Value Competition

The Need for Heightening of C Values as well as I Values

Suppose that modernity depends on people caring more about individual reward than people do in traditional societies.  But if concern about individual reward or success is heightened without a corresponding heightening in concern about moral standards oriented toward the community, that person is more likely to defect in a prisoner's dilemma.  That in turn, we may assume, will lead to the person being weeded out as a social undesirable.

A way to formalize the point: Suppose "natural man" half of the time acts like "economic man" in a prisoner's dilemma by playing the dominant strategy of defection, and the other half of the time acts like "moral man" by valuing his 5 payoff for defecting when the other cooperates as only 2.  That means that 50% of the time defection is no longer the dominant strategy; a player with that split set of preferences would cooperate in a one-shot dilemma at about the somewhat under 50% rate typically found in experiments.

Now, suppose we have "modern manager" (MM) who values his/her payoffs at twice the level "natural man" does.  If MM is to cooperate at the same rate as NM, MM has to place a higher disvalue on the temptation payoff than NM does.  For NM, the temptation payoff is 5 and the mutual cooperation payoff is 3, so making defection nondominant means that the disvalue of the temptation payoff must be greater than 2.  For MM, the temptation payoff is 10 and the mutual cooperation payoff is 6, so the disvalue of the temptation payoff must be greater than 4.

Will the Parties Reach a Deal to Reduce their Allies' Power?

Assume both liberal and conservative parties have an incentive to reduce the power of their union or church allies as part of a corresponding reduction in the power of the other side's allies.  Will a deal between the parties be reached?  A key obstacle is that it is much harder to think of plausible public policies to curb the power of churches than it is to think of plausible public policies to curb the power of unions.  Reducing or eliminating collective bargaining and anti-discrimination protections given to private sector unions federally in the 1930s and to public sector unions at the state level are plausible if highly controversial public policy changes.  By contrast, a law that eliminated the charitable tax deduction for religions that maintain their members are divinely favored and/or maintain non-scientific beliefs is not a plausible legal change.  Given that asymmetry, it is hard to see that an implicit deal between the parties could be reached.  Absent such a deal, it is hard to see the reason for liberal politicians to support legal changes that would hobble their key allies in mobilizing lower-SES voters while keeping the key mobilizing allies of conservatives intact.

Parties, Unions, and Churches

Assume the following: 1) Liberal and conservative parties have a need to attract support from lower SES people as well as upper SES people; 2) Liberal and conservative parties have a need to ally with institutions that can effectively summon support from lower SES people who are less attracted to liberal or conservative ideology and/or are less able to act effectively on their beliefs; 3) Two plausible such allies are unions for liberal parties and fundamentalist churches or other religious groups for conservative parties; 4) Both types of institutions engage in certain socially detrimental conduct (in the case of unions, rent-seeking on behalf of senior and less skilled members, in the case of fundamentalist churches socially divisive and factually dubious assertions as to the divinely preferred status of their adherents); and 5) the socially detrimental conduct by the institutions is electorally detrimental, resulting in an interest by the parties in minimizing such conduct that is in conflict with their ally's interest.

Two stories related to those assumptions follow, the first related to the attributes of leaders and followers in churches, unions, and parties and the second related to the likely outcome of the struggle between the party trying to reduce its ally's mischief and the ally trying to maintain it.

    Fused Egoism and Altruism in Union, Religious, and Party Leaders as a Means of Bundling Vegetables and Sweets for Followers

    Assume individuals recognize that they have a self-command problem with preferring "sweets" over "vegetables."   A union, church or party operates as a way of bundling features that are in the member's immediate interest--"sweets"--with features that are in the member's long-term but not short-term interest or in the interest of others if not the member--"vegetables." 

