Thursday, December 24, 2009

Tragedy of the Commons

Garrett Hardin's 1968 article on the tragedy of the commons reads, first like an ode to Malthus, and second like an ode to the state. It is thus no surprise that his premises are Malthusian or that his conclusions and recommendations are Orwellian. Although the primary discussion point of Hardin's essay is the "population problem" and his concern that it cannot be solved technically and thus requires a non-technical Orwellian solution, the influence of his essay today is more for popularizing a pivotal concept necessary in understanding the workings of the state.

Hardin draws on William Forster Lloyds 1833 essay, Two Lectures on the Checks to Population, in describing a situation where several herdsmen are led by their rational, yet self interested, actions to ruin a common piece of land. He terms this the tragedy of the commons. Herein I present a slightly modified formulation, but keeping in the spirit of Hardin's original essay.

Tragedy of the Commons

Imagine a commons, owned by none, and surrounded by privately owned plots of land. On each privately owned plot resides a herdsman with his herd. Each herdsman has a choice of letting his herd graze on his own piece of land or on the commons. When the herd grazes, it depletes the land and thus cannot be allowed to overgraze lest the land be ruined. Since each herdsman owns his own piece of land, he has the incentive to maintain and cultivate it, and thus wishes to prevent his herd from overgrazing and ruining it. But what of the commons? If he allows his herd to graze and deplete the commons, his own piece of land is left pristine. Thus, he accrues the benefits of grazing his herd, with none of the costs. Further, each herdsman knows that every other herdsman has the same incentive, to graze their herd on the commons over their own land, and therein lies the tragedy according to Hardin, for in that rational yet self interested analysis of each herdsmen ensues a mad dash to use up the commons before anyone else can, thereby ruining it.

This simple yet powerfully illustrative example of the tendency for commons to be abused, depleted, and/or ruined is an extremely important concept in understanding pollution, environmental degradation, resource depletion, and similar problems today. But first, a closer examination of the fundamental problem is required. Many readers mistake the tragedy of the commons as an argument against the free market and in favor of the state. Perhaps Hardin himself is partially to blame for this since he concludes that "the tragedy of the commons... must be prevented... by coercive laws or taxing devices," and that "the only kind of coercion I recommend is mutual coercion, mutually agreed upon by the majority of the people affected." To paraphrase: the state must be the arbiter of the commons to prevent its misuse. Unfortunately, the thinking here, in true statist fashion, is completely reversed. Recall the decision each herdsman faced. Since he owned his own piece of land, he had the incentive to maintain and cultivate it. The problem arose because of the existence of the commons, which he and every other herdsman had the incentive to use and deplete before others could. Thus, it was a tragedy of the commons, and not a tragedy of the privately owned plots of land. This is the all-important observation. The fundamental problem is not with the free market or the rationally self interested actions of the herdsman, but rather with the existence of the commons! If the commons had been auctioned off to the highest bidder, or broken up and sold off in smaller pieces, there would be no tragedy. Private property solves the tragedy that is endemic to the existence of public property.

Curiously, despite his clearly anti free market stance, Hardin already recognized this fact. In his original essay he says that "the tragedy of the commons as a food basket is averted by private property," and in a later essay opens with this astute observation:

In 1974 the general public got a graphic illustration of the “tragedy of the commons” in satellite photos of the earth. Pictures of northern Africa showed an irregular dark patch 390 square miles in area. Ground-level investigation revealed a fenced area inside of which there was plenty of grass. Outside, the ground cover had been devastated.

The explanation was simple. The fenced area was private property, subdivided into five portions. Each year the owners moved their animals to a new section. Fallow periods of four years gave the pastures time to recover from the grazing. The owners did this because they had an incentive to take care of their land. But no one owned the land outside the ranch. It was open to nomads and their herds.
Perhaps most damning, however, is this passage regarding his original concern of overpopulation:
If each human family were dependent only on its own resources; if the children of improvident parents starved to death; if, thus, overbreeding brought its own "punishment" to the germ line--then there would be no public interest in controlling the breeding of families. But our society is deeply committed to the welfare state, and hence is confronted with... the tragedy of the commons. [emphasis mine]
Indeed. The welfare state is at the root of the tragedy! And private property is the solution! To an Austrian this is an already well know and well understood concept. Ludwig von Mises discusses this in Human Action decades before Hardin popularized it under the catchy title of the tragedy of the commons:
 If land is not owned by anybody, although legal formalism may call it public property, it is utilized without any regard to the disadvantages resulting. Those who are in a position to appropriate to themselves the returns—lumber and game of the forests, fish of the water areas, and mineral deposits of the subsoil—do not bother about the later effects of their mode of exploitation. For them the erosion of the soil, the depletion of the exhaustible resources and other impairments of the future utilization are external costs not entering into their calculation of input and output. They cut down the trees without any regard for fresh shoots or reforestation. In hunting and fishing they do not shrink from methods preventing the repopulation of the hunting and fishing grounds.
Mises hits the nail on the head.

