The Laws of Economics

October 26, 2009

I’ve heard that when some kids pull leaves off of trees or bushes, their mothers or other concerned adults admonish them to stop, on the grounds that, “Well, if everyone did that, there would be no leaves for anybody else to look at.” A good insight, but one often scoffed at by economists who claim that an individual’s decision to take leaves or walk on the grass has no effect on others’ decision to do or not do the same.

True, but the reason political scientist Elinor Ostrom is all the rage these days is that she didn’t end her analysis there. It’s true, she thought, that no individual has the incentive to protect a community resource. On the other hand, it’s also true that everyone would be better off if this resource were protected. So, she next thought, since these situations are extremely common, if people aren’t irredeemably stupid, they will find a way of actually dealing with these problems, rather than just throwing up their hands and accepting that all community resources will be destroyed.

Not that Ostrom is the only person to ever be interested in such situations. Two of my new favorite economists, Harold Demsetz and Armen Alchian, have been thinking about these problems for a long time. In an article called The Property Rights Paradigm, written in the early 70’s, they talk about the consequences of private vs. communal rights. If you have JSTOR, I highly recommend the article. There are a lot of fascinating insights, presented much better than I am able to summarize here. Here’s the argument Alchian and Demsetz present:

Early in human history, people faced a choice: whether to live separately, or together in a community. It is easy to imagine that the most salient criterion in this decision was its effect on food supply. In this regard, communal living brought advantages. By pooling the production of several hunters and gatherers, the day-to-day variance in the food supply could be decreased, and probably the average per-capita food available increased, too, because of economies of scale. But these advantages carry with them a disadvantage. As soon as hunters agree to pool their production and divide the proceeds, each individual hunter has an incentive to decrease his own efforts, knowing that his own consumption does not depend directly on his output, but on the output of the group. Having agreed to output-sharing, the hunter can then go off into the forest, nap for a few hours, and then come back empty-handed, claiming he just didn’t have any luck that day.

Food is a common resource, but its production requires the efforts of individuals to maintain the supply. If this society is going to successfully form and stay together, they’ve got to overcome these disincentive effects. So, what do they do? Demsetz and Alchian write, “to reduce the severity of the shirking problem that is thereby created, it is necessary for societies which fail to establish private rights to move ever closer to a social organization in which behavior of individuals is directly regulated by the state or indirectly influenced by cultural indoctrination.” Basically, hunting becomes not a choice but a ritual. Every adult male hunts at the same time, and everyone is thus assured that no one is shirking his hunting duties. People hunt in teams, both because they are more effective for hunting, and because team members can monitor each other to ensure that nobody slacks off.

Just the other day, I was talking with someone who claimed that Native Americans “didn’t have property.” This is (arguendo) true, but economics implies that absence of property rights does not make a society immune to the problem of individual self-interest. Because they didn’t have private property, Native Americans had to use elaborate customs and rituals to keep in check the problems that would otherwise make their society fail. This system was a socialism that “worked,” by which I mean, it was better than the relevant alternative, which was not capitalism, but dissolution of the hunter-gatherer community.

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