    The dominance of liberal unions and conservative churches can be understood in terms of members' opting for a package that includes the vegetables of political ideology as well as the sweets of group ideology or self-interest.  Consistent with the story's logic, one could tell a pessimistic historical story about the rise of industrial or political unionism compared to craft unionism (a free market in unionism has led to the decline of "lots of vegetables" craft unionism in which guild privileges required guild skills in favor of the cheap to each member altruism of modern liberal unions), and a like pessimistic story about the rise of conservative evangelical religion compared to old-time fundamentalism (a free market in religion has led to "lots of vegetables" old-time religion declining in favor of the inexpensive altruism of modern evangelical religion).  But also consistent with the logic is an optimistic historical story about how unionism has become accompanied by a sophisticated modern liberal ideology that mixes altruism with egoism by blending cultural liberalism with economic egalitarianism rather than an unsophisticated, group-based, messianic socialism or communism or an apolitical, parochial view; a similar optimistic story can be told about the transition from old-time fundamentalism to a conservative evangelical religion that mixes altruism toward high-earners with egoism on culture.

    Similarly, the dominance of parties that blend altruism and egoism for both high SES and lower SES people can be derived from a preference of people for a bundling of sweets and vegetables; parties like unions and churches serve as bundling devices to solve the commitment problem.

    In parties, unions, and churches, followers want leaders who can blend both a particularistic, egoistic agenda and a broad, partially altruistic agenda.  If the ability to do so is scarce, a subpart of the story for each institution becomes about leadership as a rare attribute.  As noted before, another subpart of the story concerns whether leaders' competition to attract followers leads to a desirable race to the top or a detrimental race to the bottom.  For parties, the pessimistic story of decline over time would presumably emphasize an increase in reliance on unions by liberals and religion by conservatives, with an associated increase in detrimental conduct by these institutions.  An optimistic story would emphasize the rise of liberal and conservative parties with their distinctive mixture of altruism and egoism for high and low status people compared to older kinds of parties with a clear-cut class basis, such as workers' parties and middle-class parties. 

    The Edge of the Union or Church over the Party in the Chicken Game

    If the party has plenty of other potential allies to recruit low SES supporters, the general proposition, as argued in Becker (1983), that competition will drive down political rents, just the way it drives down economic rents, is applicable.  But assume that the liberal party is in a bilateral monopoly with the union, and the conservative party in a bilateral monopoly with the church.  This can be modeled either with a 2 x 2 matrix or continuously as a chicken game, in which the sides have a choice between a hard-line and a soft-line strategy.   If both go hard-line, there's a "crash"--in this situation, that could be viewed as a strong electoral victory for the opposing party combined with a serious loss of perquisites for the ally--say 0, 0.  If both go soft-line, with the party not pushing rent reduction and the ally reducing rents some on its own, the outcome in win-win--say 3,3.  On the other hand, the best outcome is to have other side cave while you stand firm--we'll call that 5, x (explaining in a moment the ambiguous x). 

    Both sides have an incentive to commit to a hard-line strategy.  The game has no single solution, but there are two good reasons to expect an outcome in favor of the ally rather than the party.  One reason is that the ally can be understood as more egoistically motivated than the party and hence as more likely to win the negotiation.  The second is based on the value of x, which may well be lower for the ally than it is for the party; the ally is also likely to have better information about the party's x than the party is to have about the ally's x (i.e., unions and churches understand political calculations better than parties understand how unions and churches work).  If that value is 0 for the ally when it caves to a hard-line party, being hard-line is a (weakly) dominant strategy for the ally, which makes a commitment to play that strategy credible.  The party may well believe that if the ally worked at doing so, it could find a way to make x greater than 0.  The party has some hope that will happen--for example a union leader or minister who wants to run for President has an incentive to figure out whether unionism and religion can be done at a lower social cost in order for him or her to have a chance to win.  On the other hand, his or her union and ministerial peers have an incentive to stop the renegade within their ranks from succeeding in developing a form of unionism or religion that reduces members' perquisites.   That suggests a second prediction, to accompany the first one that the ally is likely to win the chicken game with the party: Both liberal and conservative parties are highly unlikely to be led by leaders rising from the union or clerical ranks, in that these leaders are either associated with socially detrimental conduct or with betrayal of their group.

