This is the third part of a series about promoting cooperation in society. Check out part I when you get the chance!
Grocery stores and other intermediaries often save us time, but is it possible that greater efficiency comes with increased isolation and conflict?
If you have followed my ideas over the past few months, you may recall my hypothesis that repeated personal interaction can promote cooperation and peace. In this post, I show that centralization may reduce overall interaction, thus increasing distrust and conflict in society.
[Don’t fret if you are not familiar with centralization; the concept is remarkably simple. In government, centralization may refer to the political process being concentrated on a single authority. In the market, centralization means goods are managed and offered by a monopolistic corporation.]
Decentralized Interaction vs. Centralized Interaction
Under a completely centralized system, people receive most of their goods and services from a single entity. Stable countries with functioning markets generally do not have this problem, but let’s consider a modest example of centralization — grocery stores.
Without grocery stores or bazaars, you would need to interact with a great number of people. Filling a standard shopping basket would be quite an adventure filled with all kinds of people. Go to the baker for bread, the fisherman for salmon, the butcher for meat, and the farmer for some vegetables. Your basket has just four items in it, but you have already visited four people. By the time you purchase all of your goods in this decentralized market, you will have interacted with dozens of people.
Based on the repeated personal interaction hypothesis, we expect high cooperation among these people over time. As you can imagine, any cooperation benefits in this scenario come with the annoyance of inefficiency.
Enter the middlemen. Bazaars, grocery stores, and more recently, online retail giants, save you time and money by making deals with those dozens of businesspeople that you had to interact with to fill your shopping basket. Purchase what you want from a middleman, and you will soon be on your way. Fewer interactions definitely save you time, but the repeated personal interaction hypothesis suggests that trust and cooperation in society will also decrease.
The grocery store is likely beneficial for society since the gains of centralization clearly outweigh the costs of running errands for countless hours, but the same cannot be said for monopolies and governments.
Imagine a sliding scale that ranges from zero to one. At zero, the market is absolutely decentralized. This is the situation of a free market with no middlemen. Interaction is at its maximum point, but economic efficiency is very low.
When the grocers and other middlemen enter the market, the scale adjusts to a value of perhaps 0.3 or 0.4. This moderate level of centralization comes with fewer interactions in society, but economic efficiency increases. In purely economic terms, people are better off due to the middlemen.
Let’s consider a situation when the scale would be somewhere between 0.8 and 1.0. Assume that Amazon continues to grow and eventually captures 100 percent of the market share in several major industries. Nearly all economic activity is concentrated on a single company. Amazon’s business model allows it to offer a high output of reasonably priced goods, so economic efficiency is extremely high. But a coin has two faces; with high efficiency comes with low social interaction. After all, you may be lucky (or not) to interact with one person each time you purchase a product from Amazon. The interaction falls even further when you consider Amazon’s tendency to replace face-to-face interaction with automation and online interfaces.
[Economics Note: In this hypothetical scenario, Amazon becomes a monopoly purely through quality and output. Free entry is assumed, and Amazon is not a rent-seeker. Consumers are the primary beneficiaries of Amazon’s dominance]
Expect Low Interaction in Centralized Markets
Assuming free entry, the market’s centralization on dominant firms drives both economic efficiency and social isolation. If this is the direction that the market is heading, we should expect very little social interaction from the majority of economic activity. I am hesitant to suggest that this short supply of interaction will lead to conflict, but it certainly does not help build bridges between people.
Is a world of centralization and high efficiency what we really want? On the surface, this world looks like a digital dystopia disguised as utopia: a world of economic efficiency where everyone is connected, but also a world of extreme isolation where personal interaction is the rarest commodity around.
My intuition and some casual observations suggest that the scale of centralization is currently somewhere between 0.5 and 0.6. I expect the scale to continue to creep closer to that dreaded 1.0 unless there is some unexpected shift in policy or technology beyond the horizon. The perfect solution to this scenario would be a means to achieve the levels of interaction associated with decentralization while maintaining the economic efficiency of centralization. I am keeping my eyes peeled for innovations that will do this. Such solutions may just lead us to a more cooperative future.