cooperation as a truly world-altering phenomenon that requires ultimately a biological—evolutionary—explanation, but he does not fall into the trap of Panglossian optimism, as some have done. Cooperation depends, he argues, on trust, a sort of almost invisible social glue that makes possible both great and terrible projects, and this trust is not, in fact, a natural instinct hardwired by evolution into our brains. It is much too recent for that. Rather, it is a byproduct of social conditions that are at once its enabling condition and its most important product. We have bootstrapped ourselves into the heady altitudes of modern civilization, and our natural emotions and other instinctual responses do not always serve our new circumstances. By reverse engineering these social constructions, Seabright exhibits both the source of their power and their very real and dangerous limitations.

The first edition of this book was an eye-opener, an invitation to think in a new way about our predicament, and this revised edition builds more explanations on that base, demonstrating the power of the ideas by applying them to our current economic crises, throwing a particularly powerful light on the tempting mistakes we must avoid if we are to prevent even more catastrophic future collapses. (For instance, punishing the crooks and removing the fools from power is only a first and relatively minor part of what needs to be done, since there are systemic problems that even saints and geniuses could stumble over in the future.)

Like Jared Diamond’s Guns, Germs and Steel, this is a boldly ambitious book, drawing on a breathtaking range of scholarship, from history and biology and sociology and psychology in addition to economics, and challenging the blinkered visions of thinkers in all these fields, while at the same time making excellent use of the fruits of their researches. Seabright’s imagination is as powerful as his scholarship, providing fresh perspectives on just about every page. He has a genius for arresting comparisons: how are being wealthy and being ticklish similar, and why are there driverless trains, but not airplanes? He notes, startlingly, that he doesn’t have to suppress an urge to kill the waiter and get his meal for free—which is a temptation that would surely be hard for our cousin the chimpanzee to resist. This book is the clearest and most persuasive demonstration of the power and importance of economic thinking that I have encountered, and as such it is an ideal primer on economics, utterly jargon free, with vivid and graceful explanations of all the key concepts. He punctures popular convictions on almost every page and elucidates easily misunderstood concepts with graceful examples. He notes, for instance, that children are, on average, slightly less intelligent than their parents; but their parents are, on average, slightly more intelligent than their grandparents! How can this be? If this puzzles you, you haven’t yet seen just how evolution works its inexorable trudge up the slopes of fitness. He asks questions you never thought of asking, and the answers are never obvious—except retrospectively.

Think of the termite castle again. We human observers can appreciate its excellence and its complexity in ways that are quite beyond the nervous systems of its inhabitants. We can also aspire to achieving a similarly Olympian perspective on our own artifactual world, a feat only human beings could even imagine. If we don’t succeed, we risk dismantling our precious creations in spite of our best intentions. Much of what we take to be just common sense proves to be treacherous, so we need to rethink the whole thing from first principles. That is the task undertaken by this very important book.

Daniel C. Dennett

Co-Director, Center for Cognitive Studies

Austin B. Fletcher Professor of Philosophy, Tufts University

Acknowledgments

I have been exceptionally fortunate to have so many colleagues and friends who gave their time, energy, and ideas to encourage and improve this book. Diane Coyle, Isabelle Daudy, Barbarina Digby-Jones, Jeremy Edwards, Stanley Engerman, Mark Greenberg, Denis Hilton, David Howarth, Sheilagh Ogilvie, Anne Péchou, Diana Seabright, Jack Seabright, Keith Stenning, and several anonymous readers all made detailed comments on the whole manuscript. In addition, the following read some or all of the manuscript at various stages in its preparation and gave me very useful information or reactions to some of its arguments: Giuseppe Bertola, Susan Blackmore, Wendy Carlin, John Covell, Nicholas Crafts, Sophie Dawkins, Jeff Dayton-Johnson, Denis Eckert, Guido Friebel, Murray Fulton, Azar Gat, Karen Gold, Andrew Goreing, Geoffrey Hawthorn, Paul Hirsh, Marc Ivaldi, Kostas Karantininis, Hélène Lavoix, Jean Leduc, Tanya Luhrmann, James McWhirter, Patricia Morison, Elizabeth Murry, Francesca Nicolas, Andrew Schuller, Alice Seabright, Edmond Seabright, Victor Sarafian, and Kay Sexton. The following responded kindly and promptly to requests for information and advice: Kaushik Basu, Ravi Kanbur, Paul Klemperer, and Leigh Shaw-Taylor. Jennifer Gann provided a massive input to the notes, bibliography, and index as well as many wise comments on the text.

