HUMANS AS FACTORS OF PRODUCTION: AN EVOLUTIONARY ANALYSIS
Paul H. Rubin and E. Somanathan, Emory University
Abstract: This paper is an application of Darwinian analysis to the study of humans as inputs to
the production process. Biologists believe that the only factor capable of explaining the
extraordinary level of human intelligence is selection pressure from competition with other protohumans. This selection pressure would have been from two sources. First, there would have
been pressure within human groups to become more successful and leave more offspring. Second,
there would have been selection pressure between groups, as through warfare and other forms of
group competition. This second type of pressure would have provided evolutionary incentives for
individuals to be able to cooperate in groups with others, which in turn depends on the ability to
avoid cheating, or defection in a prisoner’s dilemma setting. There would also have been
feedback effects: increasing intelligence would have increased the value of cooperation, and
increasing cooperation would have in turn increased the value of intelligence. This selection
pressure can explain human abilities to form large extra-familial and extra-ethnic groups for
productive activity. In other words, Becker’s “discrimination coefficients” are remarkably small
for humans. We provide an evolutionary game theoretic model of cooperation. We argue that
humans may be selected for flexibility across generations, so that more honest societies will
induce parents to train children to avoid defection, thus leading to a further increase in the
proportion of honest persons in the society. We conclude that, had humans had different “tastes”
for cooperation, then firms might be radically different than they are.
Contact:
Paul H. Rubin
Department of Economics
Emory University
Atlanta, GA 30322-2240
404-727-6365
Fax: 404-727-4639
email: prubin@emory.edu
November 18, 1998
Forthcoming, Managerial and Decision Economics, special issue on Management, Organization
and Human Nature, edited by Livia Markoczy.
HUMANS AS FACTORS OF PRODUCTION:
AN EVOLUTIONARY ANALYSIS
Paul H. Rubin and E. Somanathan, Emory University1
INTRODUCTION
Economists are becoming increasingly comfortable with the notion that the basis for
human tastes, including economically relevant tastes, is biological.2 Humans have those tastes
that served to increase genetic fitness in the applicable past, the “Environment of Evolutionary
Adaptedness” (EEA; Barkow et al., 1992; Crawford, 1998).3 The literature examining specific
economically tastes with relevance for economic analysis is large and increasing. Hirshleifer
(1977) was an early pioneer in the analysis of the relation between economics and biology. Rubin
and Paul (1979) and Robson (1994, 1996) have examined risk preferences; Hansson and Stuart
(1990) and Rogers (1994) have examined time preference and saving behavior; Hirshleifer (1987)
and Frank (1988) have examined the role of emotions in decision making; Frank (1985) and
Coelho (1985) have examined the role of status; Waldman (1994) has analyzed a biological basis
for systematic errors in decision making; Rubin et al. (1979) have looked at forms of parent-child
support; and Rubin (1982) has discussed ethical preferences.
Some of these analyses are of tastes important in explaining consumption, not production,
decisions. Some examine saving behavior and risk taking behavior, which may be relevant for
capital supply decisions. Hansson and Stuart (1990) also analyze the labor-leisure choice. There
is nowhere in the literature an analysis of the effect of the evolution of tastes effecting more
sophisticated issues involving the use of humans as workers, or as inputs into production,
including those issues studied in the literature on transactions costs. The purpose of this article is
to provide such an analysis.4
1
The authors would like to thank Jack Hirshleifer, Michael Ghiselin, Bruce Johnson, James McClure, several
anonymous referees and Livia Markoczy for helpful comments.
2
In this, economists differ from many other social scientists, who resist such ideas: see Tooby and Cosmides, 1992.
3
This was primarily the hunter-gather, small band society of the Pleistocene, the period lasting from three million
to about 10,000 years before the present. Crawford (1998) has a useful discussion.
4
We do not address two trivial issues related to evolution. 1) We are endowed by evolution with certain amounts of
strength and stamina, and in making work decisions this constraint is binding (Becker, 1991, at 54-79). 2)
Incentives matter. Incentives are related to command over resources, and additional resources translate into
additional fitness, for both humans and non-humans. Thus, evolution explains why incentives motivate workers.
Rubin & Somanathan: Humans as Factors
Page 2
The issues addressed here will be those relevant for the transactions cost analysis of the
firm (Rubin, 1990; Williamson, 1985). The most fundamental problem in the analysis of
transactions is control of opportunism, called defection in the game theoretic literature. The way
in which this problem most forcefully manifests itself is in deciding the vertical extent of the firm - the question of which activities will be undertaken within a firm, and which handled through
markets. The paradigm transactions cost problem is the “make or buy” decision. In all cases, the
theoretical literature predicts that managers will chose the most profitable solution to this
problem, and the empirical evidence is consistent with this prediction (Shelanski and Klein, 1995).
However, the costs and benefits of alternative strategies depend on the underlying preferences of
workers and the amounts that they must be paid to induce them to work in alternative structures.
They also include the costs of monitoring to avoid cheating or opportunism by workers. These
costs depend on utility functions as well. It is these preferences that have been shaped by natural
selection, and the implications of this selection are the subject of this paper.
Solutions to transactions costs problems can better be understood if we understand the
nature of the human mind, and in particular the sources of human intelligence. Indeed, the forces
that have shaped the evolution of human intelligence still operate and are directly related to the
issues addressed above -- the control of opportunism and its relation to the scope of the firm.
The correspondence between the evolutionary forces that have shaped intelligence and the forces
that shape the behavior of modern humans in undertaking productive economic activity is striking.
We first discuss the evolution of intelligence and the forces thought to have contributed to
this evolution. We then discuss intragroup and intergroup competition. The following two
sections present a model of honesty and cooperation, first (following Frank, 1987) in a fixed
environment and then in a variable environment. We then apply the model in several areas. We
first discuss opportunism, as related to individual selection, and then the possibility of group
selection. The next section discusses human abilities to form affiliations. The final substantive
section applies the analysis to the scope of the firm. A summary concludes the paper.
