This situation is all too familiar to those who work in construction field. When I first visited the U.S. in 1991, I was struck by the following contrast: while in Soviet Union, construction was held in high esteem while business was frowned upon, in America, I discovered the opposite – business was held in high esteem while construction was not. Such attitudes are partly justified by the mafia’s much stronger affinity with construction over business. This is because in business, stealing a third of the net worth would lead to collapse, while in construction, even if a third of all the money was stolen, the building would still stand. Even more importantly, in construction, there is a lot of room for scams. According to the Cheops principle, which was developed in management theory, “Never since the Pyramid of Cheops was there a building that was completed on time and within the budget.” Having involved oneself in this undertaking, one has to muddle through it.

Shirking is another obvious example of a post-contractual opportunistic behavior. Employers and employees alike know all about it. If an employee is in full compliance with their contract, shows up at 9 AM, turns on the computer, sits down and stares at the monitor, it is by no means guaranteed that they are working and not surfing the web or watching porn. The employee may abide by all the formal requirements of their contract but without the outcome expected by the employer. Then the employer has to seek out other ways of implementing the contract, for example, by striking bargains with the employee, such as “I will let you early on Friday if you finish your work on time.” What makes this reframing of the contract possible? Shirking, as a form of opportunistic behavior.

Why would one say all these unpleasant things about people? The point is that if we want to have realistic economic theories, we need to populate economics with human beings that behave like real people do. However, real people are also very different from one another, and thus, theory needs to account for those differences, as well. We cannot say that everybody around us is a thief. Nonetheless, stealing is fairly widespread, which is to say that people may behave selfishly while remaining within normal moral boundaries. Finally, people may even not behave selfishly. This is known as “weak” behavior, which happens when an individual identifies with a certain community such as a village or a clan. Usually, “weak” behavior is characteristic of patriarchal societies. Incidentally, this is precisely why ancient Greeks did not view slaves as humans. In their novel Monday Begins on Saturday, Arkady and Boris Strugatsky present an image of the future. Two people are playing kitharas and, in hexametric verse, expounding on their lives in a magnificent society where everybody is free, everybody is equal, and everybody has two slaves. For us, this is a huge contradiction, but it isn’t one for them. A person torn out of their community is like a severed hand, finger, or ear. In many ways, humans can only truly be said to live within a certain communal network, and when a person is taken out of their network and transplanted into another, they become an instrument, a “speaking tool,” as ancient Romans would say.

Sometimes the networks provided by a traditional society are used very efficiently even today, in the context of the international markets. Thus, South Korea relied upon traditional family ties to build its system of chaebols – huge business conglomerates consisting of separate, formally-autonomous companies. Koreans ended up with very low management costs, by relying upon “weak” behavior, their society members’ traditional recognition of being parts of some bigger units. In Russia, this would be impossible. It has been long since we’ve had any traditional communities. Consequently, people have no bigger units other than themselves to identify with. Take, for example, the institution of peasant society. It started getting rooted out during the reign of Peter I, but the process wasn’t completed until the Bolshevik modernization. Having lost their familiar communal networks, people on the one hand were surrendering their relatives to agents of government-imposed terror virtually without any resistance, while on the other hand, they began identifying with non-existent communities such as the European proletariat or starving Africans. The peasant stereotype of the identification of the individual with the larger group continued to manifest itself but not on the scale of a village or other common geographic origin, but rather on the scale of national or even global solidarity.

Man vs the System

The framework of bounded rationality and opportunism doesn’t just apply to interpersonal relationships, it also applies to the relationship between the individual and the state. On its own, the idea of the state is rather abstract.  Just like “the people,” it is the subject of manipulation by human beings, individually and as groups. This is why institutional economists do not use “government” as a concept; instead, they speak about rulers and their subjects. Here, it is fitting to remember the famous Russian saying, “do not fear, do not hope, do not ask,” a motto imbued with the understanding of  bounded rationality and opportunistic behavior gained through the tragic experience of the Soviet prison system.

Why “do not fear”? Because people have a strong tendency to exaggerate certain kinds of threats. Let’s take organized crime, for example. The notion that the mafia is watching your every move is the product of our bounded rationality. Any capacity for violence is limited – this is a scarce resource that needs to be used sparingly. Another example is the idea that the government is recording our every conversation. Have you ever tried to estimate the costs of this level of surveillance?

Some ten years ago I visited a German agency housing the archives of the Stasi, the East German political police. It has an entire room filled with tapes, wiretaps of dissidents’ phones from the 1970s, that were never transcribed. In the forty years of its existence, the Stasi managed about a million of individual surveillance cases (far from all of them led to arrests, let alone sentencing). These cases were overseen by 7 million employees, seven people per individual case. Thus you should curb your estimates of the material value of your persona against the costs of government surveillance—and have no fear. Just calculate the cost of a hypothetical struggle against you personally and be assured that many of your fears are overstated.

But do not be hopeful, either. Strikingly, in the 1970s, brilliant Soviet economists developed a framework of the optimal functioning of the economy based the works of Leonid Kantorovich, one of Russia’s two Nobel Prize winners in this field. They realized that the country was ruled by a Politburo with its own internal differences of interests, competition, and filled with people some of whom had never graduated from high school. Nonetheless, according to these economists, there was such a thing as “the state,” a reasonable and well-intentioned actor, and it would implement the results of their work.

These kinds of expectations are still alive and well. The issue with them is that government’s rationality is not boundless; indeed, its rationality, that is, the rationality of individuals that make up the government, is considerably limited. Expectations of the authorities’ omnipotence are based on the idea of their divine nature. The reality is different.

The state is not always motivated by considerations of public good and this is addressed in the “do not ask” portion of the motto. Obviously, opportunistic behavior is possible both outside and inside the government. If, on top of that, the composition of the government reflects the effects of negative selection, it is quite plausible that government officials will not be bounded by moral restraints.

Is it possible to live in the world determined by these grim outlines?  Yes it is. One simply has to realize that we can hardly rely on hopes for some powerful and well-intentioned entity’s benevolence. We should rather rely upon the rules that we can use in communicating with each other. And we should rely on institutions.