It has been a pleasure to work with Richard Baggaley, my editor at Princeton. He followed the project from an embryonic stage and has been an untiring source of advice; the book’s title was his coinage. His colleague Peter Dougherty has also taken a keen interest in the project, and I have benefited greatly from his experience as a publisher and writer. The book was steered through production by Linny Schenck and Kathleen Cioffi with the immensely professional copyediting skills of Vicky Wilson-Schwartz and the design talents of Leslie Flis. Carolyn Hollis provided valuable administrative support.

Thanks to the intermediation of Patricia Morison and Felicity Bryan, Catherine Clarke began acting as my agent before we had ever had more than email and telephone contact. My daughter Alice found this strange: How can you trust to represent you someone you’ve never even met? She then thought a moment and added, I suppose that’s what your book’s all about, really. She was right only up to a point: I’ve been lucky to find an agent whose personal and professional qualities exceed anything for which social institutions can possibly take the credit.

I began writing this book in Cambridge, England, and completed it in Toulouse, at the outstanding research environment of the Institut d’Economie Industrielle. Its founder Jean-Jacques Laffont and current director Jacques Crémer, its scientific director Jean Tirole, the President of the University of Toulouse-1 Bernard Belloc, and their colleagues Marc Ivaldi and Michel Moreaux were all instrumental in enabling me to move to Toulouse. I am grateful to them all, and to the many other researchers in Toulouse who have made it such a personally as well as an intellectually stimulating place.

Besides those named above, I am grateful to the following, who, in many diverse ways that only they can know, have given me information, ideas, practical support, or inspiration, sometimes all four: David Begg, Robert Boyd, Sam Bowles, Florence Chauvet, Sabrina Choudar, Partha Dasgupta, Jayasri Dutta, Jon Elster, Rosalind English, Ernst Fehr, Christiane Fioupou, David Hart, Lucy Heller, Angela Hobbs, Peregrine Horden, Susan Hurley, John Kay, Joanna Lewis, Sylvie Mercusot, Alice Mesnard, Jim Mirrlees, Damien Neven, Nicholas Rawlins, Gilles St. Paul, Larry Siedentop, John Sutton, Susie Symes, and John Vickers.

Isabelle Daudy has been a constant support and sounding board for ideas. She urged me for many years to write a book for the general reader and has often helped me resist the pressure for the urgent to drive out the important. Our children, Alice, Edmond, and Luke Seabright, have constantly reminded me that the world around us is strange and needs explaining; this book is dedicated to them.

And finally, thanks to all the agricultural laborers, banana-growers, carpenters, dentists, engineers, flower-sellers, grocers, handbag-makers, inspectors, jewelers, knife-grinders, lathe-operators, midwives, night-watchmen, organists, potters, quantity surveyors, reed-makers, seamstresses, tattooists, undertakers, vets, window-cleaners, xylophonists, yogurt-makers, and zoologists (to name but a few) that I have met and talked with in the course of thinking about the issues discussed in this book.

