When Garrett Hardin first proposed The Tragedy of the Commons, Science Dec. 1968, he used an example of nomadic herdsmen overusing land held in common without the "protection" of property rights. The problem posed by Hardin was that without some kind of social contract to prohibit over-selfishness, each individual would gain by adding additional grazing animals to a common pasture. Without some form of social restraint, the pasture would eventually be ruined by overgrazing. No one would have incentive to stop the plunder. All incentives would work toward ruin. Hardin's tragedy was cast up then, and is applicable now to much beyond a commonly held pasture. [Note: Hardin's main message was about unbridled human population growth, pollution of the world's air and watersheds, and other potential environmental horrors. Hardin used the common pasture example only to introduce his broader message.]
In the early 1990s Hardin, along with Herman Daly used the "tragedy" metaphor in the context of common pools of capital. I wonder whether either foresaw the mess that American-led financial titans, along with ideologically blind and/or Bush-Administration-wounded regulators, along with blind politicians, rating agencies that had interests in pumping-up ratings, etc. would lead the world into. Interestingly, Hardin used a bank-robber metaphor in his 1968 article:
Today (as in times past) bank robbers come in two forms. The "blue collar" variety we all think of when we talk about armed "bank robbers," and the other "white-collar crime variety" that ever-more-frequently seem to be those we fear theses days. William Black's book, The Best Way to Rob a Bank is to Own One comes to mind.
The man who takes money from a bank acts as if the bank were a commons. How do we prevent such action? Certainly not by trying to control his behavior solely by a verbal appeal to his sense of responsibility. Rather than rely on propaganda we … insist that a bank is not a commons; we seek the definite social arrangements that will keep it from becoming a commons. That we thereby infringe on the freedom of would-be robbers we neither deny nor regret.
George Ackerlof and Paul Romer refer to this emergent process as "looting," in The Economic Underworld of Bankruptcy for Profit. Many bloggers and commentators spent the better part of the "naughties", 2000-2008 warning of the impending doom, and tracking the misdeeds of the looters. I tracked some of these Cassandras right here from 2005 forward, thinking that I might help a wee bit to the discussion, and that I might learn a bit by forcing myself to write about it. I noted in early 2007 that the Cassandras were growing weary of trumpeting the impending doom. I too was growing weary, and increasingly gloomy about the prospects going forward. Soon enough the wait would be over, and now so many track the
mess situation that I have trouble just reading through my Google Reader, some of which I mark as shared.
Meanwhile another group (not bloggers, but bankers and hedge fund managers) was busying themselves preparing to capitalize on the impending doom — prepping to loot the commons for private gain. Matt Taibbi recently covered some of this in Will Goldman Sachs Prove Greed is God?, The Guardian, April 27, portraying some of Wall Street's cleverest as Ayn Rand ideologues, interested only in themselves. These clever few (some herald them as the brightest minds on Wall Street) had figured out a way to finance a continuing string of bets against the market — the bubble housing market basket of collateralized debt obligations, credit default swaps, etc. — by constructing and selling the very debt instruments they were shorting. Clever indeed, and likely perfectly legal, albeit morally reprehensible. We'll see as to the legality of it all, as the Goldman Sachs (and other yet-to-emerge) lawsuits play out. John Cassidy offers a perspective different from Taibbi's in, Goldman Sachs and Rational Irrationality, The New Yorker, April 26. Cassidy also does a good job of explaining "rational irrationality". Just as Garrett Hardin did, 40 years ago.
The few who figured out a self-financing way to play the "shorts" game found a way around Keynes warning that, "Market can stay irrational longer than you can stay solvent." Unfortunately, their game kited the markets along while they waited patiently for the inevitable decline. Their actions, arguably, made the crash worse — much worse perhaps — than it would otherwise have been. See, e.g. Goldman Sachs, Magnetar, and Outrage, The Economist, April 19. And to add insult to injury, we and our children will all get to pay for the crash, if not now then later when the bill will be even bigger.
The fix, if there is one, may again be one that Hardin would endorse. In a May 1998 piece titled Extensions of "The Tragedy of the Commons", Hardin says: "the way to avoid disaster in our global world is through a frank policy of 'mutual coercion, mutually agreed upon.'" Hardin elaborates, again building from bank-robbing:
The morality of bank-robbing is particularly easy to understand because we accept complete prohibition of this activity. We are willing to say "Thou shalt not rob banks," without providing for exceptions. But temperance also can be created by coercion. Taxing is a good coercive device. To keep downtown shoppers temperate in their use of parking space we introduce parking meters for short periods, and traffic fines for longer ones. We need not actually forbid a citizen to park as long as he wants to; we need merely make it increasingly expensive for him to do so. Not prohibition, but carefully biased options are what we offer him. A Madison Avenue man might call this persuasion; I prefer the greater candor of the word coercion.
Coercion is a dirty word to most liberals now, but it need not forever be so. As with the four-letter words, its dirtiness can be cleansed away by exposure to the light, by saying it over and over without apology or embarrassment. To many, the word coercion implies arbitrary decisions of distant and irresponsible bureaucrats; but this is not a necessary part of its meaning. The only kind of coercion I recommend is mutual coercion, mutually agreed upon by the majority of the people affected.To say that we mutually agree to coercion is not to say that we are required to enjoy it, or even to pretend we enjoy it. Who enjoys taxes? We all grumble about them. But we accept compulsory taxes because we recognize that voluntary taxes would favor the conscienceless. We institute and (grumblingly) support taxes and other coercive devices to escape the horror of the commons.
Let's hope that when all is said and done regarding impending finance re-regulation we have not forgotten Hardin's advice. Like many others, Hardin would likely advocate for much fuller disclosure, simpler financial instruments, higher capital requirements, much lower leverage limits, and disallowing people from betting on others' impending disasters. Legislative and administrative reform measures will have to be developed carefully so as to avoid being either unduly regulatory restrictive or unduly lax. The next couple of months (years? decades?) will prove instructive. [Note: Need to look further to see who has advocated what re: "simpler financial instruments" (terms used by Rick Bookstaber in A Demon of our own Design)]
In the meantime we could do worse than to ponder Joseph Stiglitz's Capitalist Fools, and think of the roles played by various actors in building the mess we now find ourselves in.