The Economics’ Perspective on Promise

This week we read a couple chapters on Thomas Hobbes and the one chapter that really made me think about is Chapter 15 “Of Other Laws of Nature”. This Chapter, Hobbes gave an anecdote about a fool’s argument to whether one should break or keep a promise if the situation permits? In Hobbes’s argument, there shouldn’t be a case or a situation that permits cheating. There should be regulations made or specific laws made to punish and prevent those deviated behaviors at the first place. However, people will be likely and inclined to cheat if our society doesn’t hold the power to punish violations. Therefore, we see that Hobbes is a supporter of strict punishment and laws. I agree with Hobbes because I think that if a society creates a chance or a loophole for people to take advantage of, why wouldn’t they want to do so? It would be a very difficult situation to not do so if the opportunity is presented in front of you; therefore, I wouldn’t think that humans are not selfish; I would just think that we all have a brain to think for ourselves, selecting the best outcomes, when opportunity presents itself without consequences.

We come down to the idea of what is a promise and how are promises kept or broken?

In Econ 101, or any other Econ classes that incorporates topics such as strategic rationing, you will see that the game Prisoner’s Dilemma come up again and again. For this post, I will talk little bit about how as an Econ major I look at the Prisoner’s Dilemma situation.

In the economics field or any other business related field, there will always be the need to establish a mutual agreement on any subject matter. The mutual agreement may not always include contracts and laws for protection and guarantee but rather a mutual trust and understandings.

Prisoner’s Dilemma

One big example would be the agreements set among drug cartels, in which every supplier abide by an agreed amount of drugs sold and an agreed price set by the cartels. How would all suppliers play by the game and how would they plan on cheating? For sure, there are methods to prevent cheating through server punishments later on; however, cheating could still be done at the first place. In econ, we learned that the key importance of making a mutual agreement or promise is based on the number of periods played. So, if a game or a mutual agreement is set to be played only once, the outcome is for sure that both parties would most likely deviate or cheat. The reason is fairly simple, since the game is only placed once, there’s no punishment held responsible for because there are no later on periods. If the game is played infinitely and that both parties have no idea of the end point, the chance that both parities keep up with their promises is considered higher than that of the game played only once. The logic is that if a game is played continuously, there will be serve punishment if one decides to deviate and a break off a mutual trust. As a result, both parties will not only break off but also lose a large sum of profit in an economics sense.

Both Thomas Hobbes’s argument and the economics argument present the same thing: severe punishment is necessary in keeping promises, which I totally agree on.