Elinor Ostrom did not solve the Tragedy of the Commons
Elinor Ostrom did gain her Nobel for asking that very interesting question - if the Tragedy of the Commons is inevitable then how come we have commons that have survived? In the absence of Hardin’s only two solutions, capitalist ownership or socialist regulation that is?
The answer being that sometimes - time and place dependent - social pressure and mutual agreement can do the job.
Every Thursday at noon, outside the west door of Valencia’s cathedral, nine black-cloaked figures – one wearing a banded cap and with a ceremonial harpoon by their side – gather for their weekly meeting, as they have done for hundreds of years. This is the Tribunal de les Aigües (Tribunal of Waters) – a water court that may be the oldest institution of justice in Europe.
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The tribunal was of special interest to Elinor Ostrom, winner of the Nobel prize for economics in 2009, who considered it an ideal example of “the commons”, where communities around the world have devised rules for sustainably sharing and managing their scarce resources, from waterways to fisheries to forests. It is a direct counter to the mistaken idea of the “tragedy of the commons”: the belief that, left to our own devices, self-interest will necessarily drive us towards overusing shared resources. Examples like Valencia, as well as the water boards (waterschappen) in the Netherlands that manage canals and Bali’s subak system that has functioned to share water among rice farmers for the last millennium, reveal this to be a myth.
Ostrom’s question - the difficult part always being asking the interesting question - shows that this answer will work. Sometimes. 11 old farmers sitting outside a cathedral will work on a small and tightly knit community of farmers. Who’s cleared their section of irrigation canal, who is taking more than their fair share of water etc. But, time and place dependent:
Valencia’s water court may even hold lessons for the parched countries of the Middle East. More than a decade ago, leading Palestinian hydrologist Abdelrahman Al Tamimi suggested they should “import and adapt the model of the Tribunal of Waters … not only to resolve conflicts between farmers, but to reduce tensions between Israelis, Palestinians and Jordanians”. Without such mechanisms, he believed, there was little chance of developing the grassroots trust and dialogue to manage water scarcity effectively. “We can fight for water or cooperate for it – it depends on us,” said Tamimi. “The first step is to trust each other.” The current conflict has only heightened the need for long-term water collaboration.
The entire Jordan watershed is not, quite famously, the sort of tight knit community which can be ruled and judged by 11 old farmers. The social pressure simply isn’t there. Thus we are back to Hardin’s two possible solutions.
The very absence of the necessary community tells us that the community solution will not work. QED.
Of course, it’s possible to wonder why anyone bothers reading social science research if they’re not willing to understand the answers given in social science research.
Tim Worstall
To point out that this is a very, very, silly idea
Of course, given that it’s Robert Reich talking about economics and taxation is proof enough of that headline. But we’ve heard little whispers that some would like to think of doing this in Britain too. It’s an extremely silly idea:
If a wealth tax is not politically feasible, an alternative would be to end the “stepped-up basis” inherent tax rule that allows heirs to great fortunes to avoid paying a dime of capital gains taxes.
The step up rule is not about absolving people of capital gains taxes. It’s to make them subject to inheritance taxes.
To take a slightly stylised real world example. Jeff Bezos is, dependent upon the day and the hour, worth some $200 billion. Assume that’s all Amazon shares - it isn’t but just assume for a moment. We forget the actual number but upon incorporation of Amazon Bezos paid some $5,000 or $10,000 for his shares as his part of capitalising the company.
We can say whatever we like about the glory of capitalism in the returns available to those who enrich the rest of us or, obviously, as some do the rapine of the body economic by such concentrations of wealth.
But the step up basis. At the point of the death of Mr Bezos - long may he prosper, long in the future may that unhappy day be etc - what is the value of those Amazon shares? $5,000, the original purchase price? Or $200 billion, the current market value?
The step up basis is that death of the owner crystalises valuations to current market value. Values are stepped up from purchase to market value as the basis of evaluating the estate for inheritance tax.
Whether there should be inheritance tax or not is another matter. What the rate of such a tax should be equally so. But if there’s going to be an inheritance tax we’ve got to agree upon how we value what for the purpose of said tax. The step up basis is exactly that, market value at time of death.
Eliminating the step up means that the Bezos estate gets charged the estate tax on the $5,000. This is not a logically sound basis for such a tax.
That the inheritors don’t get charged capital gains tax upon what they inherit is a logical consequence of this. They’ve just paid 40% so the value at death is the starting point for any future tax liability.
It is, of course, possible to change this system. Perhaps no inheritance tax but CGT on assets inherited. Or the current IHT and no CGT.
Reich - and others who purport to support the abolition of the step up basis - never do seem to grasp that the point is to enable the taxation of the estate. And doing both - CGT and IHT - would have nominal rates at up around 80, 85% (they call for capital gains and income taxation to be equalised as well, so 40 to 45% plus the estate taxation of 40%) which isn’t a system that’s going to work.
”Those b’astards never pay CGT because muh step up basis” is good political rabble rousing but lousy, ignorant commentary upon either tax or economics. But, you know, Professor Reich……..
Tim Worstall
Whatever the pension taxation changes they must apply to everyone - yes, everyone
There’s much chatter about how the taxation of pensions contributions is going to changed and so on.
Rachel Reeves will be urged to raid the pension savings of up to 6m middle-class workers in plans presented by Treasury officials ahead of her first Budget.
The Chancellor is expected to consider a proposal for a flat 30pc rate of pension tax relief – meaning that higher rate payers will pay an effective 10pc tax charge on their retirement contributions for the first time.
The plan would affect up to 6m higher and additional rate taxpayers, costing the wealthiest savers around £2,600.