Rubin & Somanathan: Humans as Factors
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EVOLUTION OF INTELLIGENCE
The most difficult problem facing students of human evolution is the explanation of human
intelligence. The human brain tripled in size (from 500 to 1500 cc) over a 2,000,000 year period,
a remarkable growth rate. Moreover, intelligence is, biologically speaking, an extremely unlikely
event. The distinguished biologist Ernst Mayr argues that it is so unlikely that there is probably
no other intelligence in the Universe. He bases his arguments on the fact that in all of the
evolution of life on earth, there have been “probably more than a billion species of animals on
earth, belonging to many millions of separate phyletic lines...and yet only a single one of them
succeeded in producing intelligence” (Mayr, 1988, p. 72.) On the other hand, other useful traits
appeared several times. Mayr indicates that the eye, for example, evolved over forty separate
times. Earlier and less intelligent species of hominoids, such as Homo Erectus, seem to have been
biologically successful, living throughout Africa, Europe and Asia and lasting as a species for over
one million years. Thus, it was in no sense inevitable that high intelligence would evolve among
humans, and intelligence was not needed for survival.
The best explanations for the evolution of human intelligence are in terms of competition
from other humans (Alexander, 1979; Byrne and Whiten, 1988). That is, the best explanations
are that humans evolved intelligence to compete with other humans. The purpose of human
intelligence is ultimately strategic. For example, human consciousness evolved to enable us to
better understand the thoughts of others and so deal with them more effectively (Dennett, 1996.)
Having evolved intelligence for strategic purposes, the brain is then able to use the facility for
other purposes, but these are in a sense byproducts of the strategic function of intelligence.
Even if we accept this argument, however, there is still a major puzzle: What was the
level of interhuman competition for which human intelligence evolved? The two candidates are
within group competition and between group competition. Both clearly exist and are important
and both could lead to increased human intelligence. The question is the relative importance of
each in the evolutionary process. Moreover, both are related to the two basic transactions costs
problems identified above.
Rubin & Somanathan: Humans as Factors
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A separate issue is the force leading to the large cooperative groups observed among
humans. Richerson and Boyd (1992) indicate that it is at best an “open question” as to whether
the biological forces identified as explaining cooperation among other species are able to explain
the level of “cooperation among nonrelatives” observed in human societies. Below, we provide a
model explaining such cooperation, and show that the amount can increase within societies from
generation to generation. We would expect a positive feedback loop between levels of
cooperation and intelligence. If intelligence evolved to enable humans to engage in increasingly
complex social exchanges as the models discussed above indicate, then such exchange would be
valuable only to the extent that humans could trust each other to fulfill commitments. Increased
intelligence would lead to increased transactional complexity and so increased value of
cooperation, and increased ability to cooperate would make more complex transactions viable and
so lead to increased intelligence.
Consider: we observe some cooperation among chimpanzees, our closest surviving
relatives (de Waal, 1989). However, compared to humans the level is trivial. A few chimpanzees
may cooperate in hunting a monkey for meat when the opportunity presents itself. A few males
may cooperate to maintain their position as dominant in a troop, and alliances may shift. If we
compare that with the level of cooperation in a large modern firm or political party, it is clear that
differences are so large as to be qualitative. Moreover, the level of intelligence needed to sustain
the level of cooperation in human organizations is also hugely greater than among chimpanzees.
Clearly neither factor could have evolved without the other, and neither would be valuable
without the other.5
It is also important to note that biologists and evolutionary psychologists are increasingly
becoming convinced that the human mind consists of numerous “modules.” That is, intelligence
has evolved to perform certain specific tasks and different mechanisms operate to solve different
problems (Barkow et al., 1992).6 Language is one of the major modules, and has been studied
5
Of course there is substantial cooperation in societies such as ants and mole rats, where there is no claim of
intelligence. However, this cooperation is of a fundamentally different nature than among humans. See, for
example, Tullock, 1994.
6
“A psychological architecture that consisted of nothing but equipotential, general-purpose, content-independent,
Rubin & Somanathan: Humans as Factors
Page 5
before the others (Pinker and Bloom, 1992). Barkow, Cosmides and Tooby (1992) is a
compendium of studies and surveys of evolutionary psychology from this perspective. The
difference in performance on the Wason Selection Task (discussed below), depending on the story
told regarding the items involved, is a further example of this modularity. Thus, it may not always
be useful to think of an all purpose general utility maximizer in the brain. For example, it is likely
that “framing effects” observed in experimental situations are due to similar differences: The
particular module involved in solving a problem will vary depending on the statement of the
problem, although this issue has not been formally modeled.7 Evolutionary psychologists
hypothesize that the mind works in this way for essentially economic reasons: It was easier for
natural selection to mold a mind that operates in modules than it would have been to mold an all
purpose general problem solver.
INTRAGROUP COMPETITION
Consider first within group competition. Humans evolved in relatively small groups.
Within these groups, the standard form of mating was apparently mild polygyny. Because of
differential rates of investment in children (Trivers, 1985) by males and females, in humans (and
most mammals) females are a scarce resource for males. If a male can monopolize the breeding
capacity of more than one female, then the male can leave additional genes in the future gene
pool. Thus, there is selection pressure for males to attempt to obtain access to more than one
female. Males are selected to seek copulations with numerous females because such copulations
are biologically cheap for the male and have a non-zero probability of leading to additional gene
survival. However, a male will mate for an extended period or even for life with one or a few
females and invest heavily in the children of such unions because this will ensure the greatest
chance of such genetic survival of the offspring. Thus, males compete for access to the most
desirable females as long term partners.
or content-free mechanisms could not successfully perform the tasks the human mind is known to perform or solve
the adaptive problems humans evolved to solve -- from seeing, to learning a language, to recognizing an emotional
expression, to selecting a mate, to the many disparate activities aggregated under the term ‘learning culture.’”
Tooby and Cosmides, 1992, at 34.
7
Framing effects are said to exist when the same problem expressed in different “frames” elicits different solutions
from experimental subjects. For example, if some option is expressed as a loss, then subjects will reject it whereas
Rubin & Somanathan: Humans as Factors
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Since human males also invest in children, there is an incentive for human females to be
selective in choice of a mate. Humans are the only mammals with large amounts of both male and
female parental investment (Alexander, 1979.) Females look for males with relatively more to
offer to children. These offers include both inheritable biological fitness and resources available
for offspring. Females seek the most desirable males because this will lead to the most successful
offspring. This competition could lead to increased selection pressure for increased intelligence.