ACKNOWLEDGMENTS FOR THE REVISED EDITION

As the acknowledgments to the first edition recorded, I have been exceptionally lucky to have enjoyed the help and advice of a large number of people in writing this book. Since the first edition appeared my debts have multiplied so that I am now, intellectually speaking, distinctly subprime. To record all of those from whom I have learned valuable lessons would take many pages, so I shall just list here those who provided new references, made specific comments on the revised edition manuscript, or corrected errors in the text of the first. These are Nicoletta Berardi, Samuel Bowles, Diane Coyle, Tyler Cowen, Kimmo Ericsson, David Fairbairn, Xavier Freixas, Herbert Gintis, Charles Goodhart, Markus Haller, Angie Hobbs, Paul Hooper, Hillard Kaplan, Muriel Lacoue-Labarthe, Linda Partridge, Jean Pisani-Ferry, Jean-Charles Rochet, Bob Rowthorn, Alice Seabright, Diana Seabright, Jack Seabright, Stephen Shennan, Helen Wallace, Jacob Weisdorf, and David Wiggins. Susan Hurley and Jean-Jacques Laffont are two friends who greatly inspired me when I was writing the first edition and whose shrewd advice I now sorely miss.

Richard Baggaley has been an outstanding and consistently supportive editor, and Peter Dougherty’s backing for this project has been inspiring from the start. Catherine Clarke is the wisest agent anyone could wish for. I am extremely grateful to Jon Wainwright of T&T Productions Ltd for his patient and very shrewd copyediting, and to Dan Dennett for his wonderfully generous foreword. And my thanks go as always to Isabelle, Alice, Edmond, and Luke for their constructive criticism, patience, good humor, and love.

The Company of Strangers

Trust and Panic: Introduction to the Revised Edition

SOCIAL TRUST AND FINANCIAL CRISES

Modern societies are fragile. There are rare but dangerous moments when a fresh wind blowing suddenly from an unexpected quarter brings apparently solid buildings crashing down. Such collapses are no less dangerous when they involve the intangible structures of our social life: the informal norms and formal institutions that ensure that trust takes the place of mutual suspicion. The collapse may be triggered from outside, as in wartime, or it may be set off, more mysteriously, from within—by some subterranean evolution of mutual attitudes that casts sudden doubt on the trust that was once taken for granted. Whether the result is an outbreak of physical violence or the collapse of an economy of reciprocal exchange, understanding those underground developments and their sudden visible manifestation is one of the greatest challenges for our ability to understand the world we live in.

The financial crisis that began in 2007 was one of these eruptions. It came as a rude shock, not only to establishment policymakers who had been congratulating themselves on a long period of stable economic growth throughout most of the world, but also to many workers, savers, and investors who had simply stopped worrying about their future. Within a few months the world saw the first run on a British bank since the nineteenth century, the first sustained fall in U.S. house prices during the twenty years that systematic indices have been kept, a collapse of more than half in the value of shares traded on world stock markets, and the freezing-up of the interbank lending market. Within two years there were losses on American loans estimated by the IMF at nearly 9,000 dollars per man, woman, and child in the United States,¹ and the most dramatic falls in output in the major industrialized countries since the Great Depression. What kind of a panic was this? What were its subterranean causes, and what triggered their eruption into the open air?

This book is about the trust that underpins our social life, and in particular about what enables us to trust complete strangers with our jobs, our savings, even our lives. It is also about what happens when that trust breaks down, as it did recently in the world of banking and as it has done at many times in our history, sometimes with terrifying consequences. Historians and sociologists have long been fascinated by social panics,² and the more mysterious the causes the more fascinating they have found them. What prompted societies throughout Europe from the fifteenth to the seventeenth centuries to decide that hundreds of thousands of people, many of them elderly and eccentric old women, were in fact dangerous witches deserving of torture and execution? Irrationality is not an answer: if Newton and Locke could believe in witchcraft, intelligence and a scientific outlook were no defense against the panic. What prompted the Brazilian government in 1897, egged on by the press and public opinion, to slaughter many thousands of the followers of the religious mystic Antonio Conseilheiro, who had withdrawn to the remote settlement of Canudos precisely so as to be out of the world’s way? Why did thousands of Xhosa people respond in 1856 to the prophecy of a teenage girl named Nongqawuse by slaughtering hundreds of thousands of their cattle, thereby provoking a famine that killed perhaps as much as three-quarters of the population?³ And (to cite a less violent example that has intrigued sociologists) why did the population of Orléans in May 1969 become convinced that a vast operation to kidnap young women and force them into prostitution was being orchestrated by the owners of six dress shops in their city center?⁴ There have been individuals prone to deranged and paranoid fantasies in all societies at all times for which we have records, but most large modern societies usually manage to confine them, or at least their fantasies, to the margins. Why do they sometimes overflow those margins and wash into the mainstream?

