Cheating, trust and prosperity

The Houston Astros played at the Los Angeles Dodgers last weekend for the first time since the revelation of Houston’s sign-stealing during their 2017 championship season. The biggest offseason story led to the firing of Astros manager A.J. Hinch and general manager Jeff Luhnow and two other managers. Yet, according to a saying, “If you aren’t cheating, you aren’t trying.” When does the pursuit of self-interest imperil trust and prosperity?

During 2017, Houston used electronic surveillance to view the catcher’s signs and signaled the batter by banging on a trash can. The Astros defeated the Dodgers that year in the World Series. The Dodgers and their fans have not taken the news of cheating kindly. Earlier this season, Dodgers pitcher Joe Kelly was ejected and suspended for throwing at Astros batters. Fans with trash cans (who can’t attend games this year) greeted the Astros’ bus at Dodger Stadium, and a plane circled the stadium with a banner.

Major League Baseball’s response though is somewhat puzzling. Pitchers and catchers use complicated signs to keep a runner on second base from stealing signs. Coaches and players cover their mouths to guard against lip reading. Some actions to gain competitive advantage are part of the sport.

Standards regarding conduct to gain advantage have changed over time. In the 1970s and earlier, pitchers would throw at batters who “got too comfortable” at the plate. After back-to-back homers, the next batter would likely be brushed back.

When does the pursuit of competitive advantage become cheating, and how does this matter for business and economics? Is there any reason to expect people to follow rules except when in their self-interest?

Economics assumes that people act in their self-interest. As Adam Smith put it, “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. We address ourselves, not to their humanity but to their self-love.”

Professor Smith, though, also understood that people can follow rules due to moral and legal force, and even in conflict with narrow self-interest. Most of us do not shoplift because we believe this is wrong. We do not pay for merchandise only after we determine we could not get away with stealing.

Voluntary rule-following is enormously valuable. Still, we generally use a mix of prevention and voluntary rule-following. Stores take measures to combat shoplifting but do not strip search all customers. Shoplifting costs retailers around $20 billion annually, a significant but manageable total.

Business dealings employ a similar approach. Contracts give parties an incentive to perform as specified. But business is also conducted on a handshake basis. Parties expect each other to resolve problems, not merely rely on the exact terms of a contract.

Crime can be viewed as a type of cheating with enormous costs. America employs one million police officers and 750,000 security guards to control crime and incarcerates 2.3 million persons for their misdeeds. Expenditures on security devices like cameras, bars, and alarms increase the cost further. The costs of crime would be enormously lower if more people would never steal.

The flip side of cheating is trust. Trust that others in business will not cheat or steal is enormously important for prosperity. Business loans will not exist if investors fear that every new business is a scam. Lending occurs only within families in low-trust societies, which generally remain poor.

Good rules for games and laws for business benefit all parties and broadly align rule-following with self-interest. In games, good rules produce challenging competitions exhibiting skill which players and fans enjoy. In business, good laws support value-creating economic activity. Punishing rule-breakers reinforces the self-interest in following the rules.

Playing by the rules or following the law is enormously valuable. I cannot explain why Major League Baseball tolerates normal sign-stealing yet punished the Astros so harshly. Yet wherever we draw the line, crossing the line erodes the trust on which our prosperity depends.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.