Rules and the Problem of Social Cost

There is discussion in the ether about, yet again, the importance and value of having lots of rules versus having fewer.

Let's ask ourselves: What Would Ronald Coase Do?

In "The Problem of Social Cost", to simplify grossly, Coase observed that if the world was perfectly free of transaction costs, people would be able to negotiate more-or-less perfectly efficient outcomes with each other in most situations. In any sort of dispute people can just arrange with each other a mutually acceptable outcome that will be at least as good as any solution an independent arbitrator could come up with. (The solution might not be perfect, but it would be at least as good as a decision that a judge or tribunal would provide.)

However, we don't live in a world perfectly free of transaction costs, so in practice this is not always what happens. In actual fact, there are often costs to negotiation. Chief among them is time - negotiation is costly in that regard - but there may also be costs to do with discovering information, enforcement, and so forth. (It may not even be immediately clear what the real nature of the dispute is, or who it is with.)

Sometimes the transaction costs are nugatory or small, and not enough to outweigh the efficiency and desirability of the result. But on some occasions the transaction costs are so high that they outweigh the efficiency of the result. It is in these situations that a court, in Coase's view, should and does become involved in coming up with a solution.

He used the example of a real-life case about a sweet-maker and a doctor. The sweet-maker causes lots of noise which disturbs the doctor. They could negotiate a solution between themselves: whether they decide after negotiation that the doctor will move, or the sweet-maker will reduce his noise, or the doctor will just put up with the noise, or the sweet-maker will pay some form of compensation to the doctor, the solution they negotiate will be at least as good as what a court would decide.

But the transaction costs to negotiation may be high. What if the doctor holds out for excessive compensation and negotiation takes a long time? What if it is not just the doctor who has a problem with the noise, but other neighbours? What if some of those neighbours have genuine complaints but others make frivolous, vexatious or speculative claims? It will take a long time for the sweet-maker to negotiate with all those neighbours and sort out which ones have genuine complaints.

This is when a court needs to become involved, in Coase's view - when transaction costs become so high that a negotiated solution is unsatisfactory or nigh-impossible. And his opinion was that, when a court comes up with a solution, it needs to do so in the most efficient way possible - meaning, the solution it comes up with must be as close as possible to what the parties would have negotiated between themselves if there were no transaction costs. That should be the guiding principle of a court in any private law dispute - it should pursue the outcome which would have arisen if the parties had been able to freely negotiate an outcome without cost.

So let's postulate a theory - not exactly to transpose or extend Coase's theorem about social costs, but rather to come up with something that is inspired by it only.

Imagine that a "court" in the RPG context is "the game's rules". The general presumption should be that a game should only have a rule to cover situations in which transaction costs for DM fiat will be prohibitively high in comparison to the outcome achieved.

A very good example is combat rules. Deciding who is the winner and loser of a combat without reference to rules comes with an extremely high set of transaction costs - it would take ages to argue it out to a satisfactory conclusion ("Ah, but this character is wearing chain mail!" "Ah, but this character would have ducked!" "Ah, but the floor is wet - this character may have slipped!"), and it may have the more important additional cost of heated debate - PC lives are at stake and the players may disagree vociferously with the decision arrived at. Better to have a court, in the form of rules and dice, generate an outcome - and this may well have the effect of generating an outcome which the parties would have freely negotiated (i.e. being partially random but based on mutually agreed principles worked out in advance).

Similarly the surprise roll: deciding who is actually surprised without rules would take forever; the transaction costs are too high, so we just resort to pre-ordained surprise rules which tell us what to do to get an outcome.

In other words, there are scenarios where we can say that DM fiat or complicated rules would create the same or similar outcome (the PC kills the orc or vice versa), but where the transaction costs associated with DM fiat are prohibitively high - so rules are better.

On the other hand, many social situations can be very quickly resolved by DM fiat to generate a result that is at least as good as a set of complicated social rules - i.e., there are no or very small transaction costs to DM fiat, which do not outweigh its value. Does a PC succeed in persuading the guard to let him pass? Regardless of whether the DM or the rules do the job, the outcome will be either that the PC does succeed or he doesn't. DM fiat (or DM-mandated dice roll), in other words, produces an outcome that is at least as good as social rules. But the DM can do it quickly and easily and the consequences are not life-and-death - there are very low transaction costs. Better for the DM to do it, then.

Similarly, to use a well-worn example, an elf is sneaking up on the party while they sleep. However, the PCs have put little piles of coins around their encampment as a primitive alarm system. There are two outcomes: the elf knocks over a pile of coins or he doesn't. DM fiat (or DM-mandated dice roll) is going to produce an outcome that is at least as good as rules about coins around encampments. But the DM can do it quickly and easily and the consequences are not life-and-death. Better for the DM to do it, then.

In other words, there are scenarios where we can say that DM fiat or complicated rules would create the same outcome, and where since the transaction costs associated with DM fiat are low, DM fiat is better.

Of course, nobody would sensibly argue that this metric should be consciously thought through whenever a decision is required. That would be absurd. Rather, it should be used as a guiding principle: there should be a rebuttable presumption that DM fiat (whether outright or in the form of "roll a d6" or whatever) is to be preferred, and the presumption can be rebutted if transaction costs associated with DM fiat would be prohibitive.