The financial crisis of 2007 has not yet led to large-scale violence, although as the Great Depression of the 1930s may have had some responsibility for World War II it would be foolish to engage in self-congratulation too early. But this crisis is not just a panic like the others. The inhabitants of Canudos could have gone on living in peace more or less for ever if their fellow citizens had been willing to let them. Nothing obliged the populations of early modern Europe to escalate with such savagery their suspicions of eccentricity among their unfortunate fellow citizens. Although fantasies of kidnapped women have surfaced regularly throughout history, there was no compelling reason for the citizens of Orléans to succumb to them in 1969. But the financial crisis of 2007 did not just appear from nowhere out of a cloudless sky. It took time to develop, and it followed an unsustainable boom: the unraveling of confidence during the crisis can only be understood in the light of the slipshod architecture of that confidence. Understanding why the boom was unsustainable is the key to understanding the panic that followed. It is also the key to understanding how to build a sustainable architecture of social trust.

The financial crisis is both an example of and a test case for the argument of this book. The institutions of our social life underpin the trust we place in strangers. If sometimes that trust is misplaced it is because these institutions, most of the time, do a job so extraordinary that we have quite forgotten what a miracle it is that we ever trust strangers at all. Trusting strangers is, to put it simply, a most unnatural thing for us to do. It is like a foreign language we have learned to speak with such assurance that we are all the more unnerved by our inevitable mistakes and the sometimes spectacular confusions to which these give rise. To understand why it is so unnatural, and why we have nevertheless learned how to trust strangers so commonly and so easily, we need to delve far back into our evolutionary past.

THE GREAT EXPERIMENT

Our everyday life is much stranger than we imagine, and rests on fragile foundations. This is the startling message of the evolutionary history of humankind. Our teeming, industrialized, networked existence is not some gradual and inevitable outcome of human development over millions of years. Instead we owe it to an extraordinary experiment launched a mere ten thousand years ago.* No one could have predicted this experiment from observing the course of our previous evolution, but it would forever change the character of life on our planet. For around that time, after the end of the last ice age, one of the most aggressive and elusive bandit species in the entire animal kingdom began to settle down. It was one of the great apes—a close cousin of chimpanzees and bonobos, and a lucky survivor of the extinctions that had wiped out several other promising branches of the chimpanzee family.⁵ Like the chimpanzee it was violent, mobile, intensely suspicious of strangers, and used to hunting and fighting in bands composed mainly of close relatives. Yet now, instead of ranging in search of food, it began to keep herds and grow crops, storing them in settlements that limited the ape’s mobility and exposed it to the attentions of the very strangers it had hitherto fought or fled. Within a few hundred generations—barely a pause for breath in evolutionary time—it had formed social organizations of startling complexity. Not just village settlements but cities, armies, empires, corporations, nation-states, political movements, humanitarian organizations, even internet communities. The same shy, murderous ape that had avoided strangers throughout its evolutionary history was now living, working, and moving among complete strangers in their millions.

