The Economics of the Good, the Bad, and the Ugly: Secrets, Desires, and Second-Mover Advantages

269 Pages·2018·2.478 MB·English

by  Manfred J. Holler

The Economics of the Good, the Bad,
and the Ugly
The highly praised Western, The Good, the Bad, and the Ugly, has been used
in many game-theory courses over the years and has also found its way into
leading journals of this field. Using the rich material offered by this movie,
alongside other elements from popular culture, literature and history, this book
furthers this exploration into a fascinating area of economics.
In his series of Schumpeter lectures, Manfred J. Holler uses his analysis of
Sergio Leone’s movie as a starting point to argue that combinations of desires,
secrets and second-mover advantages trigger conflicts but also allow for con-
flict resolution. Many people and organizations have a desire for secrecy, and
this is often motivated by a desire to create a second-mover advantage, and by
undercutting the second-mover advantage of others. This book demonstrates
that the interaction of these three ingredients account for a large share of social
problems and failures in politics and business but, somewhat paradoxically, can
also help to overcome some of the problems that result by applying one or two
of them in isolation.
This book has been written for curious readers who want to see the world
from a different perspective and who like simple mathematics alongside story
telling. Its accessible approach means that it will be of use to students and aca-
demics alike, especially all those interested in decision making, game theory,
and market entry.
Manfred J. Holler is Emeritus Professor of Economics at the University of
Hamburg, Germany; research professor at the Public Choice Research Cen-
tre at Turku, Finland, and a member of the board of the Center of Conflict
Resolution. He is founding editor of the European Journal of Political Economy
and the journal Homo Oeconomicus (now one of its three editors-in-chief), and
also serves as assessing editor or board member for a number of other journals.
The Graz Schumpeter Lectures
Series Editor: Richard Sturn, University of Graz, Austria
Exchange Rates and International Finance Markets
An Asset-Theoretic Approach with Schumpeterian Perspective
Erich W. Streissler
An Unholy Trinity
Labor, Capital and Land in the New Economy
Duncan K. Foley
Politics and Economics in the History of the European Union
Alan S. Milward
The Dynamics of Industrial Capitalism
Schumpeter, Chandler, and the New Economy
Richard N. Langlois
Growth, Distribution and Innovations
Understanding Their Interrelations
Amit Bhaduri
Complex Economics
Individual and Collective Rationality
Alan Kirman
Public Economics in an Age of Austerity
A. B. Atkinson
The Economics of the Good, the Bad, and the Ugly
Secrets, Desires, and Second-Mover Advantages
Manfred J. Holler
For a full list of titles in this series, please visit: www.routledge.com/The-Graz-
Schumpeter-Lectures/book-series/SE0392
For more information, please visit the Graz Schumpeter Society’s website:
http://www.uni-graz.at/gsg
The Economics of the Good,
the Bad, and the Ugly
Secrets, Desires, and Second-Mover
Advantages
Manfred J. Holler
First published 2019
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
 2018 Manfred J. Holler
The right of Manfred J. Holler to be identified as author of this
work has been asserted by him in accordance with sections 77 and
78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or
reproduced or utilized in any form or by any electronic, mechanical,
or other means, now known or hereafter invented, including
photocopying and recording, or in any information storage or
retrieval system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks
or registered trademarks, and are used only for identification and
explanation without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
A catalog record has been requested for this book
ISBN: 978-1-138-60698-2 (hbk)
ISBN: 978-0-429-46734-9 (ebk)
Typeset in Bembo
by Swales & Willis Ltd, Exeter, Devon, UK
Contents
Preface and alternative facts vii
1 The trailer 1
1.1 The confession 2
1.2 The agenda 3
1.3 The story 7
1.4 Acknowledgments 8
2 On desires 10
2.1 Why desires? 10
2.2 Desires, preferences, and choices 12
2.3 Sen’s Liberal Paradox and the mixing of preferences and desires 15
2.4 Preferences on desires 26
2.5 The calculus of desires and preferences 28
2.6 Ranking sets of desires 34
2.7 Back to wants, beliefs, and desires 46
2.8 Desires and the neoclassical repairshop 50
3 Second-mover advantages 54
3.1 Of time and information 54
3.2 The Sad Hill Truel and some revisions 57
3.3 Second-mover advantages and market novelties 60
3.4 Public pioneers and the entrepreneurial State 62
3.5 Raisin picking and the Sherman-Willett trap: a theoretical excursus 68
3.6 Fair shares and second-mover advantages 85
3.7 Creative destruction and second-mover advantages 93
3.8 Strategic secrets, hiding, and the second-mover advantage 104
3.9 Who is a second-mover? Akira Kurosawa, Sergio Leone, or Bob Dylan 117
vi Contents
4 Secrets: how to create and how to deal with them 121
4.1 A variety of secrets 122
4.2 The Zimmermann Telegram and Alan Turing’s dilemma 134
4.3 Creating secrets as a work of art 158
4.4 The artist as a secret agent 176
4.5 Machiavelli’s conspiracy paradoxes 190
4.6 George Orwell’s notebook: the moral dimension of secrets 209
5 Justice in the end? 230
References 233
Index 251
Preface and alternative facts
Instead of submitting a lengthy preface, I strictly recommend reading Chapter 1
“The trailer” that follows. But there are two pieces of information that I want
to give in advance. First, some chapters contain some mathematics, or more
general, formal analysis. This is not meant to put readers off or to impress them,
but to shorten the presentation, to make it more precise, and to add lucid-
ity where the verbal presentation might suffer from ambiguity. Knowledge
of the four basic arithmetical operations is enough to master the mathemat-
ics in this book. Readers who find mathematics boring should just flip the
pages. Secondly, this book does not presuppose the knowledge of the movie.
However, if you detest movie Westerns, you might not enjoy reading this book.
Sergio Leone’s The Good, the Bad, and the Ugly is not just one of the best movie
Westerns – Quentin Tarantino called it “the best-directed film of all time”
and “the greatest achievement in the history of cinema”1 – but it also delivers
rich material to analyze and to exemplify the interaction of desires, secrets, and
second-mover advantages which is the focus of this book. My thanks for inspi-
ration, motivation, and support are given in the Acknowledgments section at
the end of “The trailer,” just like in the movies.
Since the formal level of this book is rather modest and the use of mathemat-
ics limited to its basics, the question could arise whether the book can be used
in a classroom situation. The answer is “Yes,” if your students are interested in
decision making and market entry, George Orwell and Lady Chatterley’s Lover,
creative destruction and the making of war, or learning how other people
make money, or at least in some of these issues.
1 Quotations are taken from Wikipedia and cross-checked with the original sources: Rob Turner,
“The Good, the Bad, and the Ugly,” Entertainment Weekly (June 14, 2004).

