Wed, 27 Jul 2005

Competition as a commons

Hopefully everyone is familiar with the Tragedy of the Commons. In a sentence, the tragedy works like this: if you have a depletable resource in demand, and no person or institution can control its use, it will be entirely consumed. This principle applies to many things beyond the village grazing commons from which it was originally derived. Fish, clean water, clean air, and park benches suitable for homeless to sleep are all subject to the tragedy. A characteristic of a commons being depleted is an overinvestment in extractive resources, e.g. fishing boats.

The tragedy can also be applied to bad commons. That is, resources with a negative value, e.g. ignorance, greed, or excess profit margins. Just as we need to be careful to set property rights so that there are no unmanaged positive commons, we also need to make sure not to set property rights in such a way that we eliminate negative commons.

For example, the (typically) Nigerian 419 scammer relies on people's ignorance. In this scam, the scammer claims to have control over millions of dollars which they cannot receive themselves. Instead, they offer the victim a percentage in return for making the exchange seem to be an honest business deal. Once the victim realizes that it is a scam, no other version of the same scam will work. The ignorance is depleted. And gauging from the feverish activity of 419 spammers sending me offers, they are overinvesting in their scam.

Or for another example, free markets create a commons out of high profits. If someone invents a new way to make money (and no patent applies), anyone is free to enter the market and deplete the high profits. The purpose of the patent system is to create a manager for this commons.

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Wed, 13 Jul 2005

Consumer/Worker Protection

Many people think that the role of government is to protect "the little guy" from corporations. Free-market economists disagree. It is the role of competition to protect the little guy from corporations. The problem is one of information. How do you discern the proper amount of protection? After all, you can completely protect consumers by preventing corporations from selling anything, and workers by preventing corporations from employing anyone. Set the protection level high enough, and that's what you get even if that's not what you meant.

Free-market economists believe that government cannot ever set the protection level correctly. The information cannot flow to the government quickly enough to adapt to changing workers, economic conditions, technology, procedures, and the market for safety. People's desire for protection also changes over time and their life circumstances. There is no one correct level &emdash; any one level set by the government will be wrong for some people.

Does that leave "the little guy" screwed?

No. You see, it is corporations themselves that have the information necessary to set the protection level correctly for their market. They won't volunteer that information. Instead, they will reflect it in their prices. If they are not protecting the consumer, competition will force them to charge lower prices. If they protect the consumer more, competition will allow them to charge higher prices.

Does that mean that consumers have to have perfect information in Libertopia?

No. Probably only 10% of consumers take the time to compare prices, quality, etc. These people are admired, though, and less diligent consumers listen to them. Over time, their information distributes itself among the less concerned shoppers. If a company is charging too much for too little protection, it will have lowered sales.

Free-market economists aren't in favor of less consumer protection. They're in favor of a different kind of consumer protection -- one which they believe generates a greater diversity of results which better matches the needs of individuals.

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Economics as opinion

It seems clear to me that many people interpret differences between economists as evidence that economics is solely in the realm of opinion. I disagree with this conclusion. Economists disagree on the things which are not yet decided. Economics is very much a live discipline at this time. The person who brought transaction costs (Ronald Coase) to our attention is still alive! The founders of the public choice school of thought are still alive.

Unfortunately, economists do not do a good job informing people of the things which are well decided, about which differing opinions are not valid. It's not news when a controversy is resolved. People don't read the news for agreement; they read it to find out about controversy.

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