Because both sexes have incentives to seek desirable mates, there would have been pressure for
both males and females to evolve for increased intelligence. Humans do not exhibit the extreme
sexual dimorphism of species (such as peacocks) where only one sex engages in sexual selection.8
Because males must obtain enough resources to attract a female, in certain circumstances
risk seeking behavior (particularly among young males) has been selected for (Rubin and Paul,
1979). The form of such risk taking is betting of small amounts with potential large gains because
the large gain will enable a male to acquire an additional mate. There are discontinuities in the
fitness-wealth functions. (Robson, 1995). The variance in the number of offspring is higher for
males than for females. The asymmetry between males and females can explain risk aversion on
the part of females and lesser risk aversion or even risk seeking by males. Females can bear a
biologically given rather small maximum number of children, and acquisition of additional
resources will not change this number. Males can (and sometimes do: Betzig, 1986) sire a
virtually unlimited number of offspring if they can acquire access to sufficient females.
The argument here is different, though related. Both males and females among humans
would have been selected to seek better and more intelligent mates. Thus, in humans more than
other species, because of the particular details of the breeding system (parental investment by both
males and females leading to long term pairing) there would have been strong pressure for both
sexes to become more intelligent. If the increase in intelligence through this process enabled
if the same option is expressed as a gain they will accept it.
8
An extreme version of this story is that this competition caused a form of “sexual selection.” Sexual selection is
said to exist when a characteristic becomes exaggerated because it is desired by members of the opposite sex, even
if it has no survival value (or even negative survival value). The peacock’s tail is the paradigm example. Selection
can choose such factors because natural selection is a highly myopic process. Under this theory, human
intelligence evolved to serve no particular function except attracting mates. (Wright, 1994; Miller, 1998).
Rubin & Somanathan: Humans as Factors
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humans to reach a point where increased acquisition of resources beyond immediate subsistence
became useful and if such acquisition could be facilitated by intelligence, then selection pressure
would have favored further increases in intelligence.
If humans through such mechanisms reached a point where exchange and specialization
became worthwhile to increase resource acquisition, then intelligence would have been selected to
further the acquisition of the gains from such exchange. Shreeve (1995) claims that the final push
for high intelligence came during the Ice Ages when interband trading became useful because of
diminished resources available for subsistence. He claims that the initial impetus for such trade
was mate exchange between bands, and this developed (utilizing in part kin selection mechanisms)
into more general trade. He places this innovation in the Upper Paleolithic, about 50,000 years
ago, where the archaeological record indicates a massive change in culture and in the rate of
diffusion of cultural artifacts. Shreeve also suggests that this was the point at which
consciousness, and thus fully modern intelligence, evolved.
One important way of creating additional private gains from exchange is to cheat, or to
behave opportunistically. This creates pressure to avoid being the victim of such cheating. There
is in fact evidence that the human mind is particularly well suited for detecting cheating by other
humans and humans can reason more effectively about such cheating than about other logically
equivalent issues (Cosmides and Tooby, 1992). Problems of cheating are probably quite old in
human evolution; even chimpanzees deceive each other. Nonetheless, as humans have become
more intelligent and as forms of cooperation and exchange have become more complex, then
possibilities for more subtle and difficult to detect forms of cheating increase.
Much of the evidence for ability to detect cheating for modern humans is adduced in terms
of performance on the Wason Selection Task. This is an experimental procedure requiring
subjects of solve problems related to the logical statement: If P then Q. Cosmides and Tooby
(1992) show at length that subjects do substantially better at solving such problems if the
categories P and Q deal with cheating in social situations (e.g., P: drinking beer; Q: over 21 years
of age) than if the problem is in other terms (e.g., P: letter on one side of a card; Q: number on the
other). Since the logical structure of the task is the same no matter what elements are defined as
Rubin & Somanathan: Humans as Factors
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P and Q, Cosmides and Tooby (1992) interpret their results as showing that the human mind
solves logically equivalent problems differently, depending on the content of the problem. That is,
problem solving techniques are associated with the context of the problem, not with its logical
structure. They also claim that the evidence shows that avoidance of cheating in social situations
was an important problem for humans and their ancestors, and that the mind solves this problem
better than others. Tooby and Cosmides (1996) also argue that humans are well adapted to detect
the difference between “true” and “fair weathr” friends.
Alexander (1985) argues that within-group pressure became important because of
between group pressure, discussed below. He argues that competition between human groups
operating through the “balance of power” mechanism caused human groups to become larger. As
the size of these groups increased, within group competition became more important for humans
that for any other species. Thus, on this view, it was intergroup selection that was the ultimate
driving force for human intelligence.
We now develop a model showing the value of honesty and commitment in an
evolutionary framework. We first consider a fixed environment, a situation modeled by Frank
(1987). We show that in a fixed environment there will be an equilibrium proportion of honest
and of dishonest individuals. We then extend the results to include a variable environment. We
show that there would be a benefit to being able to be socialized as either honest or dishonest,
depending on the environment. We also show that there will be benefits from cooperating with
members of one’s own group, even if members of other groups are equally honest on average.
THEORETICAL MODEL: FIXED ENVIRONMENT
As in Frank (1987), we assume an activity that requires cooperation between two persons
which has a Prisoner's Dilemma structure. These are ventures of a one-shot nature and no
retribution for defection is possible. Defection against a partner that cooperates gives a payoff of
x4; cooperation pays x3. Defection (cooperation) against a partner that defects gives a payoff of x2
(x1). x4 >x3>x2 >x1. Suppose there are two types of persons in the population, H (for honest),
and D. H always cooperates and D always defects. Both types have available an outside option
available without any need for cooperation that pays at least as much as x2 (for simplicity, say x2).
Rubin & Somanathan: Humans as Factors
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Both types try to find an H type to pair off with since both honest and dishonest individuals gain
from pairing with an honest one.
