Apple once made “the computer for the rest of us.” OK, we always knew Google wanted world domination, but we thought it would be benevolent. Google even told its coders, “Don’t be evil.” We placed the tech companies on a pedestal, in a new category. They were different from the rapacious, polluting, high-handed businesses of yesteryear.
Tech oligopolies and game theory
I like to think of this in terms of the famous Prisoners’ Dilemma in game theory. You’re familiar with it: Two suspects interrogated in separate rooms, the cops having only enough evidence to send them to jail for a short time if neither one confesses. If both confess, they’ll stay in the slammer longer. If one confesses and rats out the other, he will go free – unless the other guy rats him out.
In repeated plays, it turns out best for both prisoners if, in each play, each one mimics the tactic used by the other guy the last time around. This is known as the tit for tat strategy.
Let’s think about tit for tat between giant corporations and their customers – that is, us. The companies treat us well, we buy their products and wear their logos. They screw us (bad customer service, poison our municipal water, etc.), they profit more in the short run, but we boycott them and use yelp.com to warn off other potential patsies, er, customers.
Sounds simple, but the tit for tat strategy fails in two ways. It portrays a dispassionate mutualism, with no place for morals or emotions. (This is why it has been used to model the evolution of parasitic, symbiotic, etc. behavior in non-sentient organisms.) In our, hopefully sentient, situation, after a long period of cooperative behavior from the other party (the tech giants, or our significant other), we do develop feelings of trust. A subsequent betrayal is a real blow.
In other words, human players don’t get terribly upset if we are betrayed on the second play of the game. We do get seriously out of joint if the other player cooperates for nineteen plays and betrays us on the twentieth.
This leads us to the second failing of the prisoners’ dilemma: The only way it allows us to retaliate is to not cooperate in the next rounds – on the 21st play and forward, in my example above. Economists Avinash Dixit and Barry Nalebuff aptly note, a “stronger punishment of a cheater would be a clear deterrent.” As we want the punishment to be clear and swift, we need a bigger response on round 21. The Prisoners’ Dilemma game doesn’t provide the needed response escalation.
There are other models in game theory that do allow this “escalation”. They are common in military planning. See e.g., Warburton. Though they may come into play if and as the conflict between corporate and public interests worsens, we won’t pursue them here. We’ll turn to a still different game-theoretic idea of escalation at the end of this column.
An externality is the effect a transaction has on those who are not direct parties to the transaction. For instance, if you neither own the factory nor buy its products, but it pollutes the stream behind your house, you suffer from a “negative externality.” If you are in business and a competing firm locates near you, you may find it easier to recruit well-prepared employees. This effect, sometimes called “knowledge spillover,” is a positive externality. (Of course, being too near to a competitor can have negative effects also.)
Cynics call modern corporations “externality-generating machines,” because the corporations’ mission is to internalize revenues while externalizing costs and risks. That is, the corporations create all possible negative externalities, in order to keep growing their stock price in a brutally globalized market. If it’s cheaper for them to pollute than to clean their effluent, then they’ll pollute, leaving cleanup costs and public health consequences to the taxpayers. If they can get a free bailout from the government, their CEOs will get big bonuses, even as the same CEOs rail against the taxation that funded the bailouts.
We adored the big tech companies, especially those in software, for being non-polluters. They gave us all these lovely devices, made our businesses more efficient, made it harder for totalitarian governments to hide their atrocities, and made our workdays more fulfilling. They offered clean, safe and healthful working environments – especially compared to the mining and meatpacking industries of old – reducing the load on public emergency rooms and disability pensions.
Forty years ago, economist Tibor Scitovsky noted that “consumer” is an infantile role; adults produce. This year for the first time, young people spent more money on tech (with all its potential for producing) than on fashion (consumption items). We might say, then, that the tech industry helped us mature as a society, and maybe even as a species.
Bigtime positive externalities, all.
Yet the negatives have started to pile up. Tech companies cooperate with the NSA’s spying on the citizenry. They’ve discovered lobbying, which threatens to position them on the side of those who subvert representative government. And Apple keeps changing those plug connectors....
The pressure of global hyper-competition causes our formerly beloved tech companies to become just like any other companies.
Because the tech companies have been with us for decades but the negative externalities have only recently become apparent, our sense of betrayal is extreme. We will, perhaps unfairly, wish to punish them more severely than we would other kinds of companies. Did I say “perhaps unfairly”? Apple isn’t Comcast! Despite its shortcomings, Apple doesn’t deserve the kind of backlash Comcast does. But emotions will drive us to treat Apple, which appears to have betrayed us after a long lovely romance, more harshly than we treat Comcast, from whom we learned early on never to expect much.