Obama's Peace Prize

The following op-ed uses Obama's recent Nobel Prize to combine value competition ideas about good things arising from the competition of self-interested pols with classical/neoclassical economic ideas about good things arising from the competition of self-interested businesspeople:

Robbed by Oslo:

 

Obama and Other Peacemakers Whose Successes Were Overlooked

 

Wayne Eastman

Rutgers Business School—Newark and New Brunswick

1 Washington Park

Newark, NJ 07102

weastman@business.rutgers.edu

(973) 353-1001

 

    With its airy recognition of Barack Obama for potential rather than accomplishment--"for his extraordinary efforts to strengthen international diplomacy and cooperation between peoples"--the Norwegian Nobel Committee did the President and the cause of peacemaking a disservice, but not for the reason that most critics of the award have suggested.

    In fact, Obama would have been a reasonable if controversial choice for a peace prize based on accomplishment, given his substantial contributions as an opposition politician and then as President to the winding down of the war in Iraq.

As an anti-war Democratic candidate in 2007, Obama took the position that the U.S. needed to withdraw large numbers of troops from Iraq relatively quickly.  At the time, that position was highly controversial though popular among many Democratic primary voters, and was opposed by Hillary Clinton, John McCain and other Republican candidates, and the Bush administration.   Two years later, Obama’s position has become conventional wisdom, and has gone along with a major reduction in violence and considerable political progress in Iraq. 

    It is true that the situation in Iraq was and is highly complex, and that figures in addition to Obama--David Petraeus with his military ingenuity and Nouri al-Maliki with his outreach beyond his political base are just two who come to mind—can also be credited with major roles in the reduction in bloodshed and increase in order.  Still, a Nobel award that recognized Obama “for his central role as a democratic opposition politician and then as President in fostering a resolution to a long-running war in Iraq” would have been sound in a way that the actual award citation was not.

Although the oddity of Obama’s being recognized by the Nobel Committee for the wrong reason makes his situation unusual, he stands in a long line of figures in politics and in business over the decades who have made major contributions to peace but have been unrecognized by Oslo, with its chronic bias toward noble gestures and diplomatic agreements.

Unless they engage in dramatic diplomatic deals, hardheaded democratic politicians like Obama who care about winning elections and who often wage war as well as peace are poorly represented in the roster of Nobel Peace Prize winners.  For example, Boris Yeltsin, whose decision to end Russian control over Ukraine and the other parts of the Soviet empire was intertwined with his own electoral calculations as President of Russia and who later went to war in Chechnya, did not win a Nobel.

Given the Nobel Committee’s tilt against practical politicians, Yeltsin’s failure to win is not surprising.  But considering that it was Yeltsin—not Mikhail Gorbachev, who wanted to preserve the Soviet Union—who ended the coercive Russian empire, the Nobel Committee wound up snubbing one of the century’s major contributors to peace. 

Another politician who didn’t fit the Nobel Committee’s preferences for idealism and diplomacy but who made a major peacemaking contribution was Charles de Gaulle.  Given his deep identification with the French military, French nationalism, and French party politics, along with his often undiplomatic diplomacy, de Gaulle did not fit the Nobel Committee’s criteria well at all.  But as the man who led his nation out of a brutal, futile, and very difficult to end war in Algeria in the early 1960s, he would have been a deserving winner.   

Hardheaded businesspeople who worry about profits are even more poorly represented among Nobel Peace Prize winners than hardheaded democratic politicians who worry about elections.  But business leaders who have knit the world together economically have likely done far more for international peace in the past several decades than many actual Nobel winners have. 

