jawfish

The Fallacy of the Tragedy of the Commons
john posted in memes, Pitchforks and Torches, repost on February 3rd, 2012

The Fallacy of the Tragedy of the Commons « Center for the Advancement of the Steady State Economy.

Cooperation is often ignored by economists and lawmakers and the established powers-that-be when managing resources. This is another aspect of Richistan, the world of the extremely wealthy, where the normal selfishness of everyday humans plays out with a global power structure. When you have everything, it is hard to see why you should give up something, cooperate, in order to get something. Defending your property seems much more appropriate. This is, I think, the source of the bizarre fears of “class warfare” currently being waved about in public by the very rich and the very entitled.

Too many sheep.

Who owns, say, the natural gas deposits that have lain, untapped, under the ocean near Sable Island, a hundred kilometers from my house? Who owns the Gorgon gas field under Barrow Island off Australia’s west coast? Who owns the methane hydrate deposits off the shore of New Jersey? Who owns the limestone deposits under California’s central coast (deposits that yield up some of the world’s sublime wines)? Who owns the great boreal forests of Alaska, Siberia, and Canada? Who owns the rocks of the earth? Who, indeed, owns the air? The birds of the air? The water? The oceans? Fish stocks? Who owns the whales?

 

Who owns nature?

 

And then another set of questions, about another kind of commonwealth: who owns culture? Who owns languages, science, the accumulated genius of technology? Who owns history? Who owns, in short, the human library? Who owns it, and who has the right to sell it?

 

In an empty world, these questions, or at least the ones about nature, didn’t much matter. Nature seemed inexhaustible. Still, natural philosophers, as scientists were once called, have wrestled with the issue for millennia, as have political authorities. In Roman times, the Senate put together a series of laws that classified several aspects of what came to be called “the commons” as explicitly owned by the people collectively. These res communes, common things, included water and the air, but also “bodies of water,” that is lakes, and shorelines generally. Wild animals, as opposed to domesticated ones, were included. After the Roman empire collapsed, overrun by what the Romans were pleased to call barbarians, some aspects of the res communes came into dispute — feudal lords, and then kings, claimed to control them.

National Geographic: too many sheep

The implications of a commons is that since no one owns it, anyone can use it, exploit it, and pollute it at no charge.

So where, in a well-ordered world, do private property rights stop? How best to treat the commons so it survives for the benefit of all?How best to allocate the profits that flow from what exploitation is allowed? Private property is the engine of prosperity. Common property is the backdrop before which private actors perform. Both are necessary. So an answer is critical. We have three economic sectors: the private sector, the public (or state) sector and the commons sector. Only the last has no body of law to protect it, and no accounting systems for its profits or losses.

So the question becomes: if the various natural systems of the earth, especially the air, the water, the land and its minerals, and the complex life systems they sustain, are indeed “the commons,” how do we guard against the “tragedy of the commons?” If no one owns the resource and anyone can use it, how do we protect it from depletion?

 

The tragedy of the commons as a phrase owes its origins to Garrett Hardin’s essay in Science magazine in 1968, though the notion of a social trap involving a conflict between individual interests and the common good goes back, at least, to Aristotle.

…

Hardin’s argument was widely accepted by economists and free-market enthusiasts. The solution to the dilemma, it seemed obvious, was privatization, the enclosure of the commons.

 

But it is not obvious. Hardin’s theory was the purest poppycock, and widely adopted only because it seemed to convey the essence of free market competition. It was a truly corporatist view.

The main error was to adopt a key proposition of the free market, and of Adam Smith’s, that man is a rational being who always acts in his own best interests, and then to assume that those interests automatically involved multiplication of personal assets. But what Hardin was describing was not rational behavior — it was the purest selfishness.

Enough grass

read the whole article including the original text of the Tragedy of the Commons:

The Fallacy of the Tragedy of the Commons « Center for the Advancement of the Steady State Economy.

SOPA, Internet Regulation, and the Economics of Piracy
john posted in memes, Pitchforks and Torches, repost on January 25th, 2012

An extended and intelligent discussion about the costs and benefits of going after copyright piracy. ( By a member at the Cato Institute – so Jawfish does occasionally quote right-wingers. If the right wing was as sensible as this piece, we’d do a lot more.)

• Going after piracy costs money.
• Going after piracy as outlined in SOPA/PIPA has a very negative effect on Internet freedom, costs innocent web denizens time and money, and sounds totally unconstitutional to me.
• The industry argument for the damage done by piracy is totally bogus and undocumented.

via SOPA, Internet regulation, and the economics of piracy at Ars Technica

Earlier this month, I detailed at some length why claims about the purported economic harms of piracy, offered by supporters of the Stop Online Piracy Act (SOPA) and PROTECT-IP Act (PIPA), ought to be treated with much more skepticism than they generally get from journalists and policymakers. My own view is that this ought to be rather secondary to the policy discussion: SOPA and PIPA would be ineffective mechanisms for addressing the problem, and a terrible idea for many other reasons, even if the numbers were exactly right. No matter how bad last season’s crops were, witch burnings are a poor policy response. Fortunately, legislators finally seem to be cottoning on to this: SOPA now appears to be on ice for the time being, and PIPA’s own sponsors are having second thoughts about mucking with the Internet’s Domain Name System.

