Sunday, 18 October 2009

What We Learn From the Nobel Laureates

I had never heard of Oliver Williamson and Elinor Ostrom until they won the Nobel Memorial Prize in Economics this past week. So, what I know about their work is what I read in the papers. But that is sufficient; somewhere in this blog I wrote that everything you need to know is always right in front of your eyes!

Let us begin with Elinor Ostrom whose research, The New York Times tells us, led her to believe that something called the “tragedy of the commons” was inaccurate.
Ms. Ostrom concluded in her research that the “tragedy of the commons” was an inaccurate concept. Particularly in 17th- and 18th-century England and Scotland, the concept described villagers’ overgrazing of their herds on the village commons, thereby destroying it as a pasture. The solution often invoked was to convert the commons to private property, on the ground that self-interested owners would protect their pasture land.
Setting out to show that the tragedy of the commons is inaccurate is akin to setting out to show that Santa Claus does not exist. It is a curious starting point.

The idea of the “tragedy” came from a half-wit Texan by the name Garrett Hardin. His Wikipedia biography lists his “research” interests: overpopulation, immigration, race and intelligence – you get the idea. The Tragedy of the Commons is his magnum opus in which he argued that a shared social resource is doomed to exhaustion because the individual users will maximize their own interest at the expense of the long term social good. His conclusion: to avoid the ruin, the common property had to become private.

You see the angle. The Tragedy was published in 1968, just about the time when Milton Friedman was being pumped up to bamboozle the nation with his drivel.

So the good Indiana University professor wasted a good deal of time refuting something that did not merit a response. But what did she, herself, have to say on the subject?
Her most recent research has focused on relatively small forests in undeveloped countries. Groups of people share the right to harvest lumber from a particular forest, and so they have a stake in making sure the forest survives. “When local users of a forest have a long-term perspective, they are more likely to monitor each other’s use of land, developing rules for behavior,” Ms. Ostrom said in an interview.
Note the reference to “the relatively small forests in undeveloped countries” and earlier to the 17th- and 18th-century England and Scotland in the Tragedy.

The social system in a pre-Capitalist community is based on barter. In such a system, the members of the society use the common resource to satisfy their personal (including family) needs and not more. So, the common resource survives. Rules merely codify the individual uses that never exceed the capacity of the common resource.

With the rise of Capitalism, the society moves from barter to commodity trading. Now, the objective is no longer the satisfaction of the personal needs but the sale of the commodity for money – an open ended process that is limited only by the number of buyers. If the commodity happens to be fabric which is made from sheep wool, then to satisfy the demand for the expanding British fabric manufacturing, ever more sheep will have to be introduced to the pasture – far above and beyond its capacity. The result is first, overgrazing, and then the replacement of people by sheep. That is what caused the protracted Irish famines starting in 18th century. I thought this was known even to school children – but apparently not.

The Nobel laureate, who, by the way, is a social “scientist”, de-contextualizes the social system she is writing about, as if observing it in an imaginary Mister Rogers’ Neighborhood. That is why what she says comes across as simplistic, to the point of being childish. It is certainly irrelevant to our lives. Imagine we the people approaching Verizon or Chevron to ask for the management of our common resources, airwaves and oil!

For an adult’s take on the subject of the individual’s approach to a common resource within the given conditions, see Pontecorvo’s 1957 Wide Blue Road. You will learn more from this perceptive movie that all the works of all Nobel laureates in economics combined.

The work of Oliver Williamson, by contrast, is on a strictly contemporary phenomenon: the corporation. He discovered that, in the words of the same Times article, “large corporations exist because, under the right conditions, they are an efficient way to do business.” The Wall Street Journal (Oct 13, p. A19) explained his work in more detail:
Mr. Williamson showed that horizontal mergers of companies in the same industry – even those that increase market power and even those where the increase in market power leads to a higher price – can create efficiency. The reason is that if mergers reduce costs, the reduction in costs can create more gains for the economy than the losses to consumers from the higher price.
So Bruce Bid’Em Up Wasserstein was the agent of social efficiency. Also note Professor Williamson’s point of view in using the work “efficiency”. I earlier wrote about this view which is that of finance capital.

The most interesting part of the prize was the citation of the Award Committee that, perhaps innocently, but revealingly all the same, put the utterly incompatible works of Ostrom and Williamson next to each other to produce an anti-regulatory manifesto:
Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated. Likewise, monitoring and enforcement work better when conducted by insiders than outsiders. These principles are in stark contrast to the common view that monitoring and sanctions are the responsibility of the state and should be conducted by public employees.
Bernie Maddoff could not agree more.