An outside observer can not always determine if a partner is honest or dishonest; the two
types are only imperfectly distinguishable. Both types present a real-valued signal S distributed
according to the distribution functions FH and FD, with density functions fH and fD. These densities
are defined as in Frank (1987, p596, fn. 8). The relevant properties of the densities that are used
are: 1) FH has support on the interval (LH,UH) while FD has support on the interval (LD,UD) where
LD < LH < UD < UH. That is, there is some overlap between honest and dishonest types. 2) in the
interval of overlap (LH, UD), the probability that a person is an H type conditional on the signal S,
is strictly increasing in S. That is, the higher the value of S, the greater the probability that the
person presenting it is an H; 3) FH first-order stochastically dominates FD, that is, 1-FH(S) > 1FD(S) for all S.
Behavior in the cooperative venture and the distribution function of S are heritable traits
but the actual realization of S is not heritable. A person will enter a cooperative venture rather
than the outside option if and only if the expected payoff from doing so, conditional on the
partner's value of S, exceeds x2, the payoff from the outside option. The idea is that H types
evolved to capture gains from trade and simultaneously evolved the signal S, without which they
could not be recognized as trustworthy. D types evolved to mimic and thus free-ride off the H
types, but the mimicry is imperfect, hence the differing distributions of S. In fact, given the payoff
structure, if perfect mimicry were possible, there would be no cooperative ventures at all. On the
other hand, if D types were perfectly distinguishable from H types, (no overlap between the
supports of the densities fH and fD,) then the former would have been driven to extinction by the
latter.
Let h be the proportion of H types in the population. For an honest person, the expected
payoff from entering a cooperative venture with a person with signal S (who may be H or D) is
Pr{H|S}x3 + Pr{D|S}x1
The corresponding payoff to a D type, who will himself defect, is
Rubin & Somanathan: Humans as Factors
Page 10
Pr{H|S}x4 + Pr{D|S}x2 .
By assumption, Pr{H|S} is increasing in S, and so the payoff to both types from entering
into a cooperative venture with a person with signal S is also increasing in S. Hence, each person
will attempt to pair with someone with the highest possible S. It is assumed that the population is
sufficiently dense that each person will be able to find another with virtually the same value of S,
so no one will be willing to pair with anyone with a lower S-value than their own. Hence, pairing
if it takes place at all, will be with persons with the same S-value. Therefore, people's choices are
restricted to pairing with persons with the same S-value or choosing the outside option and
getting a payoff of x2.
Next, we note that D types will always be ready to pair since they can do no worse by
doing so. H types with signal S will pair if and only if
Pr {H/S}X3 + Pr{D/S}X1 ≥ x2.
Since the left-hand-side of this expression is increasing in S, there exists a critical value of
S, S*(h), such that all persons with signal greater than or equal to S*(h) will pair while only
dishonest persons will pair if their signal is less than S*(h). We are now ready to write down the
key expressions for the average payoffs to H and D types as functions of the population
proportion h. The average or expected payoff to H types is
EH[x](h) = FH(S*(h))x2 + x3∫Pr{H|S}fH(S)dS + x1∫Pr{D|S}fH(S)dS
(where the limits of integration run from S*(h) to UH.)
while that to D types is
ED[x](h) = FD(S*(h))x2 + x4∫Pr{H|S}fD(S)dS + x2∫Pr{D|S}fD(S)dS
(where the limits of integration run from S*(h) to UD.)
The first term in the right hand side of these expressions is the probability that an
individual will have a signal value too low to find a partner, times the value of the outside option.
The second term is the payoff from pairing with an H times the probability of finding an H with
whom to pair. The third term is the payoff from pairing with a D times probability of being paired
with a D.
Rubin & Somanathan: Humans as Factors
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As h (the proportion of honest types) approaches 0 H’s become very cautious about with
whom they will partner, and so S*(h) approaches UD, the upper limit of the support of fD. Hence,
as h approaches 0, EH[x](h) > ED[x](h). On the other hand, as h approaches 1, the last term in the
expressions for EH[x](h) and ED[x](h)] approaches 0 and so ED[x](h) > EH[x](h) if x3[1-F H(LH)]
< x4[1-FD(LH), which we shall assume. In other words, we assume that the advantage the H’s
possess of being more likely to have high signal values is outweighed by the D’s greater payoff
(from defection rather than cooperation) if the D’s succeed in pairing. It follows that the
EH[x](h) and ED[x](h) curves seen as functions of h, cross at least once. This means an
equilibrium proportion of H types exists and is stable in any sign-preserving dynamics on h (any
dynamics that cause h to decline when the payoff to H types is less than the payoff to D types and
vice versa). That is, there will be some honest persons at equilibrium and some mimics; neither
type will be driven to extinction. It is for this reason that humans are skilled in determining if their
partners are cheating, as discussed above.
THEORETICAL MODEL: VARIABLE ENVIRONMENT
We now go beyond Frank’s results and examine the possibility of intergenerational
changes in honesty within a population. We begin by asking what happens when the payoffs to
cheating or cooperation xi, i=1,2,3,4, become variable. Variations in these payoffs during the
EEA, over time and space, would have shifted the EH[x](h) and ED[x](h) curves, measuring
returns to honesty and dishonesty, respectively. As a result, H types would have had a
reproductive advantage over D types at certain times and places, while at others, D types would
have had a reproductive advantage over H types. For example, as population density increased,
leading perhaps to increased combativeness between adjoining tribes, the value of cooperation
might have increased, favoring H types. It follows that if a mutant strategy appeared that was
capable of switching from H behavior to D behavior and back as circumstances changed, it would
perform better than H and D and drive them both to extinction.
It may appear that such switches would be impossible, since the success of the H strategy
derives precisely from its ability to commit to honesty. That is, an H is honest even if it does not
pay in the immediate situation. However, parents can teach their children honest behavior. Those
Rubin & Somanathan: Humans as Factors
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thus socialized in childhood would grow up to be H’s. This is an example of what Richerson and
Boyd (1992) call biased transmission, meaning that individuals choose traits in a manner guided
by natural selection. This ability to inculcate behaviors in children confers adaptability to
changing circumstances over the time span of a generation while still conferring on individuals the
ability to precommit to honest behavior once they had been trained to be honest by their parents.
In other words, while biological evolution may have created the capacity in each of us to form
emotional loyalties and feel guilt, it may be necessary for us to be taught the appropriate
circumstances for these emotions to take over. We now view h as the proportion of individuals in
a society who have learned to be honest. This proportion may vary across societies if the
evolution of loyalty and trust is partially cultural, as would be true if training is involved.