That said, I remain a bit amazed that it’s become an indisputable premise in Washington that there’s an enormous piracy problem, that it’s having a devastating impact on US content industries, and that some kind of aggressive new legislation is needed tout suite to stanch the bleeding. Despite the fact that the Government Accountability Office recently concluded that it is “difficult, if not impossible, to quantify the net effect of counterfeiting and piracy on the economy as a whole,” our legislative class has somehow determined that—among all the dire challenges now facing the United States—this is an urgent priority. Obviously, there’s quite a lot of copyrighted material circulating on the Internet without authorization, and other things equal, one would like to see less of it. But does the best available evidence show that this is inflicting such catastrophic economic harm—that it is depressing so much output, and destroying so many jobs—that Congress has no option but to Do Something immediately? Bearing the GAO’s warning in mind, the data we do have doesn’t remotely seem to justify the DEFCON One rhetoric that now appears to be obligatory on the Hill.

Read whole article at  SOPA, Internet regulation, and the economics of piracy.

Obstacles Facing US Wind Energy
john posted in memes, repost, technologies, Whole Earth Database on January 25th, 2012

from:

The Oil Drum | Obstacles Facing US Wind Energy.

In the United States, we have been working on scaling up wind energy but not getting very far. In 2010, wind energy supplied only 2.3% of electricity purchased.

Such slow progress seems strange for a product that seems to have such great promise. It can reduce CO2 emissions. It doesn’t require fuel. It is at least partly US made. It seems to have promise for protecting against rising fossil fuel prices……

 

One of the big issues with wind is that hopes have been raised for its widespread use, without really working through feasibility issues. If we are already having trouble with the electrical grid not being able to accept more wind energy in popular wind-generating areas when wind energy constitutes only 2.3% of total electricity supply, then wind energy is going to be difficult to scale up quickly. The issues I point out in this article suggest that the cost problem is still large, and the fixes needed to add long-distance transmission are likely to make the cost problem even worse.

read the whole article and check the comments, which are often quite good at The Oil Drum.

Why is Finance So Complex? Part Two
john posted in memes, Pitchforks and Torches, repost on January 24th, 2012

Very long, angry, but well-reasoned smart response to smart responses to his previous article.

Another post I read today used Godzilla as a metaphor and I will too. The banking system, from your FDIC accounts to Goldman Sachs, is a kind of  roving Godzilla, sometimes fertilizing, sometimes destroying,  impervious to argument, out of control. Since Godzilla is a movie metaphor for US defeat and occupation of Japan, and the long-term results of  WWII history are starting to turn sour in Japan, I find it apt. Anyway this post and his previous one are very interesting analyses of what a rationalized “transparent” banking system, a tame Godzilla, might be.

interfluidity » Opaque and stinky logorrhea.

My previous post on opacity in finance attracted a lot of discussion, both in an excellent comment thread and throughout the blogosphere. Thanks. As usual, your comments put my drivel to shame.

I thought I’d follow up (very belatedly, i’m sorry!) with some remarks on opacity in finance. This will be long and very poorly organized, a brain dump of responses I feel I owe people so I can move onto other things. If you actually read it, I am grateful. (I am always grateful that you read my words at all!)

Anyway here goes:

• I, personally, detest opaque finance. I would prefer we eliminate whole sectors of status quo finance, replacing the existing skein of deceptive institutions with very simple arrangements that make it absolutely clear who bears what risks. Banks, money market funds, and pension funds are the first institutions we’d reform out of existence. They wouldn’t be the last. I became interested in financial systems as a large scale information system. It is with great unhappiness and reluctance that, after devoting years of my life to thinking about finance, I’ve concluded that financial systems are better characterized as large-scale disinformation systems and that disinformation is at the core of how they function, not some tumor that can be excised to restore the patient to good health.
• I am still an idealist. I think we should try to develop financial systems that are honest and transparent, that do not combine kleptocracy and effectiveness into a bundle that’s both impossible to refuse and debilitating to accept. But that is a larger and very different project from, say, increasing capital and liquidity ratios at status quo banks.
• We must give the devil her due. It pissed a lot of readers off and pisses me off too, but the argument I offered in the previous post is true. Over the broad scope of history, societies with financial systems that mobilize capital opaquely and at very large scale have completely dominated those that have relied only upon consenting risk assumption by well-informed individuals. Industrialization occurs in societies with corrupt and fragile big banks, or else in societies where the state coerces and obscures risk-bearing and reward-shifting on a large-scale, or (more usually) both. China is a great present day example. That does not mean it would be impossible to develop a set of institutions that would be both effective and transparent. But it does mean developing such a system is an ambitious and ahistorical project, not a mere matter of “fixing what’s broken”. Under present arrangements, transparency and what we perceive as effectiveness stand in opposition to one another. It is incoherent to demand transparency and expect “more” macroeconomically stimulative intermediation from our current financial system.
• A lot of responses to the previous post were of the form, “You are wrong, and like, duh! Look around! Look at where opaque finance has gotten us! No one trusts anyone, we can’t mobilize risk capital at any scale, etc. etc.” That’s all true! But it’s the exception that proves the rule…..

