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Barack Obama, Elinor Ostrum, and the Nobel Prize (PART 2/2)

Dr. Elinor Ostrum, 76, based her work around the idea that there are human interactions beyond the statistics of market prices surrounding the "commons" such as fish stocks, pastures, woods, lakes, and groundwater basins are managed as common property. Although this idea itself is not new  - Ludvig von Mises covered this in gory detail inHuman Action from 1949, Jared Diamond provided both historical and modern examples in his 2005 book Collapse, and Walter Block and Hans Hermann-Hoppe of the Mises Institute have reviewed many aspects of the commons already - it IS probably new to the Nobel committee.

Nobel's 5-page informational hand-out reads:

"Many natural resources, such as fish stocks, pastures, woods, lakes, and groundwater basins are managed as common property. That is, many users have access to the resource in question. If we want to halt the degradation of our natural environment and prevent a repetition of the many collapses of natural-resource stocks experienced in the past, we should learn from the successes and failures of common-property regimes.Ostrom's work teaches us novel lessons about the deep mechanisms that sustain cooperation in human societies.

"It has frequently been suggested that common ownership entails excessive resource utilization, and that it is advisable to reduce utilization either by imposing government regulations, such as taxes or quotas, or by privatizing the resource. "The theoretical argument is simple: each user weighs private benefits against private costs, thereby neglecting the negative impact on others. However, based on numerous empirical studies of natural-resource management, Elinor Ostrom has concluded that common property is often surprisingly well managed. Thus, the standard theoretical argument against common property is overly simplistic. It neglects the fact that users themselves can both create and enforce rules that mitigate overexploitation. The standard argument also neglects the practical difficulties associated with privatization and government regulation...

"Consider the management of grasslands in the interior of Asia. Scientists have studied satellite images of Mongolia and neighboring areas in China and Russia, where livestock has been feeding on large grassland areas for centuries. Historically, the region was dominated by nomads, who moved their herds on a seasonal basis. In Mongolia, these traditions were largely intact in the mid-1990s, while neighboring areas in China and Russia with closely similar initial conditions had been exposed to radically different governance regimes. There, central government imposed state-owned agricultural collectives, where most users settled permanently. As a result, the land was heavily degraded in both China and Russia.

"In the early 1980s, in an attempt to reverse the degradation, China dissolved the People's Communes and privatized much of the grassland of Inner Mongolia. Individual households gained ownership of specific plots of land. Again, as in the case of the collectives, this policy encouraged permanent settlement rather than pastoral wandering, with further land degradation as a result. As satellite images clearly reveal, both socialism and privatization are associated with worse long-term outcomes than those observed in traditional group-based governance."

Later on, the Nobel committee asks some questions on Oliver Williamson's work (who shared the prize with Ostrum), which they again regard as novel, though the Austrian school of economics has already addressed their questions.

"Why are there large firms? Couldn't we all be self-employed, trading our goods and services in the market?... According to Coase, firms tend to emerge whenever transaction costs, i.e., the costs of exchanging goods, services, and money, are lower inside a firm than in the corresponding market. But what exactly are those transaction costs that may tip the balance between markets and hierarchies? While Coase offered tentative suggestions, the question remained elusive...According to Williamson's theory, large private corporations exist primarily because they are efficient. They are established because they make owners, workers, suppliers, and customers better off than they would be under alternative institutional arrangements."

Again the Nobel committee appears to be ignorant of David Ricardo's law of division of labor and the Henry Hazlitt's work Economics in One Lesson. Ricardo's law states that, provided people's production skills are different, an economic gain always results from cooperation, even if person A is more superior than person B in good production. Let me explain briefly using three hypothetical scenarios from a deserted island.

  • Anna can collect 10 coconuts/hour OR 6 fish/hour.
  • George can collect 6 coconuts/hour OR 10 fish/hour.

It is obvious that Anna has an "absolute advantage" in coconut production, and George has an "absolute advantage" in fish production. If they work separately, say for 4 hours, Anna could collect 20 coconuts and 12 fish, while George could collect 12 coconuts and 20 fish/hour. However if Anna and George team up and spend all their labor on their respective competitive advantages, the same 4 hours yield 40 coconuts and 40 fish, a higher average yield (20 coconuts and 20 fish) than both previously had while working separately.

Now let's assume that Anna is a superwoman, and has an absolute advantage in BOTH coconuts and fish. Why would she have anything to gain by working with George?  Ricardo's law holds that working in cooperation will still result in an overall benefit. Let's see how this works.

  • Anna can collect 10 coconuts/hour OR 10 fish/hour.
  • George can collect 5 coconuts/hour OR 1 fish/hour.

Working by herself, Anna can produce either 40 coconuts OR 40 fish in four hours. Poor George can only produce either 20 coconuts or 4 fish in the same amount of time. For 8 hours of work collecting each good for 4 hours, their collective output is 60 coconuts and 44 fish.

However, George has a comparative advantage in collecting coconuts since Anna's production rate is only twice his, while Anna's tremendous fish production is 10X greater. If George only produces coconuts, he has 40 coconuts produced in 8 hours. However, Anna only has to work 2 hours to produce another 20 coconuts. She can then output 60 fish in the remaining 6 hours. Their combined efforts yielded 60 coconuts and 60 fish, a larger total than either could produce separately. So, here's the critical part, even though Anna is a superwoman compared with George, she still has a selfish reason to cooperate as it increases the individual wealth of each.

While this example is extremely simplistic, it holds the core logic as to why, given the scarcity of resources and labor in the world, free trade is advantageous to both poor and rich nations alike. Specialization and cooperation, whether between two people or two countries, creates more wealth through trade than either party would have while working in isolation, which is how the modern exchange economy arose.

Williamson's work does in part answer the Nobel's second question, "What exactly are those transaction costs that may tip the balance between markets and hierarchies?" Williamson suggests that among other factors, "undesirable political lobbying" may cause imbalances, and he is absolutely correct. In fact, in my humble opinion, the entire field of present-day economics should be renamed "governomics" as the government, by following Keynesian economic principles, is the driving force behind the destruction of capital in the United States.

As a society, we need to move from the destructive themes of the Keynesian model - deficit spending, government ownership of firms, massive inflation of a fiat monetary supply, crony corporatism, central planning, and redistribution of wealth from the people to the military-industrial complex and banking industries. Instead, we could have all of the benefits of the Austrian model separation of the bureaucratic and inefficient government from the economy, sound money and highly reward those who create wealth while sharing the benefits with all of humanity.  (see slides 46-47 here)

I offer my sincere congratulations to both Ostrum and Williamson. Their new research has added to the vast store of human knowledge, and will likely do far more for world peace if applied than the presidency of Barack Obama, as I covered in Part 1. For the sake of my country, I hope I am gravely mistaken.

October 13, 2009

Disclosure: No positions listed.


Jake Towne is running for U.S. Congress in Pennsylvania's 15th District in the 2010 election as a citizen unaffiliated with any political parties. Jake also writes at A novel campaign website where you can comment on articles and start discussions is available at  [Reach the Author Here!]


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