Economics of favours and karma

Thinking about favours and the emergence of a unit of account

Giving gifts is often seen as a selfless act, but this is only one side of the story. The act of giving generates implicit obligations, whether we like it or not. Political donors will say they are supporting a party out of selfless respect for democracy. But we know this is a lie. We implicitly understand the role of gifts in creating obligations.

At a personal level, this leads to situations that seem paradoxical on the surface. For example, if you ask someone for a favour, they are more likely to give you a favour in the future.

Such findings are only interesting because they conflict with our baseline view about the rationality of giving and receiving favours. Why is this so?

I want to try and answer this question by making explicit the “favour-accounting” system between individuals that is fundamentally implicit. Such a system captures the core human desire to reciprocate.

When we do that, it becomes clear that because of our desire to reciprocate, giving a favour generates an asset in the form of being owed a favour, while receiving one creates a liability in the form of owing a favour. That is, the favour balance sheet looks good for those who give favours, but bad for those who receive them and are on the hook for future favours.

Think about it. Why power does a political donor really have? They have accumulated assets in the form of politicians who owe them favours. In the table below I try to represent this situation in accounting form.

You would expect that people seeking to accumulate assets and wealth would be in the business of giving favours to those with the ability to reciprocate. This is especially the case when there is a large subjective value difference between the cost of the favour given, and the value of the favour received, i.e. the cost is low for those giving the favour compares to the value of the benefit to those receiving it.

After you have asked for one favour, and while your credit is good, you can expect that the same person is willing to give you another favour to boost their exposure to your “favour credit”. It is common, for example, for politicians to seek extra funding from donors already contributing, rather than find new donors.

If you come through and reciprocate favours when required, you can participate as a giver and receiver in an ongoing game of favour exchange necessary to participate in social life.

Maybe you can think of it as karma.

We can also see that giving favours to strangers won't always make them feel good about you, because you are creating liabilities for them. People often don't want to accept large gifts because of this.

But when we use money to settle favour accounts, we are saying “you gave me a favour, but I don’t want to owe you anything, so here is this money instead to cancel my obligation to you”.

I don’t feel any particular need to reciprocate with my supermarket for the food I get there, but when my neighbours give me food it ends up on the social accounts.

That is why we there is such a big difference between doing something as a hobby, and doing something commercially. When you settle your accounts with money, your future cooperation can’t be assured. Yet when you keep open the favour accounts, reciprocity ensures ongoing cooperation.

It stands to reason that you shouldn’t expect karma from counterparties where you cancel obligations with money. But you should for your non-market interactions that rely on networks of ongoing exchanges of favours and implicit obligations.

The reason I believe our baseline intuition about favours is wrong is that we implicitly think of favours that do not require reciprocation. We are thinking of a world were it is possible to give a favour and for the receiver to behave like a robot and feel no desire to reciprocate.

But this is not how humans are hardwired.

If this robot world did reflect reality, then there would be no rational basis for ever giving a favour in the first place. It is a pure loss every time. Hence, there would be no puzzles about favours, as there would be no favours. Only in a world where humans are hardwired to reciprocate do favours even exit.