Homo sapiens sapiens is the only animal that engages in elaborate task-sharing—the division of labor as it is sometimes known—between genetically unrelated members of the same species.⁶ It is a phenomenon as remarkable and uniquely human as language itself. Most human beings now obtain a large share of the provision for their daily lives from others to whom they are not related by blood or marriage. Even in poor rural societies people depend significantly on nonrelatives for food, clothing, medicine, protection, and shelter. In cities, most of these nonrelatives crucial to our survival are complete strangers. Nature knows no other examples of such complex mutual dependence among strangers. A division of labor occurs, it is true, in some other species, such as the social insects, but chiefly among close relatives—the workers in a beehive or an ant colony are sisters. There are some cases of apparent cooperation between colonies of ants founded by unrelated queens, though the explanation of this phenomenon remains controversial.⁷ There is little controversy, however, about the comparative ease with which the evolution of cooperation between close relatives can be explained: the mechanism is known as the theory of kin selection.⁸ This theory has shown that cooperation through a division of labor between close genetic relatives is likely to be favored by natural selection, since close relatives share a high proportion of genes, including mutant genes, both good and bad.⁹ But for a systematic cooperative division of labor to evolve among genetically unrelated individuals would be very surprising indeed, since individuals with mutant genes favoring dispositions to cooperate would help others who had no such dispositions and offered nothing in return. And sure enough, cooperation through an elaborate division of labor between unrelated individuals has never evolved in any species other than man.

Some species, it is true, practice a small degree of cooperation between unrelated individuals on very precise tasks.¹⁰ It has been seen among sticklebacks, vampire bats, and lions, for example—albeit only in very small groups.¹¹ But these rudiments bear as much relation to the elaborate human division of labor between relatives, nonrelatives, and complete strangers as do the hunting calls of chimpanzees to the highly structured human languages spoken all over the globe. Nature is also full of examples of mutual dependence between different species—such as that between sharks and cleaner fish (this is known as symbiosis).¹² But members of the same species occupy the same environment, eat the same food, and—especially—pursue the same sexual opportunities; they are rivals for all of these things in a much more intense way than are members of different species. Nowhere else in nature do unrelated members of the same species—genetic rivals incited by instinct and history to fight one another—cooperate on projects of such complexity and requiring such a high degree of mutual trust as human beings do.

No solution to this puzzle can be found in evolutionary biology alone. Ten thousand years is too short a time for the genetic makeup of Homo sapiens sapiens to have adapted comprehensively to its new social surroundings. If it were somehow possible to assemble together all your direct same-sex ancestors—your father and your father’s father and so on if you’re male, your mother and your mother’s mother and so on if you’re female; one for each generation right back to the dawn of agriculture—you and all of these individuals could fit comfortably in a medium-sized lecture hall.¹³ Only half of you would have known the wheel, and only 1 per cent of you the motor car. But you would be far more similar to each other—genetically, physically, and instinctually—than any group of modern men or women who might have assembled there by chance. It is true that a number of important genes have become widespread in human populations due to unusually strong selective pressures over the last ten millennia: examples include genes for resistance to malaria in regions where that disease is endemic, for fair skin and hair in northwestern Europe, where sunlight is scarce, and for lactose tolerance—the ability to digest milk—in adults in parts of the world where cattle and sheep were domesticated earliest.¹⁴ It is even likely that the speed of human genetic evolution has been substantially faster over the last ten millennia than it was beforehand, if only because we have faced such challenging variations in our environments during that time.¹⁵ Our bodies have also been profoundly affected by improved nutrition and other environmental developments over the centuries. Still, except in some dimensions such as height and perhaps in skin color, the biological differences between you and your furthest ancestor would be hard to distinguish from random variation within the group. If you are reading this book in a train or an airplane, this means your most distant ancestor from Neolithic times was probably more like you, biologically, than the stranger sitting in the seat next to you now.

