We turn now to theoretical developments in the concept of reciprocity to consider what we call the strategy of indirect reciprocity. Our argument here will be that even though Regulatory Ambassadors to corporations and small towns combined with regulatory surges elsewhere spread reciprocity thinly (albeit more widely and strategically than current practice), if surges are discharged with sufficient frequency and publicity, they may imbue indirect reciprocity in the compliance behavior of those not targeted by surges or Ambassadors.
Cultivating habits of civility
The message of invincibility that an enforcement pyramid is intended to give is not learned mainly through the personal experience of being pushed up a pyramid by a regulator. It is also learned through efforts by regulators to educate a community that a regulatory pyramid exists. It is learned by observing misfortune befall others who escalate up pyramids during surges. Most of all, good responsive regulators use outside-in regulatory design (Braithwaite 2005, p. 156), that is, the regulated industry participates in designing regulatory pyramids. Participation in the design and periodic redesign of regulatory pyramids is another path whereby leaders from the regulated community learn to play the game at the base of the pyramid, reducing the frequency and costs of iterated encounters at higher levels of the pyramid.
One idea here is that even when a social practice like diplomacy is transacted in one-shot interactions, those who have been socialized as diplomats learn habits of cooperation. That is, the diplomatic norm, even with enemies, is that cooperation is the normal response, with betrayal reserved as a response for exceptional circumstances where interests are seen as exceptionally profound. Diplomats generally do not learn that cooperation is normally the right response from iterated encounters in which they experience bad consequences of non-cooperation. Rather, they learn to be cooperative in their training. Secondly, because so many of the moves and countermoves of diplomacy are publicly known, especially to insiders of the craft, diplomats learn from observing escalated iterated encounters experienced by other diplomats. They observe escalations to war even if in their personal experience they never encounter an escalation that leads to such a serious outcome. Socialization for civility is the first line of defense against people being uncivil back to us. Observation of consequences from uncivil escalations by others is a second less important defense. Personal experience of how one's own uncivil behavior has bad consequences is the least important path to learning civility.
Elias (2000) sees a long historical trajectory of “civilizing” processes in the west. The theory of indirect reciprocity is a useful lens for seeing the brilliance of Elias and his relevance to understanding all forms of regulation. Diplomacy is central to the history Elias recounts. “Courtly” good manners arise first in the courts of kings and nobles in the Middle Ages. Before the rise of “courtesy,” knights achieved their objectives through largely unregulated violence. Unarmed citizens deferred to knights out of fear. As state structures consolidated, however, even powerful knights learned to live in worlds surrounded by others capable of killing them. In the court, knights learned to avoid upsetting others by following courtesies of diverse kinds. These averted aggravation of others: from refraining from spitting on the floor to blowing one's nose on a tablecloth. These forms of bad manners became shameful, though only if perpetrated in the gaze of other members of the aristocracy. All such things could be done in the presence of servants or the middle class. But from that point, according to Elias's documentary history of manners, shame democratized as an emotion. Shame evolved into a Victorian emotion that could be experienced by aristocrats for doing something shameful in the presence of the lower classes.
This was one of the ways that shame became a more powerful regulatory tool during the past 700 years of human history. At the end of this civilizing process, aristocrats ceased regulating lower classes by wearing a sword in public (Braithwaite 1993, p. 3; Shoemaker 2001, p. 205). Instead, the gentry learned that life was safer when both duels with other sword-wearing gentlemen were avoided and when abrasive encounters even with the poor were averted by habits of civility that became more universalized. At the end of this historical civilizing process, polite, cooperative encounters with others were favored over uncooperative, abusive ones, first through habits of socialization for civility, only secondly through observation of how escalation could befall others, and only thirdly through personal experiences of escalation to violence arising from one's own rudeness. This is the social structure of civility that contemporary regulators inherit and harness when they have the wit to do so. Elias likened the court to a stock exchange where the repute of each “courtier” was continuously being formed and assessed. Later, when the division of labor became more complex, those of high rank found themselves more dependent on the lowly, and so all of social life became an exchange where repute for civility was being formed and assessed. Technological change was also significant in Elias. In a seventeenth-century world with little traffic, the aristocracy did not fear shameless rudeness to the lower orders as something that might trigger road rage. While we agree that Elias taps something sociologically fundamental about the long-run democratization of shame and civility and its connection to today's low homicide rates compared to the Middle Ages, genocides remind us that there is no unidirectional inexorability or irreversibility about this. Genocide happens because all regulatory strategies fail at times, from civility induced by indirect reciprocity up to armed intervention to resist genocidaires. The next section describes indirect reciprocity more abstractly as a civilizing and trust-building process.
Learning from others' experience: Indirect reciprocity
It is obvious that people learn habits of cooperation not only from their own experience, but also from the experience of others. The examples presented above suggest that learning from others' experience is a cheaper way to internalize the value of cooperation, even for society as a whole. This lesson and its underlying logic are well captured and presented in reciprocity literature. Reciprocity is usually defined as a pattern of mutually contingent exchange between two or more players (Malinowski 1926; Gouldner 1960). Gouldner (1960) presented a systematic account whereby a norm of reciprocity, once established, develops a beneficent cycle of mutual reinforcement because people involved in this cycle have internalized some general moral norm. This concept of reciprocity based on previous encounters became more articulated as economists and biologists sought to use formal modeling to explain the evolution of cooperation (Taylor 1976; Axelrod 1984; Boyd & Richerson 1988; Nowak & Sigmund 1992; Bowles & Gintis 2004).
