Convexity as moral ideal, with a moral

Suppose you were given a pound of rice. You'd prefer two pounds, but you can't have them at the same objective price, or relative sacrifice subject to a communal valuation. You'd also increasingly prefer to have each intermediate amount of rice, at some intermediate price.

Then suppose you were given a playing card. You'd prefer two cards, but you can't have them at the same subjective price, or relative sacrifice subject to your personal valuation. You'd still definitely want another card, but one-and-a-half cards could be an insult worth fury and vengeance; it could be worth less to you than a single card, in toto. This often happens eventhough the one-and-a-half cards strictly include that single card you really wanted.

The first paragraph portrays a typical assumption of orthodox economics. The second has more of a behavioral flavour. In econ 101, we assume perfect rationality, knowledge, expectations and markets. On real markets on the other hand we deal with behavioral psychology, bounded rationality, our own evolutionary baggage and very real market failures. As a species, we've done so for a really long time now, so we

• deal exceptionally well with common place, imperfect markets, as a community,
• do not deal with most markets adaptively or rationally enough to deal with unexpected circumstances, and
• as a norm can't deal well enough with markets approaching full arbitrage balance.

As a consequence, we e.g.

• extend fairness and justice norms to people who we haven't dealt with before and do not expect to deal with again, leading to large, rationally speaking unexpected, efficiency gains
• retaliate at our own cost against unconventional/unfair prices because that is the sane strategic response to the kind of one-shot game we typically face when dealing with the thin markets of earlier days, our days of growing up which meant habitually ending up on the constrained side of the market, or the nonmonetary markets having to do with our personal life as opposed to the official, monetary economy; the sane response of convexity/diminishing marginal utility then cannot easily be given even on markets truly approaching perfection because we're too habituated to responding first and foremost in terms of strategy; and
  
• we commonly oppose the more involved and complex market organizations, like the derivatives markets, because they are too rational for us to individually comprehend; this is essentially Hayek's point for the unifying, extra-individual nature of markets as whole.

After reading a bit of Ken Binmore, I'd say both of the two starting examples have some of it right. In the really long run, and written large, rationality would call for only the first part holding true. We'd have to be really, really rational and consistent with respect to just about anything, once true, comprehensive equilibrium took hold. More of just about anything would have to feel good to us.

However, the second part still makes sense in the modern world, given that we haven't yet adapted to the really long run, which runs at evolutionary timescales. We've only short ago adapted to some limited consequences of the existence of the market, so it's no wonder we can't deal with all its complications rationally. Least of all are we able to mutually bargain to the optimum that would eventually obtain after unlimited evolution, bargaining and social interaction. Often punishing another person for not providing what they could provide but didn't is saner in the long run than rewarding them for what they did provide in the short run. Threatening to withhold the reciprocal benefit of even the single card can prove worthier than getting one-and-a-half cards, if you expect to get the full two cards. That holds even if the two cards continue to come only from the next round of the game onwards.

Given human psychology, there's also no easy way of assuring this principle is only applied to games where mutual benefit requires it. We're prone to applying the common case to the special one even when not warranted, such a thing cannot be efficiently monitored, and in any case we don't have any incentive to limit such applications until social evolution has started to prune out the worse behavioral patterns. Our emotions are a tool of credible commitment, so they cause us to threaten even when the game can rationally speaking expected to be one-shot. (That's where the behavioral game theory results with ultimatum games come from.) We also threaten in forms which cannot be easily discerned to be threats at all. ("Take it or leave it." Such a thing is fully within everybody's rights, but it can variably be a viable threat or not. It can be either an exercise of necessary turning down of a nonviable contract on the perfect market, or an exercise of market power on an imperfect one.) Or, take, social evolution has already started to prune out the marriage instituation, yet hasn't wiped it all out. (Clearly limiting your options isn't a good way to go about it when viable, humane alternatives exist even for the children.)

That's really the whole of the problem of morality and law. We need them in order to deal in a society with our individual deficiencies with respect to what is optimal, societally/reciprocally speaking. Proper moral and legal norms are conscious constructs opposing our natural tendencies that have become dysfunctional and/or maladaptive, no matter what their source. In the end, unlimited evolution and competition would jointly make all of those norms unnecessary. But those processes haven't had their time to operate, and they'll probably never have, given the changing nature of society and individual nature.

That's why morality and law exist now, and why they will also continue to exist. At the societal and cultural levels they counteract human/individual tendencies that Reason suggests are bad at the societal/reciprocal level, yet which cannot be uprooted by any other means. As such any moral person will always wonder why the norms exist in the first place, given how much work and headache they give, but in the end will end up enforcing them, succumbing to them, and being perplexed at why not everybody voluntarily follows them.