Apologies for this Non HIT post, but these issues affect us all an post economic turmoil, its worth thinking about this. Economist who are usually champions of capitalism are also quick to point out some common weaknesses that have to be addressed.

Hirchman’s Exit vs Voice

This wonderful obituary to Albert Hirschman in the economist, summarizes his voting theory from his most famous book, “Exit, Voice and Loyalty: Responses to Decline in Firms, Organisations and States”. According to the theory, Mr Hirschman argued that people have two different ways of responding to disappointment. They can vote with their feet (exit) or stay put and complain (voice). Mr Hirschman raised some problems with the cult of exit. Sometimes, it entrenches the status quo. Dictators may rule longer if their bravest critics flee abroad (indeed, Cuba uses emigration as a safety valve). Monopolies may have an easier life if their stroppiest customers find an alternative.

So in disappointment, many give up ownership and no longer have influence to change the factors that brought about the disappointment.

Hardin’s Tragedy of the commons

In this well documented phenomenon first postulated by Garret Hardin in the journal science in 1968. Wikipedia summarizes the theory well;

“The metaphor illustrates the argument that free access and unrestricted demand for a finite resource ultimately reduces the resource through over-exploitation, temporarily or permanently. This occurs because the benefits of exploitation accrue to individuals or groups, each of whom is motivated to maximize use of the resource to the point in which they become reliant on it, while the costs of the exploitation are borne by all those to whom the resource is available (which may be a wider class of individuals than those who are exploiting it). This, in turn, causes demand for the resource to increase, which causes the problem to snowball to the point that the resource is depleted (even if it retains a capacity to recover). The rate at which depletion of the resource is realized depends primarily on three factors: the number of users wanting to consume the common in question, the consumptiveness of their uses, and the relative robustness of the common.^[18]”

In a nutshell, when a common resource has no ownership, there is little or no incentive to manage it.

Externalities

Externality as defined by Professor Jan Horst Keppler of the University Paris-Dauphine; “Externalities or external effects are goods that have an impact on welfare (positive or negative) that is not taken into account by the agent producing them” – I would have that this impact to cost or benefits are often left out in the transaction of buying and selling.

Often in a negative externality scenario, the market is unable to recognize the true cost of the good sold due to the lack of a feedback mechanism. Examples of this abound in environmental concerns – where the cost of the good does not factor in the cost of pollution or socio economic ills incurred to other anonymous stakeholders affected by this transaction.

So I’ve been thinking that the 3 issues mentioned above we see in capitalism have a common theme of a perversion of ownership. Sometimes what matters is not the same as what is valued in our selfish quest for utility and around incentives. In some parts of the world, culture plays a strong role to mitigate this. If there exist a culture of common ownership, then there will be a non monetary motivation to own and manage that which is subject to the perversion of our selfishness, apathy or greed. Another mitigating factor is information – when we truly understand true cost, or have constructs for collective ownership or a collaborative deep motivation to retain ownership despite disappointment, we can mitigate this natural inclination of the perversion of ownership. In any case, these issues inform me that there will always be a need for government and laissez faire capitalism is but a pipe dream.