For example, Sony founder Akio Morita and long-time Toyota leader Eiji Toyoda would have been worthy Peace Prize recipients, given their roles in transforming a nation that had been convulsed by violent nationalism into a model of how to succeed through economic rather than military strength.  Neither Toyoda’s contributions to a just-in-time inventory system that has encouraged businesses to integrate their operations with those of other businesses around the world nor Morita’s contributions to innovations in electronics that in turn have contributed to a global popular culture fit into the familiar Nobel categories of idealism and diplomacy.   But if the right test is how much a life’s work has moved a nation and the world away from the ways of war to ways of peace, both men would have been good choices.

Given that consequences are tricky to evaluate and that hardheaded democratic politicians and businesspeople have multiple motives and are not saints, recognizing them for contributions to peace will always be controversial.   If Sam Walton had won a Nobel Peace Prize for his central role in knitting together the Chinese and American economies and in doing so enhancing the prospects for world peace, the award would have been simultaneously reasonable and open to reasonable criticism from the many critics of Walton and Wal-Mart.

   Likewise, it would undoubtedly have been controversial if Obama had been recognized in 2009 for his contributions over the last two years to reduced violence in Iraq, given the complexity of the situation there and the close connection between Obama’s actions and his political ambitions.  But such recognition would have been much more sensible than what the Nobel Committee actually did.

There have been all too many Nobels awarded over the years for high-minded but less than effective idealism and ultimately futile diplomatic deals.   Progress toward world peace has depended and will depend in large part on hardheaded, calculating actions by imperfect, unsaintly leaders like Boris Yeltsin, Charles de Gaulle, Akio Morita, Eiji Toyoda, and Sam Walton.  Perhaps in his acceptance speech in Oslo, Barack Obama can employ his formidable gift for explaining to tell us how he is proud to be one of those leaders, rather than the plaster saint that the Nobel Committee takes him for.

The Brain Executive in the Individual Model

In the collective V-C model of politics as thus far formulated, all the action is at the level of the electorate, with the pols treated as rational actors who will be aligned or not to the greater good according to whether the electorate is.  For the collective model, doing it that way has pros and cons, with one major factor on the pro side being the reality that voters in fact are feeling, thinking agents.  For the individual V-C model of the brain, on the other hand, modeling based on the "electorate" having complex preferences/values may put more weight on individual neurons/"voters" than is plausible.  To multiply entities by modeling the brain as having millions/billions of sub-centers of choice/consciousness, etc. is not viable; I've always thought, and still think, that that problem can be avoided by conceptualizing "voters" in the brain as operating through a mechanistic process, but another way to try to get around the problem is by foregrounding the preferences/values and strategies of a brain executive or executives rather than beginning with the assumption made in the collective model that the greater good is latent in the preferences of the electorate.  Instead, greater goods (no need to postulate one "greatest good"; presumably, a hill-climbing approach analogous to natural selection in which changes are for the better though not necessarily for the best will do just fine) could be seen as discoverable through effort by the brain executive(s).  A problem I see at the end of the road is that brain executives need to be subject to some type of discipline by the brain electorate, so I'm not sure whether the problem of the brain electorate's preferences can be avoided in the end.  But at least one can begin with the executive(s), and see where that goes.

A second key issue is whether one needs competing brain agents who both (or all) are reasoning, feeling agents or whether it's sufficient to have one rational agent, who is not competing against another agent but rather competes against the autonomic/limbic/System 1/unconscious/subconscious/baseline brain, which in turn rewards/punishes the rational agent.  Though I'm personally attracted to a "competing rational agents within the brain" assumption, a single agent has the advantage of not multiplying entities and of corresponding to a mainstream sense of ourselves, with considerable grounding in the recent psych lit, as having a single rational consciousness that operates alongside nonrational parts of ourselves.  