Yet evolutionary biology has something important to tell us all the same. For the division of labor among human beings has had to piggyback on a physiology and a psychology that evolved to meet a far different set of ecological problems. These were problems faced by hunter-gatherers, mainly on the African woodland savannah, over the six or seven million years that separate us from our last common ancestor with chimpanzees and bonobos. Some time in the last two hundred thousand years or so—less than one-thirtieth of that total span—a series of changes, minuscule to geneticists, vast in the space of cultural potential, occurred to make human beings capable of abstract, symbolic thought and communication.¹⁶ Just when they occurred involves difficult issues of dating,¹⁷ but since all human beings share these capacities the genetic changes that made them happen probably occurred at least 140,000 years ago. But the first evidence of the new cultural capabilities to which they gave rise is found in the cave paintings, grave goods, and other symbolic artifacts left by hunter-gatherer communities of anatomically modern man (Cro-Magnon man, as he is sometimes known), which are no older than sixty or seventy thousand years—and most are much younger. These capabilities seem to have made a move toward agriculture and settlement possible once the environmental conditions became favorable, after the end of the last ice age. Indeed, the fact that agriculture was independently invented at least seven times, at close intervals, in different parts of the world suggests it was more than possible; it may even have been in some way inevitable.¹⁸ These capabilities also enabled human beings to construct the social rules and habits that would constrain their own violent and unreliable instincts enough to make society possible on a larger, more formal scale. And they laid the foundation for the accumulation of knowledge that would provide humanity as a whole with a reservoir of shared skills vastly greater than the skills available to any single person. But these cultural capabilities did not evolve because of their value in making the modern division of labor possible. Quite the contrary: modern society is an opportunistic experiment, founded on a human psychology that had already evolved before human beings ever had to deal with strangers in any systematic way. It is like a journey to the open sea by people who have never yet had to adapt to any environment but the land.

THE ARGUMENT OF THIS BOOK

The chapters that follow explore what made this remarkable experiment possible and why, against all the odds, it did not collapse. They also explore why it could collapse in the future, and what might be done to prevent that from happening. Part I shows why the division of labor is such a challenge for us to explain. It looks at the way in which even some of the simplest activities of modern society depend upon intricate webs of international cooperation that function without anyone’s being in overall charge. On the contrary, they work through eliciting a single-mindedness from their participants—a tunnel vision—that is hardly compatible with a clear and nonpartisan vision of the priorities of society as a whole. It seems hard to believe that something as complex as a modern industrial society could possibly work at all without an overall guiding intelligence, but since the work of the economist Adam Smith in the eighteenth century, we have come to realize that this is exactly how things are. Like medical students studying the human body, therefore, we have to understand and marvel at the degree of spontaneous coordination displayed in human societies before we can even begin to investigate its pathologies. This coordination comes about simply because of a willingness of individuals to cooperate with strangers in a multitude of small but collectively very significant ways.

Part II looks at what makes such cooperation possible, given the psychology we have inherited from our hunter-gatherer ancestors. The answer consists of institutions—sets of rules for social behavior, some formal, many informal—that build on the instincts of the shy, murderous ape in ways that make life among strangers not only survivable but attractive, potentially even luxurious. These rules of behavior have made it possible for us to deal with strangers by persuading us, in effect, to treat them as honorary friends. Some of the institutions that make this possible have been consciously and coherently designed, but many have grown by experiment or as the by-product of attempts to achieve something quite different. Nobody can claim they are the best institutions that human beings could ever devise. They are simply the ones that happen to have been tried, and that, given the psychology and physiology of the creatures that tried them, happen to have survived and spread.¹⁹

The explanation begins by showing how the division of labor can create great benefits for those societies that can make it work. These benefits come mainly from specialization, the sharing of risk, and the accumulation of knowledge. But advantages to society as a whole cannot explain why a division of labor evolved. We also need to understand why individuals have an interest in participating. A division of labor needs to be robust against opportunism—the behavior of those who seek to benefit from the efforts of others without contributing anything themselves. In other words, participants need to be able to trust each other—especially those they do not know. This is particularly important as the cost of misplaced trust can be high—the loss not only of economic resources but of our lives. As the chapters of part II describe, our most deadly predators on the African woodland savanna were not the big carnivores but other human beings²⁰; levels of daily violence were dramatically higher than they are in almost all parts of the modern world. We are the descendants of those whose cunning and judgment helped them to survive this murderous environment, so it is hardly surprising if our inherited psychology sometimes sits uncomfortably with our high-minded ideals.

