Cartels, Combinations, and The Students’ Dilemma

teaching teaching economics teaching adam smith cartel combination prisoners dilemna

December 22, 2022

And there’s the catch. If only one student took the exam, then she would be guaranteed 100% on it no matter how well she did. So, the best situation for each student would be for them to be the only one to take the exam." 
At the end of this semester I watched with amusement as several different local cartels (“combinations,” in Adam Smith’s terms [Bk I, Chap VIII, p.68]) acrimoniously collapsed.
My students had set up these combinations in four of my classes in an attempt to ensure that they all received 100% on their final exams without having to take them. 
Their reason for attempting to establish these combinations was simple. I had told them that I would curve their exams, so that the highest score will be bumped to 100%, with every other student receiving the same number of “free” points as the highest-scoring student had been given. So, if the highest score was 80/100, all students would receive an extra 20 points. 
This delighted the students. They were almost cheering when they realized that if the highest score was 0, everyone would get 100%. All they needed to do was to unanimously agree that no-one would complete the take home exam and submit it to me by email.  
Earlier in the semester we had discussed the role that self-interest plays in society. We had noted, with Smith, that “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest” [BK I, Chap II, p.16]. But we had also observed that private self-interest will not always lead to social good. As Smith wrote, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices… [Bk I, Chap X, Pt 2, p. 130]”. We had also played various Prisoner’s Dilemma games to explore Smith’s argument that such conspiracies would be unstable and ineffective unless those engaged in them could draw on the force of law to “effectually and… durably” [Bk I, Chap X, Pt 2, p.131] enforce their members’ agreements to maintain them.  
This latter discussion of Smith’s work led to the students’ elation being short-lived. They quickly saw the connection between the tradesmen’s problem of enforcing their “conspiracy against the public” without legal support and their problem of enforcing their conspiracy against their professor. Without legal support the tradesmens’ conspiracy would only work “by the unanimous consent of every single trader” [Bk I, Chap X, Pt 2, p.131] and would last only as long as “every single trader continues of the same mind” [Bk I, Chap X, Pt 2, p.131]. The same observation was also true of the students’ conspiracy to ensure that no one would complete and submit their final exam. 
For all students to receive 100% on their final (and thus satisfy each of their desires to get this score) they would all have to refrain from attempting it and submitting it. But if even one student took the exam the others would run the risk of doing very poorly indeed if they had abided by the conspiracy not to do so. And there’s the catch. If only one student took the exam, then she would be guaranteed 100% on it no matter how well she did. So, the best situation for each student would be for them to be the only one to take the exam. To secure this they should encourage others to stick to their class agreement not to take the exam while secretly taking it themselves. 
Recognizing this some of the students started to worry that others were intending to betray the conspiracy and take the exam to benefit themselves. When they voiced their concerns, doubt spread. Students started referring to their earlier discussion of Smith. One class approached me asking if they could become a temporary C18th-style corporation, with me serving as “the law” and enforce their agreement. (I refused.) Accusations and counter-accusations flew. One by one, the students’ voluntary combinations collapsed. 
Then things got worse—at least from the students’ perspective. The ambitious students realized that other students might also be trying to maximize their points from the final. To get them they might take the exam seriously and try to do as well as possible on it. That means that the highest score on the exam might be very high indeed. There would thus be few if any “free” points from the curve. To defend themselves from the possibility that the curve would result in very few “free” points a student who wanted to maximize their score on the final exam would not only have to take it but work to do well on it. 
At this point some of the students become upset, as they realize the time that they spent working to secure and stabilize their conspiratorial combinations would have been better spent on studying. But I reminded them, that time was not wasted: Their experiences had brought into sharp focus Smith’s insights into the role that government intervention plays in supporting the anti-competitive measures so beloved by “people of the same trade” [Bk I, Chap X, Pt 2, p.130]
For some reason this did little to comfort them.
But what did comfort them was an optional extra-credit question that I emailed them as an addition to their final exam after their combinations had collapsed: Explain how the “invisible hand” would work against cartels to the benefit of society. After their experience in trying to game their final exam all the students were able to explain why cartels would be unstable in a free society. Some expanded on this, noting that the “invisible hand” had used their self-interest to try to form a cartel, to realize why this would not work—and that this had motivated them to study harder for the exam as this exercise had made its competitive nature more apparent to them. Just as competition in the market aids society by spurring the production of better, cheaper goods, so too can competition in the academy aid society by encouraging students to learn better. 
Just as Smith observed that there is no essential difference between a porter and a philosopher, [Bk I, Chap II, p.16] so is there no essential difference between an C18th Scottish tradesman and a C21st student in New Jersey. 
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