So--beginning with the single agent, is there a good baseline model of suboptimality?   One candidate would be a rational agent without preferences other than for getting rewarded by the System 1 brain.  On the surface, that agent sounds like what we want, in that it combines rationality with lacking an agenda of its own.  So what's wrong with that agent?  One story is that the agent must care about factors other than System 1's approval or disapproval: The agent needs preferences in order to be motivated to act, and if lacking in any guide to action other than getting approbation from System 1 will be overly prone to do what System 1 wants and will hence under-discover courses of action that System 1 would not come up with but that bring it benefits.

A second set of potential baseline models for suboptimality involve solely egoistic or solely altruistic agents, with subcategories of egoism and altruism defined (e.g., egoism could be with reference to the executive itself, to the brain itself, or to some subgroup other than the universe, and likewise for altruism).  The intuition is that an agent with an admixture, possibly a randomly varying one, of egoism and altruism has advantages in avoiding the pitfalls of the more purely egoistic or altruistic agent.

A third issue as to which I'm less clear involves the relative role of calculative utilitarian reason and pattern-oriented deontological reason in the agent.  One can follow Gary Marcus, Joshua Greene, et al, and equate the reasoning agent with utilitarianism.  I've never seen things things that way personally--I've always supported the idea of competing calculative and cultural agents, both of which are rational (or alternatively of a single rational agent with an admixture of utilitarian and deontological reason).  But taking the Marcus-Greene approach is simpler, and allows for cross-cutting of the self-other and utility-deontology dimensions, with a calculative reasoning self that is both self and other oriented and a deontological System 1 that is also both self and other oriented.

Concretizing the Individual Model

A situation: Consider an employee (e.g., an associate in an investment bank or law firm) who is deciding whether to commit wholeheartedly to the firm or whether to combine employment with commitment to his or her own pursuits (e.g., writing a novel, having a child, etc.).  The choice involves egoistic/individualistic and altruistic/communitarian logic and emotions on both sides of the ledger. 

A claim (not necessary for the model to work, but nice if true): Human choices in general are like the employee example just given.  That is, whether the choice is to buy a Prius or a Hummer; to work for Teach for America or McKinsey; to maximize immediate firm profit or to act in a way that is more environmentally beneficial and possibly better for the firm long-term; or to help a man of another ethnic group who has been robbed and is bleeding by the side of the road, the emotional and the logical considerations on both sides of the ledger fuse individualism and communitarianism.  (E.g., one who does not help the robbery victim is not simply acting in an egoistic fashion but is also responding to a communitarian emotion or logic that postulates that one should uphold the ideal of loyalty to one's group even though failing to help someone in obvious need is personally painful.)

The background story: Human beings have a complex, ambivalent mix of individualism-egoism and communitarianism-altruism (as in E.O. Wilson's reference to the Arjuna-Krishna story).  Arguably, we are structured so as to have these positions intertwined within our brains rather than separated.  That is, instead of opposing superego and id centers located in different parts of the brain, in both emotion-oriented regions (e.g., the amygdala) and executive reason-oriented centers of the brain (e.g., the pre-frontal cortex) we have an ambivalent fusion of loyalty to broader groups (e.g., family, firm, faction, or society compared to self) along with loyalty to narrower groups or entities (e.g., self, family, firm, or faction compared to society).  (At the micro-level, this could be conceptualized through an analogy to voters: Neurons have "preferences" of a certain intensity and also randomly or otherwise have "overlapping preferences" or "values" that reinforce or counter the underlying preferences.)

If this position is right, a given choice in practice involves a fusion of individualistic and communitarian emotions and/or reasons on both sides of the ledger.  From an efficiency/optimality modeling perspective, the challenge is to analyze the optimality or non-optimality across the board or under specific circumstances of a fusion of individualism and communitarianism in the brain as opposed to other arrangements (e.g., a separate superego and id, or no individualistic or communitarian preferences/values).  (A key modeling sub-issue is how to construct the executive; it seems right to assume an executive, or competing executive centers, checked by feedback/"votes" from the rest of the brain, but in the individual case there is not the empirically obvious evidence of competing sides within consciousness that there is in the collective case, where we can observe competing parties and ideologies.  My intuition, partly supported by fMRI research by Greene, et al, is that the brain executive can be defined in terms of Benthamite-Kantian competition, with the reasoning part of the executive, if we follow Greene, being Benthamite.)