1 The trailer
Combinations of desires, secrets and second-mover advantages trigger conflicts
but also allow for conflict resolution. Many people have a desire for secrecy.
Often the desire of secrecy is motivated by creating a second-mover advantage
and by undercutting the second-mover advantage of others. This book will
demonstrate that interaction of these three ingredients accounts for a large
share of social problems and failures in politics and business but, somewhat
paradoxically, can also help to overcome some of the problems that result from
applying one or two of them in isolation. An adequate design of secrets can
be a tool to circumvent second-mover advantages and to avoid or solve social
conflicts. This observation was the point of departure, yet, also the conclusion
of the Schumpeter Lectures which I gave at the University of Graz, November
7–12, 2013. The title of this series of four lectures was “The Good, the Bad,
and the Ugly: From Ethics to Economics and Back Again.” Two of the four
lectures were directly inspired by Sergio Leone’s 1966 masterpiece The Good,
the Bad, and the Ugly. I showed sequences of the three-person duel, an icon
of the history of movie making, and of the rather dramatic “sharing” of the
treasure between the Good and the Ugly towards the end of the movie, both
taken from a DVD version.1 In the other two lectures, I made some occasional
remarks related to the movie in order to emphasize the coherence of the lec-
ture project and the universality of the discussed topics, but also to prepare the
audience for more direct references.
What looked like a simple exercise – writing down one’s lecture notes –
turned out to be a rather complex project. As I cannot expect the reader to
look at the film material, when reading the book, I had to rearrange the mate-
rial of the lectures for this volume. On the other hand, the writing-down of
the text allows a much more thorough discussion of the basic concepts ana-
lyzed here – i.e., desire, secrets, and second-mover advantage – which were
1 I would like to thank Jörg Altekruse and his Zeitfilm Media company (in Hamburg) for their
assistance in preparing classroom media materials from the film. This was a rather complicated
and time-consuming project. I also would like to thank my son Michael (Mikko) Holler, who
gave me a DVD of The Good, the Bad, and the Ugly as a Christmas present.