Money and Markets: Essays in Honor of Leland B. Yeager

Ethnic conflict and the economics of social cooperation 227interest in setting aside their ancient ethnic rivalries and animosities for a “UnitedStates of Europe” may indeed be a world-class “enlightened” view, but it is not theview held by groups in many parts of the world, including Europe itself, asillustrated by the xenophobic reaction to the enlargement vote of May 1, 2004(Sailer 2004). Welfare economists assume (often without argument) that theproblem of nationalities – one of the most pervasive in international politics today– stands outside the purview of economic analysis. This view, if generally acceptedby economists, would greatly reduce the contemporary relevance of the discipline.It turns out that something approximating a scientific case can be made insupport of the claim that the forced exodus of one people from the territory ofanother (or perhaps their marginalization within the territory) can under certaincircumstances raise (rather than lower) the living standards of those remainingbehind. I shall now present the broad outlines of such an argument.3 An abstract model of economic gain and lossConsider a large territorial area named, for convenience, Alphaville. The residentsof Alphaville fall into two categories. There are “C-types,” who always keep promisesthat they have made, even when promise keeping is personally unprofitable tothem (Frank 1988: 11–14). The “D-types” act opportunistically and with guile.The D-types do this without exception. This does not mean that D-types neverkeep promises they have made, nor does it mean that D-types always steal andloot. They do keep their promises, but only insofar as it is profitable for them to doso; when it is not profitable, they break their promises. Similarly, they do not robor steal when the expected utility from engaging in such risky activities is low.Robbing, stealing, and swindling are viable whenever the expected utility is large(Casson 1991: 15–17, 24; Becker 1968). D-types also engage in a great variety ofdeceptions, both in advertising their goods and services and in presenting phonywarranties and bogus related services. D-types are extremely undesirable tradingpartners because their moral code does not rule out dishonesty, opportunism, subterfuge,and strategic guile. They are avoided not only by the C-types but also byother D-types, who prefer not to trade with their own kind if they can find a C-typeto trade with instead.We can fix our ideas with a simple table showing the respective (average) payoffswhen D-types trade with C-types and with each other: 5CDC 25; 25 5; 40D 40; 5 10; 10When a C-type trades with another C-type, they each walk away (on the average)with gains of 25 utils each. When a C-type trades with a D-type, the C-type gains(on the average) a mere 5 utils and the D-type gains 40 utils (on the average). Whena D-type trades with another D-type, they net (average) gains of 10 utils each. 6