A Brief Discussion of Hobbes’s “Covenants” in Modern Economics

In Thomas Hobbes’s “Leviathan“, he discusses the concept of “State of Nature” and the important role of a “Leviathan” (Commonwealth) in a society. According to his argument, performing and keeping “Covenants” among men is paramount. Studying Hobbes reminds me of the market structures in Economics, and the nature of competitions in a market economy. After substituting “Companies” in an economy for “men” in a society,  I noticed Hobbes’s theory is no longer perfectly feasible in such a modern scenario. In fact, instead of “keeping Covenants”, the “Leviathans” in a market economy would more apt to break them.

In a modern Market Economy, does the "Leviathans" still act the same role? Are "Covenants" between companies, like those between "men", still encouraged to be kept by a commonwealth? (link)

In a modern Market Economy, does the “Leviathans” still act the same role? Are “Covenants” between companies, like those between “men”, still encouraged to be kept by a commonwealth? (link)

Instead of going directly into economics, let’s first start off talking about Hobbes’s “State of Nature”, with the absence of a commonwealth. There are several “laws of nature” in this scenario: 1. men seek peace 2. men make covenants in the way of peace 3. perform covenants made. In such a “State of Nature”, there is no authority and all men are self-interested and fearful. However, men do have information – they are aware of others’ decisions and can communicate with one another about their action. This is why “State of Nature” is not a “Prisoner’s Dilemma”, where people have no information of others’ decisions, but an “Assurance Game”, where people have full information of others’ decisions and always follow others’ action.

Therefore, in the “State of Nature”, despite of men’s intention of seeking peace, the “covenants of peace” are fragile because of the absence of a commonwealth. Since all men are self-interested and fearful of others, “keeping covenants” is undesirable. At the same time, because of the full information, men would quickly follow someone who firstly break the covenants (like the “fool“). As long as one man broke the covenant, all men would tend to follow, making “peace” a short-term and fragile situation in the “State of Nature”.

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Assurance Game in “State of Nature”: The outcome of the game is either both “keeping covenants” or both “breaking covenants”. Thus without a commonwealth, since everyone is self-interested and fearful, it is fragile to maintain peace in Hobbes’s “State of Nature”. The ultimate outcome would most likely to be the lower-right corner. (Picture Credit: myself)

Now let’s take a look at a modern economy, assuming a regulator is not present. In a modern economy, there are a huge number of firms doing businesses. Since the utmost interest of an economy is making profit, all the companies would therefore try to avoid competitions. Thus, “covenants” would be formed between firms who produce homogeneous products. By forming “covenants”, they will set common prices, reduce the cost of differentiating their products, reduce the cost of advertisements and Research & Developments, in order to maximize their profits. If we conclude the above situation using a similar set of “Laws of Nature”, it would be: 1. firms seek peace (avoid competitions) 2. firms make covenants in the way of minimizing competition 3. perform covenants made.

Unlike Hobbes's state of nature, where men are self-interested and are thus reluctant to seek peace, firms in a modern economy tend to form covenants and seek peace (reducing competitions), instead of breaking covenants and  Without a regulator, firms tend to form giant corporation   

Unlike Hobbes’s state of nature, where men are self-interested and are thus reluctant to maintain peace, firms in a modern economy tend to form covenants and seek peace (reducing competitions and maximizing profits). Without a regulator, firms tend to form giant corporation and make huge profits out of consumers together. Therefore the most likely outcome would fall into the upper-left comer. (Picture Credit: myself)

The difference in the final outcome between the two scenarios, in my opinion, are caused mainly by the different interests. In the “State of Nature”, people are self-interested. Even though there is an incentive of keeping peace, “self-interests” ultimately make people break their covenants. On the other hand, the main interest of firms in a modern economy is maximizing profits. Compared to competing with each other for market shares, they would rather form covenants in order to avoid competitions and maximize profits.

And this is when the “Leviathans” do their jobs. (Cover of Thomas Hobbes “Leviathan“)

In the “State of Nature”, the role of a commonwealth, according to Hobbes, is to keep the covenants from breaking. Since men are self-interested and fearful, the only way peace would be permanently preserved is the establishment of a commonwealth, which rules men and force men to keep the covenants.

However, when it comes to the situation of a modern economy, the role of a “Leviathan” is completely opposite. In a healthy market economy, competition is encouraged while “convents” is penalized. In Economic terminology, those “Convents” are called “Cartels”, and they are generally illegal in most of the countries. This is because anti-competition behaviors are actually detrimental to the economy. Therefore, unlike the situation in Hobbes’s “State of nature”, “breaking convents” is an important duty for the “Leviathan” in a modern economy.

Thomas Hobbes’s “Leviathan” is an insightful book in terms of its influence to the modern politics. Even the US constitution was partially influenced by the theory in the book. However, we also need to acknowledge the drawbacks of the book. As the above example of a modern market economy shows, Hobbes’s “Laws of Nature” and the role of a commonwealth could not be blindly applied to every aspect of our lives universally.

Leviathan“: a book published in 1651 is apparently outdated in the context of modern economics. Are those so-called – “classics” still meaningful to our modern lives? (Link)

 

 

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