Additionally, if there is competition between groups or societies, then those with higher values of
h may be expected to be more successful in at least some environments.
We are now ready to draw some implications for firms.9 H types will now refer to persons
who have been taught to be honest, while D types are those who have not. The expected payoff
to an H type is
EH[x](h) = FH(S*(h))x0 + [1-FH(S*(h))][x1+λ(x3-x1)]
while that to a D type is
ED[x](h) = FD(S*(h))x0 + [1-FD(S*(h))][x2+λ(x4-x2)]
where S*(h) now denotes the level of S below which it does not pay firms to employ people in
positions that require them to be trustworthy, x0 denotes the payoff people get if they are not so
employed, x1 (x2) denotes the expected10 payoff H (respectively D) types get if a firm violates its
implicit contract with them (by laying them off to avoid retirement benefits, for example), x3
(x4)denotes the expected payoff H (respectively D) types get if the firm adheres to its implicit
contract with them, and λrepresents the probability that the firm will honor its implicit contract.
9
We assume for simplicity that all firms are identical and that the payoffs to being honest or not in relationships
other than the employment relation are additively separable from those from the employment relation, and so can
be ignored here.
10
The expectation is taken with respect to the conditional distribution FH[.|S>S*] for H types and the corresponding
distribution for D types.
Rubin & Somanathan: Humans as Factors
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The equilibrium proportion h of H types will now be determined by equating the payoffs of H and
D types. It may take about a generation for adjustment to this equilibrium to take place.
We want to examine the implications of a change in λ, the proportion of honest firms. A
fall in λmay come about, for example, if firms begin to change hands more often, so that the new
management does not feel bound to honor the implicit contracts made by their predecessors. If x3x1 > x4-x2, (then a fall in λ, the propensity of firms to honor their implicit contracts with their
employees will reduce EH[x](h) by more than ED[x](h). This will lead to a decline in h, and in the
aggregate gains from exchange in situations requiring trust. Note that it is quite likely to be the
case that x3-x1 > x4-x2. x2 is likely to be significantly greater than x1 because D types are likely to
accumulate human capital while on the job that is not specific to their employer, even when such
accumulation is less productive than acquiring employer-specific skills. This is because it will not
always be possible for the employer to observe what employees are doing. Hence, in the event of
an unexpected layoff or violation of the implicit contract by the employer, D types will have
significantly better outside options than H types. Next, note that if the employer honors the
implicit contract, it is not clear that x4 will be much greater than x3, since D types gains will then
consist mainly of shirking without being detected. Thus, a reduction in firms’propensity to honor
implicit contracts with their employees is likely to lead to a fall in the honesty of workers.
In any case, the changes in firms’employment policies have external effects in this setup.
Each firm has an effect on the total accumulation of “honesty”, a valuable asset for society,
because when parents are educating their children, they do not know which firm their children will
be employed by. The traditional approach to the problem of opportunism has been one of agency
theory, with or without complete contracts. In these models external effects of a firm’s actions do
not exist, since potential employees are self-interested agents who assess each firm’s reputation
separately. Moreover, there is no asset comparable to honesty.
Another phenomenon on which the existence of H and D types may shed some light is that
of people’s inclination to choose others like themselves in undertakings that require trust even
when the dimensions in which they resemble one another are unrelated to the undertaking in
question. One explanation is that people who commonly associate with each other have better
Rubin & Somanathan: Humans as Factors
Page 14
means at their disposal of punishing one another for deviations from good behavior than people
from different social and business circles.11 Here we offer another explanation which applies even
in situations in which punishment is not possible.
Consider the case of two groups of people, with identical proportions of H and D types.
Suppose cooperative ventures with the payoff structure from Frank, discussed above, are possible
between members of different groups as well as between members of the same group. Suppose
further that both groups have identical distributions of the signal S for both H and D types, but
that the signal can be seen only by others from the same group. This is an extreme version of the
idea that members of different groups might, due to unfamiliarity, find it harder to assess each
other’s trustworthiness than might those from the same group. It follows that no cooperative
ventures giving an expected payoff of more than x2 will occur between members of different
groups. We prove this by contradiction.
Suppose, by way of contradiction, that cooperative ventures between a subset A of
members of Group 1 and B of members of Group 2 do occur that give all of them an expected
payoff of at least x2 and some more than x2. It must be true that for every member of A who
receives an expected payoff of x > x2 from pairing with a member of B, the expected payoff from
pairing with another member of his own group (Group 1) with the same value of S as himself,
must be less than or equal to x. (Otherwise such persons would form pairs within their own
group). But the expected payoff from pairing with a person with signal S is increasing in S.
Hence, the group A must consist of members, at least some of whom have different values of S.
For if it is worthwhile for someone from A with signal S to pair with a member of B, it will a
fortiori be worthwhile for all those from A with S0 < S. Hence, the expected payoff from pairing
with a randomly selected member of A must be less than the expected payoff from pairing with
the member of A with the highest S value, which in turn is less than the expected payoff from
pairing with a randomly selected member of B. But by symmetry, it must be true that the expected
11
Sethi and Somanathan (1996) use this idea in their theory of the evolution of social norms in common property
use.
Rubin & Somanathan: Humans as Factors
Page 15
payoff from pairing with a randomly selected member of B must be less than the expected payoff
from pairing with a randomly selected member of A. This contradiction completes the proof.
It is clear that what is going on here is adverse selection. Members of Group 1 with high
signal values would rather not pair with someone randomly selected from Group 2. But this
lowers the quality (expected honesty) of the pool of people from Group 1 willing to pair with
people from Group 2, and as this process is driven to its logical conclusion, all pairing takes place
within groups.
OPPORTUNISM
Within-group selection is directly related to opportunism, an important form of cheating,
or defection. Within a group, an important source of gain to an individual would have been
through opportunistic behavior. This could have taken many forms. One would have been for a
male to deceptively convince a female that he would support her and any children a union for the
purpose of inducing copulation. Males who were more successful at convincing females of this
when it was not true would have left more descendants in the gene pool so there would have been
selection for this behavior. On the other hand, females who could detect this sort of false promise
would have themselves been more successful at survival and at raising children successfully, so
there would have also been strong mechanisms to detect exactly this form of cheating. Brinig
(1990) discusses exactly this problem in a modern context and shows that there are still
mechanisms in place to limit exactly this form of male opportunism.