Read the rest at interfluidity » Opaque and stinky logorrhea.

Why is Finance So Complex? from interfluidity
john posted in memes, Pitchforks and Torches, repost on January 24th, 2012

Part One

Why Is Finance so Complex?

Why does the Godzilla of Finance roam the land bringing wealth and destruction?

The response to comments is great too.

Why is Finance so complex?

Lisa Pollack at FT Alphaville mulls a question: “Why are we so good at creating complexity in finance?” The answer she comes up with is the “Flynn Effect“, basically the idea that there is an uptrend in human intelligence. Finance, in this view, gets more complex over time because financiers get smart enough to make it so.

That’s an interesting conjecture. But I don’t think it’s right at all.

Finance has always been complex. More precisely it has always been opaque, and complexity is a means of rationalizing opacity in societies that pretend to transparency. Opacity is absolutely essential to modern finance. It is a feature not a bug until we radically change the way we mobilize economic risk-bearing. The core purpose of status quo finance is to coax people into accepting risks that they would not, if fully informed, consent to bear.

Financial systems help us overcome a collective action problem. In a world of investment projects whose costs and risks are perfectly transparent, most individuals would be frightened. Real enterprise is very risky. Further, the probability of success of any one project depends upon the degree to which other projects are simultaneously underway. A budding industrialist in an agrarian society who tries to build a car factory will fail. Her peers will be unable to supply the inputs required to make the thing work. If by some miracle she gets the factory up and running, her customer-base of low capital, low productivity farm workers will be unable to afford the end product. Successful real investment does not occur via isolated projects, but in waves, forward thrusts by cohorts of optimists, most of whom crash and burn, some of whom do great things for the world and make their investors wealthy. But the winners depend upon the existence of the losers: In a world where there was no Qwest overbuilding fiber, there would have been no Amazon losing a nickel on every sale and making it up on volume. Even in the context of an astonishing tech boom, Amazon was a pretty iffy investment in 1997. It would have been an absurd investment without the growth and momentum generated by thousands of peers, some of whom fared well but most of whom did not.

One purpose of a financial system is to ensure that we are, in general, in a high-investment dynamic rather than a low-investment stasis. In the context of an investment boom, individuals can be persuaded to take direct stakes in transparently risky projects. But absent such a boom, risk-averse individuals will rationally abstain. Each project in isolation will be deemed risky and unlikely to succeed. Savers will prefer low risk projects with modest but certain returns, like storing goods and commodities. Even taking stakes in a diversified basket of risky projects will be unattractive, unless an investor believes that many other investors will simultaneously do the same.

We might describe this as a game with two Nash Equilibria (“ROW” means “rest of world”):

If only everyone would invest, there’s a pretty good chance that we’d all be better off, on average our investments would succeed. But if an individual invests while the rest of the world does not, the expected outcome is a loss. (Colored values wearing tilde hats represent stochastic payoffs whose expected value is the number shown.) There are two equilibria, a good one in the upper left corner where everyone invests and, on average, succeeds, and a bad one in the bottom right where everybody hoards and stays poor. If everyone is pessimistic, we can get stuck in the bad equilibrium. Animal spirits are game theory.

This is a core problem that finance in general and banks in particular have evolved to solve. A banking system is a superposition of fraud and genius that interposes itself between investors and entrepreneurs. It offers an alternative to risky direct investment and low return hoarding. Banks guarantee all investors a return better than hoarding, and they offer this return unconditionally, with certainty, without regard to whether other investors buy in or not. They create a new payoff matrix that looks like this:

Under this new set of payoffs, there is only one equillibrium, the good one on the upper left. Basically, the bankers promise everyone a return of 2 if they invest, so everyone invests in the banks. Since everyone has invested, the bankers can invest in real projects at sufficient scale to generate the good expected payoff of 3. The bankers keep 1 for themselves, pay their investors the promised 2, and everyone is made better off than if the bad equilibrium had obtained. Bankers make the world a more prosperous place precisely by making promises they may be unable to keep. (They’ll be unable to honor their guarantee if they fail to raise investment in sufficient scale, or if, despite sufficient scale, projects perform more poorly than expected.)…

read the rest at interfluidity Why Is Finance so Complex?