The Tragedy of the State

Although I have shown that the tragedy of the commons is easily averted by the introduction of private property and is, in fact, the natural consequence of the existence of public property, one further observation is necessary. In a follow up article to his original essay, Hardin correctly recognizes that it is not all commons that are subject to the tragedy, but only those that are un-managed.
To judge from the critical literature, the weightiest mistake in my synthesizing paper was the omission of the modifying adjective "unmanaged." In correcting this omission, one can generalize the practical conclusion in this way: "A 'managed commons' describes either socialism or the privatism of free enterprise. Either one may work; either one may fail: 'The devil is in the details.' But with an unmanaged commons, you can forget about the devil: As overuse of resources reduces carrying capacity, ruin is inevitable."
Although private property does avert the tragedy, privatization of certain resources such as air and the seas is sometimes difficult in practice. But that is not to say that we must suffer the tragedy as critics of Hardin's have noted. The free market has a natural tendency towards order, co-operation, and efficient management of scarce resources. It is only with the introduction of mis-management, usually stemming from coercion or politics (read: the state), that the tragedy rears its ugly head. Stefan Molyneux illustrates this wonderfully with his analysis of the destruction of the Newfoundland cod stocks. Rather than belabor the point (certainly one can find many resources on cogently describing and documenting the phenomenon), I instead wish to draw the readers attention to one particular statement Hardin makes and examine it more closely within the framework developed in this article.

Hardin states that "a 'managed commons' describes either socialism or the privatism of free enterprise," and that "either one may work; either one may fail: 'The devil is in the details.'" That free enterprise solves the tragedy has already been discussed. The free market naturally tends towards order, not failing unless there is external coercive or political influence brought to bear on it. But what of socialism? Can it succeed? Do we expect it to fail? Is the devil really in the details?

It is my contention that socialism is destined to fail as a solution because the "management" it provides does not actually eliminate the crux of the problem, which is the existence of public property. Although it does bring management, that management is itself a commons and thus susceptible to the tragedy as well. In essence, all socialism does is move the tragedy back one level. Whereas previously there was a commons that each herdsman was incentivized to abuse, there is now a public management structure that each herdsmen is incentivized to gain control off so that he can abuse the underlying commons. Since nobody in the public management structure actually owns the land -- they are merely temporary caretakers -- there is still no incentive to preserve the land. Grazing rights will thus be granted to the most vocal lobby, who, recognizing the temporary nature of their ownership, will treat it no differently than a commons and deplete it as quickly as possible before they lose access to it. In fact, this is the root cause of pollution and environmental degradation today. Most of the destroyed land is 'publicly owned' -- meaning the government sells mining/dumping/etc rights to the highest bidder/biggest lobby and sits back and watches as that land is destroyed. Although the pollution and destruction is a result of private actions and thus easily confused for "greedy capitalism", the true flaw is the socialist desire for public property, public ownership, and public management.

If instead of granting usage rights, the government simply auctioned off the land to the highest bidder, that would create the incentive for the new owner to preserve the land, just as each herdsman had the incentive to preserve his own privately owned piece of land. Morris and Linda Tannehill explain this tendency clearly in their discussion on property:
Private owners, because they can hold their property as long as they please or sell it at any time for its market price, are usually very careful to conserve both its present and future value. Obviously, the best possible person to conserve scarce resources is the owner of those resources who has a selfish interest in protecting his investment. The worst guardian of scarce resources is a government official —he has no stake in protecting them but is likely to have a large interest in looting them.

To the extent that he has control over a natural resource (or anything else), a government official has a quasi-ownership of it. But this quasi-ownership ends with the end of his term in office. If he is to reap any advantage from it, he must make hay while his political sun shines. Therefore, government officials will tend to hurriedly squeeze every advantage from anything they control, depleting it as rapidly as possible (or as much as they can get away with).
To take this observation a step further, what is even more tragic about socialism is that it creates new commons where previously they did not exist. An institution with the power to tax and legislate rarely goes unnoticed by the more unscrupulous in society, who are inevitably drawn to its power and seek to control it for their own benefit, or, at least, gain favors from it. A casual look at Washington should be ample evidence of this phenomenon. Lobbies for any and every imaginable special interest are in continuous competition to deplete and ruin the commons that is the public purse. This happens through subsidies, handouts, and juicy contracts where the people footing the bill (the taxpayers) are forced to part with their hard earned and privately owned resources to create this sought after commons.