Females would also have incentives to cheat. A female would want the most desirable
male to sire her children. On the other hand, she would also benefit if any male would continually
provide resources to support her and her children. This creates an immediate incentive for
cheating: have sex with the most desirable male around, and convince another male that he is
really the father of the children and should invest in them. Again, there would have been selection
pressure on females for cheating and on males detecting such cheating.
The evidence is strongest at showing that we are adapted to detect and punish cheating,
but this in turn implies that cheating was important in the EEA. There is substantial evidence
today that humans have been selected to avoid opportunism. One piece of evidence is that
Rubin & Somanathan: Humans as Factors
Page 16
regarding the Wason Selection Task, cited above. This shows that an important mental module is
exactly aimed at detecting and reducing opportunism. Cosmides and Tooby (1992) also cite
evidence that humans are more disposed to food sharing when luck is an important component of
success (as in hunting) than when lack of success is due to shirking; see also Posner (1980) and
Rubin (1982).
Trivers (1985) in his discussion of “reciprocal altruism” lists several innate psychological
mechanisms related to enforcement of agreements: friendship, which would serve to facilitate
long-term reciprocal altruism; “moralistic aggression,” anger when an individual believes that
other have cheated; gratitude and sympathy, emotions aimed at monitoring the amounts involved
in reciprocally altruistic exchanges; guilt, a feeling that leads individuals to atone for cheating
when they are likely to be caught; and a sense of justice.
Frank (1988) also discusses the role of
anger with respect to opportunism. Thus, modern efforts to control opportunism as discussed in
the transactions cost literature are a continuation of a basic human trait. On this reading,
opportunism and avoidance of opportunism are both evolutionary old human characteristics.
Neither has appeared as part of a business or capitalist framework; rather, both have been around
before our ancestors were human, and probably were major contributors towards our current level
of intelligence.
The evolutionary sequence may be this: Intelligence evolved to some level to solve
intragroup problems, as discussed above. However, once intelligence reached this level, then
other forces, involving intergroup selection, took over.12 Alexander (1985) suggests another
feedback loop: as human groups became larger, then intragroup competition was increased. We
now discuss group processes.
GROUP SELECTION?
In addition to the process of individual selection described above, there may also be a
process of group selection. This is said to occur when it is in the interest of an individual to
subordinate his selfish goals to the goals of the group because groups in which such subordination
12
It would be intellectually satisfying to explain human intelligence as the result of one process. However, given
the low probability of such evolution (Mayr, 1988), it is not surprising that more than one process is required.
Rubin & Somanathan: Humans as Factors
Page 17
occurs are likely to survive at the expense of groups where there is no such altruism. Arguments
that actions are undertaken “for the good of the species” are group selection arguments. Group
selection models are out of favor among biologists for reasons that should be comfortable to
economists. The behavior underlying such models tends to be subject to free riding problems.
That is, assuming that an individual does something for a group at his own expense is no more
plausible in a biological context than in a market context. Thus, methodological individualism is as
popular among biologists as among economists.
Nonetheless, there are powerful arguments for what appears to be group selection among
humans. (Elworthy, 1993, presents and discusses many such arguments.) Robson (1995)
suggests that competition between societies is likely to have been important in human evolution,
but has not been studied sufficiently. The issue is discussed at length in van der Dennan and
Falger (1990). Wilson and Sober (1994) present a logical argument for group selection. The
analysis above readily lends itself to a group selection model: those societies (groups) in which
honesty was at a higher level would have generated higher incomes or better fighting ability, and
would have been more successful. However, our analysis allows for genetically identical groups
to nonetheless differ in levels of internal trust and thus in cohesiveness because of the possibility
of different socialization patterns.
An intermediate between individual selection and group selection is kin selection. Because
relatives share genes, any action that helps a relative will also increase the number of copies of the
gene itself in the population. (Hamilton, 1964; for a good general introduction to these issues, see
Dawkins, 1989.) Thus, individuals are selected to offer assistance to genetic relatives, with the
degree of altruistic assistance proportional to the degree of relatedness. Human groups in the
EEA were likely to have been kin groups, so that group selection would have been related to kin
selection. Kin selection would therefore have reinforced group selection, perhaps to the point
where altruism, or at least unwillingness to defect, towards members of the group would have
been selected. Reeve (1998) has a discussion indicating that kin selection and cultural adaptation
can give results similar to those expected from group selection.
Rubin & Somanathan: Humans as Factors
Page 18
Thus, the argument is this: Consider two groups of proto-humans. In one, individuals
cooperate for purposes of predation, including particularly predation against other humans. In the
other, individuals are more selfish. Then the benefits to an individual in the cooperative group
must outweigh the benefits to an individual in the selfish group. Moreover, if cooperation is an
“Evolutionary Stable Strategy” (ESS; Maynard Smith, 1982) it must be that a selfish individual
in a cooperative group would lose, or that a gene for selfish behavior could not successfully
invade a group of cooperative individuals. This is more likely as members of the groups become
more closely related.
Groups are then in competition with each other. The competition may be for resources
(probably territories in the EEA). If may also be for access to females. The Bible provides a
good (if bloodthirsty) example of this competition among early human tribes:
7) And they warred against the Midianites, as the LORD commanded Moses; and
they slew all the males...
17) Now therefore kill every male among the little ones, and kill every woman that
hath known man by lying with him.
18) But all the women children, that have not known a man by lying with him,
keep alive for yourselves.) (Numbers 31).
If intelligence was associated with victory in such competitions (which were perhaps
common among primitive peoples, and perhaps pre-humans as well: Bigelow, 1969), then the
selection pressure on humans for increased intelligence would have been important. More
substantial discussions of the role of warfare in human evolution are in Alexander (1979, 1985);
Bigelow (1969); Carneiro (1970). Elworthy (1993, at 103-112) has an extensive bibliography
discussing this issue. This is the most likely explanation for at least part of the rapid increase in
human intelligence. Alexander (1979, 1987) is a critic of group selection arguments, but
nonetheless a proponent of the view that intergroup competition and “balance of power” criteria
were important in human evolution. Thus, such intergroup competition is not inconsistent with an
emphasis on individual selection.