Nevertheless, social cooperation has been built, and on a scale unimaginable to our ancestors. It has done so through robust institutions: robust in that those who operate within them can be trusted to do what others expect them to do. Given the facts of human psychology, these institutions ensure that cooperation not only happens but is reliable enough for others to be willing to take its presence for granted, at least most of the time. One such robust human institution will be described in detail: it is the institution of money. Another is the banking system. We shall look at the foundations of trust in financial institutions, and examine the delicate balance between the natural incentives of individuals to signal their trustworthiness to others and the need for outside supervision to enforce trust. Effective institutions rely on a minimum of outside supervision, knowing that a little outside supervision can make natural incentives go a long way.

As the recent financial crisis has painfully reminded us, such trust in institutions can often be seriously misplaced. So what went wrong in the recent banking crisis? The answer is that what went wrong was an understandable consequence of what, in most circumstances, goes right. An effective banking system allows most people, most of the time, not to worry about what is happening to their savings, to leave judgments about risk to others. Like an autopilot, it allows people not to pay attention even when they have a lot at stake. That’s a very good thing: in the complex modern world we would be overwhelmed if we really tried to pay attention to every possible risk to our security and our prosperity. But also, like an autopilot, an effective banking system can lull even those who are supposed to be on duty into nodding on the watch. In the end there was a banking crisis because too many people placed too much faith other people’s judgments about risk,²¹ even though trusting other people’s judgments about risk—up to a point—is exactly what the banking system allows us to do.

The rest of part II develops this idea that human cooperation depends on our adopting a kind of tunnel vision. Not only does widespread social trust arise in spite of the limitations of people’s individual perspectives, but it even requires tunnel vision in order to persist. This is because the most effective mechanisms for ensuring trust rely not just on incentives but on people’s internalization of values through education and training. This process entrenches commitment to professional values and at the same time makes them resistant to change. Codes of personal behavior and professional ethics can therefore make individual acts of local cooperation more reliable, while generating a degree of systematic blindness to the more distant consequences of our actions. Such blindness—tunnel vision—has dangers that are a natural by-product of its inherent virtues.

Part II has therefore argued that we can understand why human beings have proved capable of cooperating with strangers, thanks to institutions that build on their already evolved hunter-gatherer psychology. Part III goes on to look at global consequences—at what happens when human beings equipped with this psychology, and responding to the presence of these institutions, come together in the mass. Our mutual interdependence has produced effects that utterly surpass what any of the participants can have intended or sometimes even imagined. The growth of cities, the despoliation of the environment, the sophisticated functioning of markets, the growth of large corporations, and the development of stocks of collective knowledge in the form of science and technology: all are part of the landscape of human interaction even though nobody has planned them to look the way they do, and all have contributed to the dramatic historical improvement in the prosperity of mankind. But since nobody has planned them, we should not be surprised that while some of them look encouraging, others look very troubling indeed. For instance, the growth of cities—the result of countless uncoordinated individual decisions about where to live and work—has led to some of history’s most creative and innovative environments. It has also produced pollution and disease on an unprecedentedly concentrated scale. Cities themselves have often been able to organize collective action to overcome these by-products of their affluence, but only by living off a hinterland whose resources they exploit and to which they export their waste. But the world as a whole cannot do as cities have done, for it has no hinterland. The example of water, which we shall look at in detail, shows us that problems of global pollution and resource depletion will prove extremely dangerous unless we can find ways of calculating and accounting for the cost of the resources we use and the pollution we cause. For this we need to draw on one of the other great unintended characteristics of modern society: the capacity of markets to calculate prices that summarize the information necessary for allocating resources in a world of scarcity. Markets, when they work well, have a remarkable ability to allow their participants—who may never even physically meet—to pool information about the scarcity of the goods and services they are exchanging. It is precisely this kind of information that we need in order to treat our limited environmental resources wisely.

