The hand of God, maths, and corruption


 

The more we know about human nature the more cynical we become. We believe, and this is fundamental for modern civilisation, that to succeed we should rely on people’s vices rather than on their virtues, and it is self-interest that drives the world to prosperity and collective benefit.

‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner,’ wrote Adam Smith, the father of modern economics, ‘but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love.’ In this famous passage, taken from his book ‘An Inquiry into the Nature and Causes of the Wealth of Nations’, Adam Smith set out the mechanism by which he thought our society operates.

A man, he believed, pursues only personal gain but to get what he wants he must deal with others exchanging what he has for what he needs. Through this, ultimately self-centred, process ‘led by an invisible hand to promote an end which was no part of his intention’ we all, miraculously, become wealthier and happier.

Smith was a religious man and for him the ‘invisible hand’ was the mechanism by which God administered the universe and if he was right then either God, omniscient and benign, favours corruption or the hand is not His.

Adam Smith’s theory is attractive by its apparent simplicity and appeal to day-to-day experience: it is usually easier to get your dinner by paying for it than by begging. Yet there are circumstances when rational behaviour in each individual case means an overall disaster.

The well known example is the so-called prisoner’s dilemma in game theory, a branch of mathematics concerned with decision making in social interactions. In its classical form the prisoner's dilemma goes as follows.

Two suspects are arrested by the police. The police have insufficient evidence for a conviction and, having separated both prisoners, interview each of them to offer the same deal. If one testifies and the other remains silent the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both remain silent both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other each receives a five-year sentence.

What should a prisoner in this situation do? Suppose that the other prisoner doesn't confess. Then the best course of action is to confess and go free. Even if the other prisoner does confess it will be better to have done likewise - at least the sentence will be lower.

It appears that it is better to betray in either case thus both prisoners are likely to confess and end up serving sentences of five years even though if both had remained silent they would have served only six months.

It is easy to see that the question ‘to bribe or not to bribe’ is just a variation of the prisoner’s dilemma. A company that operates in a competitive market has – unless it is certain that corruption will be punished - very strong reasons to grease someone’s palm.

There are a number of explanations for corruption, of which the main is greed. Yet if our thinking is correct then the picture is alarming: greed can be controlled if necessary while the root cause of corruption appears to lie in the inner logic of an economy like the Russian one and is, therefore, less amenable to reform.

Isn’t this difficult but lucrative market of 140 million people worth a little kickback?
 

There are, however, circumstances that do not fit this pattern. A few days ago IKEA, the Swedish retail giant, fired two top managers in Russia for ‘closing their eyes’ to corruption. A comparatively small bribe paid by a lower-ranking IKEA employee to connect a shopping centre in St. Petersburg to electricity cost Per Kaufmann, a director in Central and Eastern Europe, and Stefan Gross, a real estate director, their jobs.

Why did IKEA do this? Isn’t this difficult but lucrative market of 140 million people worth a little kickback?

The Swedes, it appears, are ready to sacrifice their Russian business in their praiseworthy yet foolish crusade against corruption - unless their actual intention is to change the rules and play some other game.

‘We're eyeball to eyeball, and I think the other fellow just blinked’ were the words of Dean Rusk, the US Secretary of State, at the height of the Cuban missile crisis in October 1962, the most dangerous nuclear confrontation ever to occur on the planet.

Yet again, from a mathematician’s standpoint, American and Soviet leaders were playing a game, the game of chicken in which two drivers speed towards each other on a collision course: one must swerve or both will die in the crash but the one who turns is a loser, a ‘chicken’.

Here the rational strategy is to swerve: however hard it might be to become a chicken, the alternative is even worse. Both opponents must choose the lesser of two evils and stand back.

Yet that is exactly what IKEA is refusing to do. It speeds up with eyes shut and steering wheel broken. Though, here is the trick: the only way to win the chicken game is to become demonstratively and loudly insane, so that the opponent will see no way out but be reasonable himself.

By giving its top managers a public whipping IKEA is trying to appear like a lunatic who is ready to crash but not to swerve and by rational craziness to force those at the other end to admit defeat.

 

February 22, 2010
text: E. Istomina
picture: Michelangelo

 

 

THERE IS NO NEED TO MAKE A HUGE ISSUE OF CORRUPTION

TEXT: Anton Malginov, partner, Muranov, Chernyakov & Partners

Corruption in Russia is nothing new. Russian classical literature is full of stories of nepotism and bribery as acute and pressing issues. Today, there is a lot of talk about corruption. Some of it is true, though a lot is just speculation and exaggeration.

It is true that many officials consider their positions not as a place of service but primarily as a way of earning money. It is true that fighting corruption is difficult, and the measures taken so far are not always effective. It is true that it is tempting to succumb to corrupt schemes which seem to offer a rapid solution. And it is not surprising then that foreigners, once in Russia, begin to resort to corruption mechanisms themselves which they would not do at home.

However, it would be wrong to say that everything in Russia is decided by money. This is not so, and our experience and practice confirm it. The opposite is said, as a rule, by those who themselves tend to use corrupt methods. They encourage corruption.

It should be noted that lawyers are among those who are most interested in fighting bribery. The reason is pragmatic: money paid in the shape of a bribe is what should have been paid to lawyers for resolving an issue by legitimate means.

Corruption in one form or another exists in every society, regardless of its level of development or organization - in some places more, in others less. There is corruption in Russia. Yet, it is not a specifically Russian problem, and there is no need to make a huge issue of it.

 

 

How not to give bribes
Share/Save