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Realism And The Agent-Principal Problem

Patrick Harris makes an interesting comment on my last post: [E]ven though the realist preference for the anti-ideological pursuit of the national interest makes great sense to me, it’s very clear that nations do not always behave that way. I might suggest that the greater the constraints that security competition places on a given political situation, […]

Patrick Harris makes an interesting comment on my last post:

[E]ven though the realist preference for the anti-ideological pursuit of the national interest makes great sense to me, it’s very clear that nations do not always behave that way. I might suggest that the greater the constraints that security competition places on a given political situation, the more likely it is that actors will behave as realist theory will predict. In that case, the reason that the US is behaving that way it is despite having no substantial interest in the Syrian Civil War is precisely because we have very little directly at stake and do not anticipate immediate consequences for our core interests. Ideology and sentiment is given more free reign where material factors are less constraining. That doesn’t debunk realist theory, but it does demonstrate it’s limitations.

There’s a potent analogy to the agent-principal problem in corporate governance. Theoretically, corporations are organized to serve the interests of the shareholders – they have no independent interests of their own. In practice, of course, management’s interests and shareholders’ collective interests do not always coincide. Where there is robust competition for the shareholder dollar, for management positions, and for profits, that divergence shouldn’t be terribly important. Poor profit performance would be rapidly reflected in poor stock market performance, and in the cashiering of the incumbent managers.

By contrast, weak competition in any of these areas will result in a larger divergence. If a company has a “cash cow” that is not vulnerable to competition, management has a powerful incentive to over-invest in risky greenfield initiatives, even those with a negative expected value, in order to justify its own lucrative position to shareholders (the cash cow could probably be managed very cheaply, which wouldn’t be good for management). Limits on transferability or voting rights of shares or other restrictions that “lock in” shareholders to a particular investment will reduce the incentives on management to run a lean cost structure. Ditto for situations where managers can effective form a cartel, either controlling their own selection or bargaining collectively (or both).

Analogously, if the United States has extraordinary freedom of action (the equivalent of a “cash cow”), then the incentives to limit exposure to foreign policy liabilities are limited – and, indeed, the regime interests may be aligned, generally, with any policy that justifies their position, even if it has a negative expected value not only for the nation but for the regime itself (by limiting its future freedom of action).

I’ve talked in the past about the utility of “real options” theory for understanding the sometimes perplexing motivations of revisionist powers in the international system. (In a nutshell: if your power is expected to decline over time, it may make sense for you to take actions that have a chance of dramatically increasing your power, even if on an expected-value basis you will lose power faster. In options terms, it’s rational for you to pay a premium to buy volatility.) That kind of analysis is probably even more useful if applied to agents and interests within a system rather than to the system itself.

More generally, I think it can be useful to think about “realism” in terms other than expected value. I should have kept that in mind when writing my last post.

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