Nevertheless, there are other aspects of the division of labor that markets on their own cannot effectively coordinate. Many kinds of productive activity take place inside firms, which represent islands of planning and coordination—often also between strangers—in the sea of unplanned market transactions around them. What makes some activities suitable for large firms, whose members are more anonymous to each other, while others are suitable for small firms? The answer is that successful firms adapt to their economic environment by channeling information between people in a way that market transactions cannot do. Information, and the spectacular accumulation of knowledge across the centuries, is another of the remarkable by-products of modern society: how has it happened, what are its benefits, and what are its dangers? Finally, the last chapter in part III explores the paradox that a society whose members are interconnected as never before can nevertheless exclude some of its most vulnerable members—the unemployed, the poor, the sick.

So, although part III will give us many reasons to be impressed by the achievements of modern society, it will also show us urgent reasons for concern. The persistence of desperate poverty in a world of plenty, the destruction of the world’s environmental assets, and the spread of weapons of large- and small-scale destruction (resulting from the diffusion of information into the hands of those who would use it for aggressive ends) all call for conscious reflection on solutions, using that same capacity for abstract reasoning that has created so many of the problems in the first place. So part IV looks at the institutions of collective action—states, communities, and other political entities—and considers their virtues and their weaknesses in the face of the need to design collective solutions to the common problems of our species. At first, it may look as though we have abundant reasons to be optimistic. For while part III indicated the daunting scale of these common problems, part II has already shown us that the emotional and cognitive capacities for cooperation, and for rational reflection on the proper uses to make of that cooperation, have a solid foundation in human evolution.

Unfortunately, however, the human capacity for cooperation is double-edged. It is not only the foundation of social trust and peaceful living but also what makes for the most successful acts of aggression between one group and another. Like chimpanzees, though with more deadly refinement, human beings are distinguished by their ability to harness the virtues of altruism and solidarity, and the skills of rational reflection, to the end of making brutal and efficient warfare against rival groups. What modern society needs, therefore, is not more cooperation but better-directed forms of cooperation. The book concludes by asking just how optimistic we can reasonably be, knowing that some of the very qualities that have made the great experiment of modern life possible are also those that now threaten its very existence. Just how fragile is the great experiment on which our species set out ten thousand years ago? And what can we do to make it less fragile now?

Understanding the delicacy of our social institutions and their roots in our evolutionary past helps us to think constructively about the pressing problems of the world today. Take globalization—one of those rare abstract nouns that can bring people out marching in the streets in their hundreds of thousands. The anxieties provoked by globalization are not new but have been with us for ten thousand years—anxieties about powerful individuals and groups of whom we know little but who may intend to do us harm or who may undermine our security and our prosperity even if they have no intentions toward us of any kind. Terrorism, too, is a modern name for a phenomenon that provokes in us an age-old fear: that among our enemies are numbered not only those who bear us personal grudges but also those who do not know us or even care about us as individuals at all. Living with these fears requires us to deploy abstract reasoning in the service of institution-building, today as throughout the last ten thousand years. As our world has grown more complex, we now have to do more than create the simple local marketplaces where the first strangers could meet in enough security to justify the risk of dealing with each other. We have to create a marketplace where tribes, corporations, and whole nations can meet in relative security and do the deals that underpin their collective prosperity. But though the scale of the challenges has grown, they retain much of their old character. And the last ten millennia have shown repeatedly how those who have not learned from their history may never notice their deficiency until, fatally, they are pitted against adversaries who have.

The argument of this book rests, therefore, on four pillars:

•  First, the unplanned but sophisticated coordination of modern industrial societies is a remarkable fact that needs an explanation. Nothing in our species’ biological evolution has shown us to have any talent or taste for dealing with strangers.

•  Second, this explanation is to be found in the presence of institutions that make human beings willing to treat strangers as honorary friends.

•  Third, when human beings come together in the mass, the unintended consequences are sometimes startlingly impressive, sometimes very troubling.

•  Fourth, the very talents for