Discretion Is Necessary For Commitment Power

The usual supposition in economics is that predefined rules are preferable to administrative discretion, in that the latter often precludes credible commitments, and introduces a social dilemma that an enforceable rule could solve (Simons 1936; Kydland and Prescott 1977; Root 1989).

This logic holds to the extent that one can rely on external enforcement somewhere in the logical chain, whether from the state or from preexisting norms. In the case of monetary policy for example (as in Kydland & Prescott 1977), this can be a valid assumption, as the central bank is generally already embedded in an enforcement apparatus. Suppose therefore that a society, desiring to pre-commit itself to cooperation now and for eternity, delegates the enforcement of cooperation to a disinterested and omniscient robot. There is no necessity of punishing the robot, as it necessarily obeys its programming. Is this sufficient to close the incentive gap?

The problem is this: if the structure of social life is such that there always exists some opportunity for profitable (in terms of the objective payoffs) defection from a society’s norms, then it follows that any conceivable set of pre-announced and rigidly followed rules will be vulnerable to exploitation, either by rule-makers or rule-followers. One might think of malicious compliance as an example. As Boyd & Lorberbaum (1987) show, no deterministic strategy is the best response to all other strategies, and therefore no such strategy can resist invasion in a social dilemma.¹ To protect itself from novel defection strategies, therefore, an organization or a society must found its explicit rules upon some measure of discretionary administration in order to account for a variety of normative considerations without a monistic (and therefore exploitable) meta-principle.

A course of action is ‘discretionary’ if it is decided on the spot rather than according to explicit and pre-announced rules. There are two very different things this can entail. The traditional economics of commitment takes the lack of precommitment to entail rational maximization of the objective payoffs, i.e. the sort of behavior that – per section 2 above – would make society impossible if pursued consistently. But refusal to commit to an explicit rule does not necessarily entail rational maximizing – at least, not of the objective payoffs – for agents with altruistic preferences. Rather, a more basic feature of this refusal is the tacitness of the rules used to generate action. A discretionary action, in other words, is not deterministically related to, and cannot be fully justified in terms of, basic values.²

Taking discretion to mean tacit decision rules flips the logic of rules versus discretion on its head. Indeed, rational maximizing – being in principle fully explicable – should be considered a variety of rule-bound behavior. And in this sense, it is the very lack of a fully articulable decision rule that generates commitment power in certain contexts. Some tacit, inarticulable, and flexible “gut sense” of being exploited is necessary for identifying and punishing defectors, lest a rigid or preannounced rule set be invaded by novel defection strategies. Tacit decision rules can be thought of as meta-rules governing strategy-switching in order to maintain something like a best response to these novel strategies. And indeed, the necessity of such a “gut sense” governing strategy switching in social settings seems to have been a significant driver of the development of human intelligencee (Cosmides et al. 2010). Hayek’s (1952: 192) dictum that the mind can never fully explain itself is more than simply a limit in principle to self-knowledge; it is also a precondition of social behavior.

Robocop, therefore, is not a viable method of precommitting to open-ended cooperation, for the same reason that complete contracts are impossible. If it is impossible to close the incentive gap on the basis of explicit individual incentives, any mechanical enforcement of preannounced or pre-programmed rules, however nuanced those rules may be, must eventually fall to exploitation without discretionary judgment and tacit decision rules as a backstop.³

One straightforward policy implication is that the push toward uniformity in judicial sentencing, for example with mandatory minimum sentencing guidelines, is likely to ossify the ability of bureaucratized societies to maintain cooperation, at least in the criminal justice arena. While the logic of the law may be of necessity fully articulated, the rules governing its application in particular cases is, and must remain, tacit. Vague and imprecise legal concepts such as negligence, reasonableness, and so on, are important bulwarks against novel forms of defection that arise in response to existing complexes of articulated rules. Any functional legal system must rely to some extent on the legitimacy of the decision rule Justice Potter Stewart used to delineate the category of pornography in Jacobellis v. Ohio: “I know it when I see it”.

Second, the recent development of programmatic contract enforcement and trustless exchange with blockchain technology cannot substitute for judges and juries any more than an explicitly programmed Robocop can enforce cooperation upon a community. These developments can be extremely valuable, especially to the extent that they can relieve courts of the burden of cases where the mechanical application of a rule is sufficient. This may indeed be many cases, but it can in principle never be all cases. In this sense smart contracts, DAOs, and other programmatic contracts are a complement to, and not a substitute for, traditional contracts enforced by the judgment of a human mediator.⁴

Finally, the necessity of opaque decision rules to the maintenance of cooperation indicates why sacredness is such a central feature of human experience. Something sacred resists analysis, resists being broken down into its constituent concepts; it must be apprehended as a whole (cf. Rappaport 1971; Hayek 1952: 76). In contrast to the common perception of sacred values as inflexible, this resistance to articulation is precisely what creates space for prosocial strategy-switching.

It is no wonder, therefore, that attempts to analyze sacred concepts frequently provoke offense (Tetlock, et al. 2000). This reaction is especially familiar to economists, who are in the business of pointing out tradeoffs. It is, of course, valid to take an outside perspective on sacred values and point out that – for example – a human life can have a concrete opportunity cost that may not be judged worthwhile to bear, hence the much-maligned “value of a statistical life” (Simon et al. 2019). At the same time, economists ought to appreciate the functional role of sacred values in human cooperation. Particular sacred values may – and often should – be criticized and analyzed, but sacredness itself cannot be dispensed with or rejected as irrational.

Footnotes

1. Their model is in the context of a dyadic Axelrod-contest, but generalizes straightforwardly to the N-person case.
2. Such actions may, however, be justified post hoc in ways that bear no relation to the actual decision rule, which is inaccessible to conscious reflection (see Henrich [2016, ch. 7] for examples). This rationalization may nevertheless be important for the external legitimacy of a discretionary decision.
3. The opaqueness of the processes behind “deep learning” neural network AIs (Knight 2017) – despite typically being seen as a problem (e.g. Park et al. 2017) – could in principle suffice. Of course, given that the legitimacy of punishment is the key constraint, an opaque algorithm is not likely to command much assent.
4. Harwick & Caton (2020) develops this argument at greater length. This argument does not preclude smart contracts as the technical scaffolding for the application of discretionary human judgment, on which see Lesaege & Ast (2018).