Corporate social responsibility and the bigger picture
Corporations get their charters from the States (often Delaware or Nevada), and in return the People expect the corporations to obey the law, pay their taxes, and create jobs. This is bare-minimum corporate social responsibility (CSR). The next CSR step beyond this minimum would be for corporations to reduce their production of negative externalities.
No, I haven’t suddenly changed the
subject; I’m tying the game/escalation/externality argument to a bigger
picture. Let’s look back with rose-colored glasses on a world that plausibly
existed before the first Earth Day. (That was in 1970, for history-impaired
readers.) Environmentalists thought corporations would engage in remedial
action if the harm they were doing – the negative environmental externalities,
a term they had never heard then – were simply pointed out to them. Executives
who had not read Silent Spring
had no idea that the planet could not recover from the pollution levels of that
In the event, they persisted in the post-WWII economic-growth-at-all-costs mentality. Environmentalists raised the ante by blocking construction projects that threatened obscure insects that (despite the undeniable virtue of biodiversity) no one really wanted to defend. Corporations escalated, killing public transit projects and pouring still more CO2 into the atmosphere. Environmentalists exaggerated and even fudged data on global warming, which is real, and corporations then engaged in more vociferous climate change denial.
We now see an outcome in which climate change denial is a result of both of the kinds of escalation recognized by game theory: The 2-party escalation of hostilities analyzed by Warburton and others, and the psychological self-escalation proven by Staw. Staw investigated people’s behavior vis a vis what operations research people call the sunk cost fallacy, and what ordinary folks call throwing good money after bad. Staw showed that people do it, and continue to do it, long past the point of obvious irrationality, and past the point at which the loss is irrecoverable.
In just this way, if polluters and environmentalists could have cut through the crap earlier, it would have saved a lot of grief. Now, neither side can back down. The cost of remediating the damage done by some corporations, if assessed by a court, would exceed the book value of the corporation. No CEO can afford to admit that.
I may fall into the same fallacy as I contemplate abandoning my 30-year loyalty to the Apple brand and converting to, well, not Windows, but Android. Yet I have all those programs and accessories for the Mac and iPhone...
I even have an iPad, heaven knows why. A machine suitable only for consuming content, never for creating content, and Apple had the chutzpah to try to sell it into the educational market, where we professors want our students to create. The iPad is a giant step back from putting productive resources in hands of “consumers”. (It lets us consume content more efficiently, I’ll give it that.)
Naturally, as environmental problems worsen, new companies will sprout up to remediate. We’ll hail as heroes any companies whose products reduce environmental damage. Tesla, anyone? Time will pass, investor pressure will intensify, and those well-intentioned companies will become... just companies. The corporate interest and the public interest will remain at odds.
I’ve aimed in this column to explain, via the theories of games and externalities, why this happens. Sorry to say, I have no solution. I do hope analytic explanation will be, as it often is, the first step toward making improvements possible and that many good thinkers will take up the challenge.
 The Prisoners’ Dilemma game is mathematically impeccable, but its metaphor is flawed. First of all, there are 3rd and 4th players, each with their own agendas: The police want convictions. The court system has its own objectives, involving justice, overcrowded dockets, etc., and it imposes constraints on interrogation techniques. The mathematical formalism does not recognize these players. Second, the Prisoners’ Dilemma game is only interesting and meaningful if played repeatedly against the same opponent. Anyone stupid enough to be captured multiple times – with the same partner! – won’t have enough brain cells to grasp the Nash Equilibrium.
Game theory, incidentally, is ideal for analyzing oligopolistic situations like that of the tech giants. Adam Smith type equilibrium analysis only works for commodity markets with many sellers and many buyers.
 Marc Warburton, Applying a Game Theory Approach to Escalation Control. SAIC USSTRATCOM/J525 Deterrence Assessment Branch, 4 February 2008. http://www.mors.org/UserFiles/file/meetings/08det/warburton1.pdf
 P. Limprayoon and F. Phillips, “Corporate vs. Social Attitudes toward Environmental Externalities.” Int'l. Jour. Global Environmental Issues, Vol. 11, No. 2, 2011, 109-138.
 Tibor Scitovsky, The Joyless Economy: The Psychology of Human Satisfaction. Oxford University Press; Revised edition (March 26, 1992)
 Barry M. Staw: "Knee-deep in the Big Muddy: A Study of Escalating Commitment to a Chosen Course of Action". Organizational Behavior and Human Performance 16(1):27-44. Game theorist Martin Shubik’s work reinforced Staw’s. See also Barry Schwartz, “The Sunk-Cost Fallacy, Bush Falls Victim to a Bad New Argument for the Iraq War,” Slate.com, Sept. 9, 2005. Extra points if you can identify the Pete Seeger song Staw took his title from.