Rubin & Somanathan: Humans as Factors
Page 19
If in the EEA all members of groups were likely to be kin, then natural selection would not
have needed to develop a mechanism to separate group loyalty towards kin from group loyalty
towards others. That is, if group loyalty would have automatically been kin loyalty, then there
would have been selection pressures for group loyalty independent of kin status.13 Thus, in the
context members of groups finding cooperation with each other more valuable than cooperation
with non-members, as discussed above, it is likely that selection would have been for cooperation
with acquaintances or with those with similar characteristics, rather than with actual kin.
Moreover, if the Biblical behavior quoted above were typical of early human competition, then
members of groups would indeed have been relatives because non-relatives would have in general
been killed. Thus, the mechanism defining group membership may not have been selected for
among humans; group identifications can be remarkably flexible.
There is evidence about the willingness of humans to contribute to public goods. There is
both experimental and field evidence of such contributions. Ledyard (1995) summarizes the
experimental evidence. Real world evidence includes the debate in public choice about the
reasons for individual voting behavior and discussions of charity. The experimental evidence
consists of various sophisticated replications of versions of the prisoner’s dilemma, where playing
the “cooperate” strategy is viewed as contributing to a public good. This cooperation among
experimental subjects may be due to the forces identified here.
AFFILIATIONS
The most remarkable feature of the group affiliation modules among humans is flexibility.
Humans define group affiliation in numerous dimensions. Indeed, this aspect of human behavior
is so pervasive and so prevalent that it has largely escaped notice among many. However, the
flexibility of the group identification mechanism is one of the most important features of human
behavior. The flexibility of the group affiliation mechanism makes existence of today’s large
societies possible. If it were not so flexible, if group identification were confined to kin (or to
those raised together, who in the EEA would have generally been close kin), then the world of
13
The incest avoidance mechanism seems to operate by reducing sexual desires between those raised together,
independently of any genetic relationship. Presumably in the EEA most people raised together would have been
siblings, and the mechanism evolved with this as a basis.
Rubin & Somanathan: Humans as Factors
Page 20
humans would be very different than it is. We might be as intelligent as we are now, but we
would live in small non-cooperating bands and would never have discovered the benefits of mass
division of labor.14 Shreeve (1995) believes that this situation describes the Neandertals, and
explains their lack of success relative to modern humans. Richerson and Boyd (1992) indicate
that the biological basis for the amount of cooperation observed among humans is obscure, and
that it is an open question as to whether identified evolutionary mechanisms are able to explain
this level fo cooperation.
We argued above that the evolutionary mechanism for deciding who is in the group and
who is not would have been weak because most or all group members would have been relatives,
so that kin selection and group selection would have been reinforcing. Therefore, humans could
easily learn to form groups with non-kin when it became useful to do so. It is also possible that
this preference itself evolved. That is, some humans may have been unable to form groups with
non-kin, and these humans would have been selected against because those able to form more
general groups would have been more successful. A possible argument for this latter point is that
there is evidence that there are increasing returns to scale in group size -- larger groups are likely
to be more successful because adding individuals to a group increases the chance for productive
inventions (Kremer, 1993). Human group affiliation mechanisms are today flexible.
Peres and Hopp (1990) point out that young (pre-pubertal) humans are quite flexible and
able to learn languages with great ease. Adults are much less flexible and have difficulty learning
new languages and customs. Thus, if societies rely on such traits as markers, then it would be
relatively difficult for adults to move from one group to another. On the other hand, in the
modern world where millions of people may be socialized into the same culture and language, this
mechanism would not limit the ability of people to join new groups.
What are some of the group affiliations that a typical human experiences? Most important
of course is the family. One will feel loyal towards the birth family, the nuclear family (or in some
cases families) and the family of the spouse. Because of geographic dispersion, connections with
14
Extreme environmentalists and others who advocate a “return to nature” might be expressing an implicit
preference for a much more parochial and narrow group affiliation mechanism.
Rubin & Somanathan: Humans as Factors
Page 21
birth families will sometimes be attenuated, but such loyalty is an important group identity.
Relationships with extended families are now less important than previously (Becker, 1991, 342361.) Many feel ethnic or religious identities.15 Ethnic loyalty is an intermediate between kin
loyalty and other forms of group identity, since members of the same ethnic group share more
genes than randomly selected individuals.
Many feel loyal in various ways towards groups in which membership was in the past.
Many feel such loyalty to cities in which youth was spent. Many also feel loyalty towards
undergraduate colleges, a feeling that alumni associations are eager to exploit. People also feel
loyalty toward political parties and perhaps various hobby associations. Some may also affiliate
with fraternal organizations such as the Lions or Elks. Humans may also join various
occupational and professional associations.
Moreover, for many of the affiliations mentioned above there is no economic justification.
Membership is a consumption good. Explaining the extent to which individuals do join such
groups and contribute, rather than free riding, has been a major puzzle facing economists. For
example, there is a large literature in public choice dealing with the decision to vote. The
argument here is that consumption of membership in groups of various sorts is an innate element
of utility functions, just as is consumption of particular goods and services. We have been
selected to feel group loyalties and to develop such loyalties towards any group of which we are a
member, including political parties.
Perhaps the most salient feature of group membership is the “us versus them”
characteristic of membership. (“Conflict serves to establish and maintain the identity and boundary
lines of societies and groups”: Van der Dennen and Falger, 1990, p. 6). This is true whether there
is formal membership in the group or whether there is mere loyalty. Even if attack and defense
are not a normal part of day to day life, we remain ever ready to defend any group with which we
feel an affiliation. Of course, for most of us most of the time such defense is purely verbal.
15
Originally religion and ethnic or tribal identities were identical. One major breakthrough in human society was
the severing of this link, so that individuals who were not ethnically related could nonetheless be members of the
same religious group.
Rubin & Somanathan: Humans as Factors
Page 22
Humans also identify quickly with groups and feel loyalty to groups, even if they are told that
assignment is random (Kreps and Denton, 1997).
It is also interesting that males are more group oriented than females. For the best
example think only of routing for sports teams. There is not doubt that this is a male activity.