Incentives to Overcome Market Failure

In the standard asymmetric information story, the cure for market failure lies in some type of regulation, such as lemon laws that allow consumers to return defective used cars.  In the story of Green and Burner preferences, nothing straightforward is wrong with Faux Green cars in the way that is the case with a used car that is a lemon.  Accordingly, curing the market failure is trickier.  But here as in many other cases, incentives can work.  The implication of the story told in the previous post is that given different incentives through having Burner competition, the Green car employees will incur expenditures to assure the market that their car is True rather than Faux in a way that does not make sense for them when there is no Burner competition.  Alternatively, there could be a regulatory response, with a government agency that duplicates the expertise of the employees.  Doing it that way, though likely more costly than incentivizing the employees, would be the way to go in the absence of consumer heterogeneity that allows employee incentivization.

Does Value Heterogeneity Help When One Product Feature Has More Social Value?

Suppose, in keeping with intuition, that the gas guzzlers preferred by the Burners in the previous example generate higher negative externalities than the economical vehicles preferred by the Greens.  In that case, could it still be better to have some consumers with Burner preferences, as opposed to a homogeneous market in which all consumers have Green preferences? 

One intuition is that heterogeneity could be better if it induced the producer to develop an effective Green car rather than an ineffective one; Burner preferences would serve as a useful check on problems associated with a homogeneous Green market.  What follows is an effort to flesh out that intution with a principal-agent plus asymmmetric information story:

Suppose the employees of the car company can either devote a high effort level to make a "True Green" car that genuinely reduces negative externalities and performs well on other counts, or slack and make a "Faux Green" car by, say, reducing use of gas by substituting another fuel source with even higher negative externalities.  Further suppose that whether a car is "True Green" or "Faux Green" is private information of employees that cannot be communicated to the employees' principal P or to consumers.  Finally, suppose all consumers are homogeneously Green, meaning that that they internalize the relative negative externalities of auto fuel sources in their welfare function. Given these assumptions, consumers will assume that a purported Green car is Faux Green rather than True Green and will not purchase it, resulting in a market failure and a return to employees of X. 

Now, alter the assumption of consumer value homogeneity to an assumption of value heterogeneity, in which a portion of consumers are Greens who internalize negative externalities that are known to them and a portion are Burners who do not.   Further, assume, as is intuitively plausible, that the asymmetric information problem of True Green and Faux Green cars is not present for Burner cars.

The presence of Burner as well as Green consumers allows P to set up a Burner division as well as a Green division within the firm and assign employees to the different divisions.  (Assume that employees in different divisions cannot collude).  A Burner car will be produced without a market failure.  (One can if one wishes assume that Green consumers will prefer to buy the Burner car over a Faux Green car, or adopt less restrictive assumptions.)  The employees in the Green division now face a different situation from the one in the homogeneously Green market.  Instead of a payoff of X for Faux Green work, they now face a payoff Z as low as 0, in the event P can terminate them and rely solely on the Burner car.  Given that difference, the payoff Y to the Green employees of exerting the effort to develop a True Green car may well now be higher than the payoff Z of developing a Faux Green car.  The introduction of heterogeneity in the form of Burner preferences has alleviated the market failure occurring in the homogeneous market.

Tweaking the Heterogeneous Values in Markets Story

Suppose a car company is deciding whether to invest $10 billion in developing a new car.  Assume that the result will be a good product, in that the net social benefit of the new car is $3 billion.  Further assume the private benefit of the product is $8 billion.  Given these conditions, the socially beneficial investment will not be made.