While Gouldner did not give a sufficient answer as to why altruistic behavior comes out of egoistic motivations, these scholars sought to resolve that dilemma through what Gouldner called “an altruism in egoism, made possible through reciprocity” (Gouldner 1960, p. 173). For example, Axelrod argued that reciprocity does not require us to assume conversation, trust, or altruism between players, the presence of central authority, or even their rationality, if there is an indefinite number of interactions between them (Axelrod 1984, pp. 173–174). In a Prisoner's Dilemma, people have incentives not to cooperate with each other in a single encounter because of the possibility that the other will take advantage of this and defect. If the game is repeated indefinitely, however, then tit-for-tat, as revealed in Axelrod's famous computer tournaments, tends to foster an evolution of cooperation.
While this reciprocity assumes that individuals repeatedly encounter a partner, theories of non-direct reciprocity have now been proposed to accomplish the evolution of cooperation even without assuming indefinite bilateral encounters. According to the current literature on indirect reciprocity, cooperation can evolve without direct interactions because people learn that socially cooperative actions can increase their future benefits, though not reciprocated by the recipient, in a social web in which individual and collective activities are continuously observed and assessed by numerous others (Alexander 1987; Nowak & Sigmund 1998a,b; Wedekind & Milinski 2000; Leimar & Hammerstein 2001; Ohtsuki & Iwasa 2004, 2006; Tullberg 2004; Berger 2011; Sigmund 2012). Indirect reciprocity is a newer theoretical framework based on acquaintanceship in which cooperation does not require the same two individuals ever to meet again. What matters is an individual's reputation in the community as a civilized member of it. Note the resonance here with Elias on civility in courtly diplomacy. People are more inclined to cooperate with individuals who have helped others in the past, who present in encounters with habits of civility, even if they have not met them before. Nowak and Sigmund claim that indirect reciprocity works because cooperation “confers the image of a valuable community member to the cooperating individual” (1998b, p. 573).
Two conditions may apply: first, iterated encounters must be common in a community, though not necessarily between the same individuals; and second, it must be possible for a player to estimate the reputation of the opponent (Nowak & Sigmund 1998b, p. 576). It seems that iterated encounters are not necessary when indirect reciprocity exists in a situation where an individual is assigned to a partner for a single round and their decisions are observed by other community members (Fehr & Gachter 2002; Diekmann 2004; Ahn et al. 2009). Nevertheless, it is essential that iterated encounters occur somewhere in the regulatory landscape so that they are available to be observed, and, thus, individuals get opportunities to increase their reputation and, therefore, “increase the chance of obtaining benefit in a future encounter as a recipient” (Nowak & Sigmund 1998b, p. 576). Individuals and firms may not rely mainly on reputation that has been built in the course of a specific regulatory encounter in the present, but in past encounters with that regulator on very different matters and with unrelated officials who may not even be regulators.
A Regulatory Ambassador would strategically choose her target. By making the most crucial encounters more iterated, she can give a lesson to other potential regulatees that they are lucky to avoid regulatory investigation at this moment, but still subject to future escalation risks. The strategy of indirect reciprocity should give a sense to others that they always need to build a civil reputation that will help them cope with the next uncertain encounter with a regulator. This is cooperation without future encounter, but with risk of future encounter.
The first element of indirect reciprocity (iterated encounters between others that can be observed) is closely related to a second element: to make the regulator's reputation so conspicuous that regulatees are persuaded to indirect reciprocation. This instructs Regulatory Ambassadors to promote an image and a practice of active relational engagement with regulatees. By building this kind of reputation in the community, a prudent regulator also utilizes the relationships and communication with regulatees to strengthen networks of reciprocity and social capital. This delivers the social capital benefits theorized by Putnam as effects of generalized reciprocity (Putnam et al. 1993; Putnam 2000).
Putnam recognizes the importance of this indirect reciprocity if it becomes a norm when he explains social capital, even though he employs a slightly different term. Instead, he uses generalized reciprocity, when he says “even more valuable, however, is a norm of generalized reciprocity: I'll do this for you without expecting anything specific back from you, in the confident expectation that someone else will do something for me down the road” (Putnam 2000, pp. 20–21).4 He adapts the norm of generalized reciprocity as a means for networks of civic engagement to engender trust and social capital: “A society that relies on generalized reciprocity is more efficient than a distrustful society, for the same reason that money is more efficient than barter. Honesty and trust lubricate the inevitable frictions of social life” (Putnam 2000, p. 135).
In the era of regulatory capitalism, whether regulators build trust relationally or distrust through betrayal of responsiveness is a rather critical variable in the constitution of Putnam's generalized reciprocity. Regulatory Ambassadors should prefer to get into the field and communicate with people as Venetian resident ambassadors in fifteenth-century Renaissance Italy first did at the Holy See or at the court of the Holy Roman Empire (Beverley 1999; Fubini 2000). Because by doing so, they can enhance the communication and intelligence, and at the same time, create the networks of relational regulation, which will eventually become social capital assets. By employing this strategy, Regulatory Ambassadors can build up “a cultural template for future collaboration” in a world where reciprocity is a scarce resource (Putnam 1995, p. 67). The great accomplishment of diplomacy from which regulatory scholarship can learn is that it does constitute a template for future collaboration. As in the move from direct reciprocity in Axelrod's tournaments, to indirect reciprocity, as in the Elias civilizing process in medieval courts, a key insight in Putnam's theory of social capital is that socialization to a reputation for collaborative, iterated problem solving helps diplomacy to succeed. This means that the well-socialized novice in their first diplomatic encounter on an issue that has seen no previous encounters can succeed by leaning on the reputation of their diplomatic service for reciprocity, on its reputational social capital, by enacting its norms of civility. So can business regulators.