In addition to the public purse, there is a less visible and far more dangerous commons create by socialism: public courts. While the public purse limits ones control over the citizens to their bank accounts, the control one has via public courts is virtually unlimited. Is it any wonder that throughout history various institutions have tried desperately to control this aspect of the state? In the middle ages the church was able to successfully control it to the extent that it was able to legislate morality and punish through physical violence at the hands of the state those who rejected their dictates. Today, we realize how misguided that partnership was. But the root issue was not the church and its desires, but rather the existence of this particularly dangerous commons that enables certain segments of society, through public courts, to control the lives of every citizen. What could be more dangerous? I realize this may sound quite outlandish to anyone who has never been exposed to the idea of private courts so I will leave the discussion for another time since it is beyond the scope of this article. I only leave the reader with this article and hope that intellectual curiosity leads the reader to explore this idea further.


In this article we have looked at the tragedy of the commons and examined its tendency to arise wherever there is a commons. We have also argued that an understanding of pollution, environmental degradation, and various other negative phenomenon today should be understood by drawing on this concept and tracing their existence to the state. Finally, we have argued, contrary to Hardin, that only free enterprise can solve this tragedy and create a society that values the environment as well as individual freedom. Socialism cannot do this because we realize that the welfare state is not simply at the root of the tragedy, but is the tragedy! And magnified if one begins to broach the subject of political entrepreneurship.

Sunday, March 15, 2009

Broken Window Fallacy

“One of the more enduring myths in Western society,” writes Mike Moffatt, “is that wars are somehow good for the economy.” Indeed, this myth is so prevalent and entrenched today that it has mutated into many other forms. Natural disasters, pollution, and various other economic ills, are all advanced as economic boons based on this same faulty logic. The underlying fallacy, as Mr Moffatt explains, “is an example of something economists call The Broken Window Fallacy.” While I do agree with his appraisal, I must disagree on the fundamental nature of the misunderstanding. The broken window fallacy is certainly one aspect of the problem, but I think the deeper misunderstanding is a failure of the scientisitic approach to economics. In this article I describe the Broken Window Fallacy as I find it best understood in hopes of laying the foundation to better explain the latter concern.

Bastiat’s Parable

The broken window fallacy is so named for Frederic Bastiat’s parable of the broken window, where a child having broken a window is hailed as having created economic activity by the onlookers, who all the while ignore the hidden opportunity cost of the broken window. Bastiat concludes that the flaw in the reasoning is that the onlookers only account for the “seen” (the broken window and consequent activity) and ignore the “unseen” (what would have happened had the window not been broken). For a look at this original formulation of the fallacy, I highly recommend Moffat’s article. However, I find the absurdity illustrated by the fallacy much easier to follow when described in the context of natural disasters.

Natural Disasters

One of the more popular variants of the broken window fallacy is that natural disasters result in economic growth. I remember when Katrina came around, there was no shortage of pundits (recent Nobel laureate Paul Krugman included) describing it as having created economic activity and growth, because, after all, rebuilding all the destruction will add to GDP! But was Katrina really beneficial? Imagine there is a city that is leveled by an earthquake. The residents then rebuild their city. This adds to GDP and is hailed as creating economic activity and growth. But is that an accurate assessment?

First, does it create economic activity? Well, of course it does; it is hard to argue that it does not. However, one must be careful not to reach false conclusions based on this. Doing so, as Bastiat would say, ignores the unseen. It is seen, and definitely true, that the destruction and subsequent rebuilding of the city creates economic activity. However, it is not seen what would have happened had there been no earthquake to begin. In the time the residents lost and rebuilt their city, they could have built a second city, or made improvements to their existing city, or done any number of other things they value. However, because of the earthquake, none of those happened, which is considerable lost opportunity. Thus, although the earthquake creates economic activity (the seen), it does so at the expense of other economic activity (the unseen).

At this point one might respond that the economic activity in response to the earthquake would far exceed anything that might have happened otherwise, especially if the economy was in a recession, where a shortfall of demand, so it is held in the Keynesian paradigm, is responsible for the decline in economic activity. The sophistry in this argument is clearly apparent when one realizes that, despite the economic activity in response to the earthquake, there has actually been no growth! While before there was a city, now, post earthquake, there is again a city and nothing more. Whereas, any economic activity in absence of the earthquake would result in the original city plus whatever was created in addition. Thus, the residents had to work extra hard just to break even.

The Keynesian misunderstanding here is that they do not understand the nature of wealth and economic growth. Real wealth is tangible, physical, goods. Money, as the medium of exchange, is a claim on real wealth. Thus, the earthquake destroys real wealth, which must be restored at great pain. Whereas, no earthquake leaves the residents with ample time and opportunity to create more wealth in addition to what they already have. Stated in this manner, one can easily see that any natural disaster is bad for the economy because it destroys real wealth, and that what the Keynesian is really saying is that we can create growth by destroying our existing wealth. The same is true for wars. Wars destroy wealth. Blowing up cities, killing soldiers or civilians, and everything else that comes with wars destroys wealth. Thus any addition to GDP and decrease in unemployment is only to restore total wealth to its previous state. Not to mention that people would be far better off making shoes, or cars, or anything they actually value and use, rather than munitions, things that get destroyed and destroy other things. As Emmanuel Goldstein famously writes in Orwell's 1984:
The essential act of war is destruction, not necessarily of human lives, but of the products of human labor. War is a way of shattering to pieces, or pouring into the stratosphere, or sinking in the depths of the sea, materials which might otherwise be used to make the masses too comfortable.
How the Keynesian considers this good for the economy escapes me.