Because of physical weakness and child care responsibilities, females typically do not engage in
war or in pre-war activities among primates. Thus, if the group behavior module is evolved from
the warlike behavior of our ancestors, then it is not surprising that females are selected for a
weaker response to this module. The initial impetus for group formation might have been
communal cooperative hunting, also a generally male oriented activity (Tooby and Devore, 1987).
THE SCOPE OF THE FIRM
A fundamental issue, going back at least to Coase’s classic 1937 article, is the limits of the
firm. If activities are carried out between firms, using the market, then there are available what
Williamson has called “high powered incentives” for efficient low cost production. On the other
hand, additional market transactions are required. If activities are carried out within firms, then
fewer transactions are needed, but possibilities of shirking and opportunism become greater
because incentives are weaker. Entrepreneurs and managers organize firms to maximize profits,
adjusting for these two costs. But the scope of organization for this purpose depends crucially on
costs of inducing workers to join firms.
Underlying this entire analysis is an implicit set of prices required to motivate workers to
work for firms. It is this set of prices that has been the product of natural selection. If human
evolution had been different, then the entire scope of the firm and the scale of production in
society would also be radically different. For example, if humans were more solitary or less
willing to cooperate, then wages for workers in large firms would perforce be larger, and so the
optimal tradeoff between internal production and use of the market would be shifted more
towards the market. If humans were more cooperative (probably a less likely evolutionary
outcome) then more transactions might be in firms than is now the case.
Rubin & Somanathan: Humans as Factors
Page 23
Consider as an example telecommuting: working at home and using modern technologies
(phones, faxes, computers) to communicate with co-workers. We make no predictions here
about the likely extent of this practice at equilibrium. However, what will be relevant for
establishing this scope are exactly the sort of preferences we analyze here. If humans prefer to
work in groups with others, then telecommuting will be relatively less successful; if they are
indifferent, or prefer solitary work, then it will be relatively more extensive in the economy. This
preference will be reflected in wages and earnings demanded by workers in differing institutional
settings, and so firms will naturally adapt to the preferences. Our point is that if these preferences
were different, then the optimal adaptation would also be different.
The scope of potential membership in groups or organizations is remarkably flexible.
Humans have preferences for associating with relatives, and for forming groups with members of
the same ethnic group. Such preferences sometimes extend to economic transactions (Landa,
1981). But these preferences are easily overcome. Modern firms (at least in the U.S.) employ
workers of differing ethnic groups and genders. Such groupings would have been uncommon in
the EEA. Since agglomerations were small and often family based, ethnic variation would have
been uncommon. Sexual division of labor is quite old, so work groups would have been of one
gender – males hunting, females gathering (e.g., Silverman and Phillips, 1998). Again, willingness
to join such diverse groups would depend on the flexibility of affiliation mechanisms; were they
less flexible, then it would be much more costly to organize firms in the way they are currently
organized. Ethnic and gender preferences (identified by Becker, 1971, as “discrimination
coefficients”) are sufficiently weak so that workers can be induced by relatively small payments to
work in such firms. Indeed, while many believe that humans are racist and xenophobic, the
remarkable thing about preferences is the relatively small magnitude of these tendencies. The
ability of humans to feel identity with groups based on arbitrary methods of assignment (Kreps
and Denton, 1997) also means that workers can switch firms and feel full loyalty to the new firm.
Moreover, although humans are undoubtedly opportunistic, the amount of such
opportunism may be limited by a desire to appear honest and by early socialization into an ethic of
honesty, as discussed above. Again, if preferences for working with kin were stronger, or if
Rubin & Somanathan: Humans as Factors
Page 24
opportunism were more prevalent, then the amount workers would demand to work in diverse
environments, or the costs of monitoring, could be sufficiently high so that such workplaces
would not exist, and the benefits of the increased productivity generated in such workplaces
would not be available to us.
Cosmides and Tooby (1989, p. 35) argue that the remarkable success of humans as a
species (demonstrated by population growth, the biological measure of success) has been due to
food production and disease prevention. They claim that “there is no reason to suppose” that
“participation in coalitional competition for resources” -- what economists view as exchange and
division of labor, and what we consider in this paper -- has been relevant. However, modern
medicine and modern agricultural techniques themselves depend on modern complex society.
Modern medicine depends on a large scientific base, and modern mechanized agriculture requires
an industrial system. The types of adaptations discussed here are in fact necessary for the level of
population growth observed in modern humans.
SUMMARY
The argument of this paper is that preferences relevant for labor markets evolved in a
Darwinian process. Focusing attention on evolved preferences does not diminish the scope for
economics. Economics is still highly important because humans are above all flexible. Thus,
although there may be underlying preferences, changes in prices can lead to changes in behavior,
just as economists have always argued. The advantage of a biological approach is that more
content can be placed in the underlying preferences, so that hypotheses can be derived regarding
the subjects of maximization.16
Human intelligence evolved to solve problems related to competition with other humans.
Within groups, there was opportunistic behavior. Successful human ancestors deduced ways to
behave opportunistically, and also to avoid being victimized by opportunistic behavior. The
literature on transactions costs emphasizes the importance of opportunism and its control in
16
As the realization of the importance of biology increases, some other social sciences will require substantially
more revision than will economics: Tooby and Cosmides, 1992.
Rubin & Somanathan: Humans as Factors
Page 25
explaining many economic institutions. But this importance is much older than the modern
business economy, and played a fundamental role in our becoming human.
The second force leading to intelligence was the possibility of selection of individuals
based on their willingness to join groups and refrain from defection. Individuals who were able to
function in groups were more successful than individuals without this capacity. Societies that
successfully inculcated in children a relatively low propensity to behave opportunistically were
more successful than others. Pressure to define group membership narrowly is weak. Humans
today are remarkably flexible in their ability to form all sorts of groups. This flexibility is
responsible for the mass production society in which we live; if human preferences for joining
groups only with kin were stronger, we might be intelligent, but we would not be rich.
The fact that the two mechanisms responsible in evolutionary time for current levels of
intelligence continue to operate today is astonishing. The implications are noteworthy. In
particular, it seems quite possible that evolutionary pressures for continued increases in
intelligence may still be operating on humans, even in today’s mass societies. At least, this
possibility is worthy of serious consideration.
Rubin & Somanathan: Humans as Factors
Page 26
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