Now assume that the market is divided into two types of consumers, both of whom deviate from RC.  Type 1 ("Greens") overvalue fuel economy compared to RC; type 2 ("Burners") undervalue fuel economy compared to RC.  Neither type is purely irrational, though, in that both are willing to pay more for a good car that is either fuel-economical (for Greens) or fuel-uneconomical but with other virtues (for Burners), as opposed to a car that is not good.  Specifically, assume Greens will overpay $5000 for a good fuel-economical car and $1000 for a mediocre one; Burners will overpay $5000 for a good uneconomical car and $1000 for a mediocre one; both sides will pay corresponding amounts *less* than RC levels for cars of the other, non-preferred type.  Finally, assume there are 1 million Greens and 1 million Burners. 

With the value-divided non-RC market, the investment will be made by the company, as long as the car can be fit into either the Green category or the Burner category.  Either a good Green car or a good Burner car will generate an extra $5 billion in private benefit for the company compared to the RC case, or an extra $4 billion compared to producing a not-good car of the desired type in the non-RC case. 

Now compare a non-RC market with homogeneous values.  Suppose consumers are all Greens, with a non-RC preference for high fuel economy.  If one believes that ex ante good new cars are likely or very likely to be Green cars rather than Burner cars, the story can readily be told in a way that makes Green value homogeneity better than bifurcation into two contrasting camps.  To make the case for value heterogeneity in terms of the story, my intuition is that you need to do one or both of the following: a) introduce a "work cheaper" component of the story in which car company managers/employees will work at lower cost in the value heterogeneity environment (there's an analogy to politics, in which an optimistic story can be be told about pols accepting lower than RC compensation because of nonmonetary benefits they receive from working on behalf of their ideology); or b) tell a dynamic story about how value heterogeneity promotes better products compared to homogeneity by penalizing bad products of either type in a way that an all-Green or all-Burner market fails to do.  The dynamic story strikes me as the first avenue to pursue, partly because I think it may be latent in the assumptions already made about Greens and Burners, or in a plausible tweaking of those assumptions.

Modeling the Optimality of Opposing Non-RC Preferences in Markets

Suppose a business has to make a product decision between Change (C) and Stasis (S).  It can spend X to develop the optimal C or S product for the firm; assume that the profit-maximizing decision is also the socially optimal decision.  The development cost X is greater than the private benefit PB to the business assuming rational consumers, but less than the net benefit to society SB of the optimal C or S product.  Accordingly, the business will not incur the development cost and society will lose SB. 

Now assume that the consumer market is divided into non-rational consumers.  Half of the market consists of pro-C early adopters who have a non-RC preference for new products, especially ones that work well, and half of the market consists of pro-S late adopters who have a non-RC preference for the tried and true, especially what works well.

The intuition: The non-RC bifurcation of the consumer market between early adopters and late adopters can induce the business to spend X to develop the optimal C or S product in cases in which an RC market or a market of all early adopters or late adopters will not induce it to do so.   A numerical example: Suppose the cost X is $100 million, with a private benefit PB of $75 million and a social benefit SB of $200 million.  As noted before, the cost will not be incurred by the business given rational consumers (and no government or other subsidy).  Now assume that the market consists of one million pro-C early adopters who will overvalue an optimal C product at $100 each and a suboptimal one at $50 each, and one million pro-S late adopters who will overvalue an optimal S product at $100 each and a suboptimal one at $50 each.  Given this bifurcated non-RC consumer market, it now pays the business to spend the $100 million, since developing an optimal C or S product will give the business an additional $50 million from non-RC preferences in addition to the $75 million from RC preferences. 

If everyone has non-RC preferences in favor of C or S, the business's incentives to develop the optimal product are weakened.  For example, if everyone is an early adopter and if the business believes there is a .5 chance the optimal choice is S rather than C, the numbers shift back against spending the $100 million.