Fallacy of GDP

The Keynesian, however, has a further retort, namely that wars and natural disasters boost GDP and lower unemployment. They often mistake the argument above as implying the converse, and since we have clear empirical evidence to support their claim, they conclude that the Austrian criticism must be invalid. However, I do not dispute their claim. In fact, I will gladly admit that GDP receives a boost and unemployment declines. However, the problem is that GDP is an inappropriate concept when discussing economic growth. It is boosted because GDP is a measure of economic output, and not economic growth. You can blow up a city and rebuild it, which creates output, but does nothing for growth. In fact, this is precisely what wars and natural disasters do. They destroy wealth that must be replaced, hence boosting output in the short run. However, the net effect is that there has been zero economic growth, only replacement of the lost wealth. Economic growth is an increase in real wealth, not a temporary increase in output.

And what of lowering unemployment? Surely that is a boon? Actually, no. Employment in and of itself is meaningless unless one considers the kind of employment. We could have half the country dig ditches and the other half fill them up and keep everyone fully employed, but that would be completely useless activity which would make everyone poorer (people would have fewer useful things). Growth is achieved through the process of savings and capital investment which creates the capacity for increased future output of goods that people actually value. The Keynesian misses this simple point because they are concerned not with real economics but silly aggregates that are abstracted to the point where they share little with the underling reality they are intended to model. The Keynesian thus sees rising GDP and falling unemployment and mistakenly concludes economic growth, when what they are really observing is a temporary increase in output to replace destroyed wealth.

To further illustrate this disconnect, consider this simple example: imagine you have a machine that makes widgets. The machine itself is made of widgets. Let us say it can produce 2 widgets a month, and is made of 12 widgets. Every month you take your 2 widgets to the market and buy whatever you need. Thus you produce and consumer 2 widgets every month. Now, consider that instead of selling both widgets every month, you decide to scale back your standard of living and save 1 of the 2 every month. One year later you would have saved 12 widgets and can buy a new machine. Going forward, you can then produce 4 widgets a month and live a better lifestyle. Thus, you gave up present consumption (1 of the 2 widgets) in order to accumulate capital (saved widgets) to ultimately create economic growth (the new machine). While you were saving your widgets, GDP temporarily drops, but ultimately results in real growth.

Conversely, imagine if you had instead of saving 1 widget, taken 1 widget out of the machine every month. With your 3 widgets a month you could live an improved lifestyle for 1 year, until you realize you have completely cannibalized your machine and cannot produce any more widgets. You can increase present consumption by consuming capital, but this ultimately leaves you with no means for future production. However, it does temporarily boost GDP because you are consuming 3 widgets every month, but results in economic contraction once you realize you can no longer produce more widgets with your non existent capital. In reality, capital is not a homogeneous blob as the Keynesians believe, but rather a highly complex structure of production, which is all the more reason to understand that savings and capital investment are the root of economic growth, not consumption, which only creates temporary GDP increases by cannibalizing the productions structure that results in economic contraction.

This simple example should hopefully be illustrative of the fallacy of GDP. More importantly, however, Shostak explains that GDP is a completely empty concept that demonstrates the sheer intellectual bankruptcy of the Keynesian faith.

Krugman Speaks Out

Lest the reader mistake my characterization of the Keynesians as inaccurate, here is a quote straight from the horses mouth:
The fact is that war is, in general, expansionary for the economy, at least in the short run. World War II, remember, ended the Great Depression. [Italics original.]
Or consider this one instead:
What saved the economy [after the great depression], and the New Deal, was the enormous public works project known as World War II, which finally provided a fiscal stimulus adequate to the economy’s needs.
Indeed such naive causal inferences and aggregate based models of the economy shift the discussion from human action towards abstract models, thus losing any connection to catallactics and the underlying processes that comprise the field of economics. A triumph of scientism over truth!

If I am too harsh, dear reader, then I ask you this: do we not rightly condemn witch doctors and snake oil salesman as quacks? Are they not frauds peddling false hope? Then why the double standard with Krugman and his ilk prescribing their own form of snake oil and rain dances for any and every economic malady? Enough people are duped by quacks. Don't be one of them. I hope this article and my blog helps you form the understanding of economics necessary to reject the quackery of Keynes and his scions.