Well, maybe, etc. We’d remind that it’s not actually pension tax relief it’s pension tax deferral. The pensions are taxed as income on their way out of the pot in those future golden years. So taxing money that goes in and also that that comes out is pretty obviously double taxation.
However, our real insistence here would be that whatever the rules then they’ve got to apply to everyone, equally. To civil service pensions for example. To NHS doctors’ pensions - to MPs’ pensions, obviously. And do so at reasonable calculations of the pension valuation too. None of this use of varying discount rates to prove that, acshully, that £80k a year civil service pension is only worth 2 pence as a capital sum. Similarly, if teacher pensions’ employer contributions are equivalent to 23% of salary (a figure we’ve seen somewhere or other) then that 23% gets taxed just like any other pension contribution. So too those of the higher levels of the civil service - obviously.
By analogy think of the rule of law. The definition of which is that it applies to all equally. Even Cabinet Ministers (even if ex-) can get 7 years’ pokey for lying about a hotel bill. The Permanent Secretary gets his pension and his pension contributions taxed in exactly the same way as the hotel receptionist.
Quite apart from anything else we tend to think this will improvethe advice Ministers receive on the subject.
Tim Worstall
And so they prove that The Spirit Level is a crock
The originators of The Spirit Level, Wilkinson and Pickett, take to The Guardian to reveal that they were right all along:
Our landmark book revealed the cost of inequality. Fifteen years later, things have only got worse
Richard Wilkinson and Kate Pickett
We have long thought that the claim was something of a crock. Imagine our joy at the crockness being proven by Wilkinson and Pickett.
When economic inequality gets worse, so does our health and wellbeing. Inequality can affect a society’s death rates, its levels of chronic disease, and the amount of violence (including murders) it experiences. What we weren’t prepared for when we first wrote the book was how much worse things could get.
That’s the theory. The hypothesis if we are to be more accurate about it.
And our data show that even small differences in inequality matter: marginally reducing inequality can have a big impact on people’s health and wellbeing.
That’s a prediction derived from the hypothesis. Which is excellent, it’s now possible to do science. We see whether the prediction accords with reality as a test of the hypothesis. Remember, it only needs one of those ugly facts to disprove an hypothesis.
Things have got worse - that claim from the first quote. If inequality reduces from what it was in those dying days - 2009/10 - of the Brown Terror then things should get better. So, what has happened to inequality in that time period?
The Gini, the usual measure of inequality in a society, has declined from 36.6 (all individuals) in that origin year to 35.7 (2022, last year currently calculated).
We’ve had that marginal decline in inequality and yet things are still getting worse. The hypothesis is a crock, isn’t it?
Sure, sure, we all knew that anyway but it’s nice to have the proof from the horses’ mouth. No?
Tim Worstall
Add Solow to Baumol and you’ve really got something
An interesting line from Andrew Sissons about Baumol’s Cost Disease. Maybe it’s not entirely cost? One interesting part of it being this:
Baumol’s version of his “disease” actually combines two effects. The first is the famous finding, outlined above, that productivity gains in one sector lift wages in all sectors. The second, less positive part is that productivity growth will necessarily be slow or stagnant in some parts of the economy — typically the service sector. The combination of these effects, according to Baumol, is that the stagnant sector takes up a larger share of the economy over time, and that it gradually drags down overall productivity growth. Because services get more expensive, we have to spend more on them. Because they then make up a larger share of the economy, the economy gets less productive over time. Sounds bad.
And Baumol’s pessimistic theory matches the empirical data since 1967 (when he first published) pretty well. The rate of productivity growth has slowed down in advanced economies, and the service sector has grown as a share of the economy. The prices of many services have risen, while prices of many manufactures have fallen.
If you’re looking for an explanation as to why growth has slowed down in advanced economies, Baumol provides a simple, almost mechanical explanation, which presents the slowdown as inevitable. Maybe it’s Baumol’s world and we’re just living in it?
As so often we’d not insist that this is everything but we would insist that it’s some part of that everything. If productivity is more difficult to improve in services and we’ve a more service oriented economy then obviously, growth - dependent as it is upon increasing productivity - becomes slower.
We would though go on to point out one more thing. We should add Solow to Baumol:
It is a tautology that economic expansion represents the sum of two sources of growth. On one side are increases in "inputs": growth in employment, in the education level of workers, and in the stock of physical capital (machines, buildings, roads, and so on). On the other side are increases in the output per unit of input; such increases may result from better management or better economic policy, but in the long run are primarily due to increases in knowledge.
The basic idea of growth accounting is to give life to this formula by calculating explicit measures of both.
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While the growth of communist economies was the subject of innumerable alarmist books and polemical articles in the 1950s, some economists who looked seriously at the roots of that growth were putting together a picture that differed substantially from most popular assumptions. Communist growth rates were certainly impressive, but not magical. The rapid growth in output could be fully explained by rapid growth in inputs: expansion of employment, increases in education levels, and, above all, massive investment in physical capital. Once those inputs were taken into account, the growth in output was unsurprising--or, to put it differently, the big surprise about Soviet growth was that when closely examined it posed no mystery.
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How, then, have today's advanced nations been able to achieve sustained growth in per capita income over the past 150 years? The answer is that technological advances have led to a continual increase in total factor productivity a continual rise in national income for each unit of input. In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U.S. per capita income, with increased investment in capital explaining only the remaining 20 percent.
Baumol does not tell us that increasing services productivity is impossible, he just says it’s more difficult. We also have that historical evidence, via Solow, that planned economic systems do not increase productivity but market based ones do.
Ah, so therefore we need to have more - and more more - markets in services in order to be able to increase productivity in services. As Sissons points out:
The Baumol effect is like a tide that lifts all boats. It brings higher wages to everyone, sharing the benefits of productivity growth across the economy.
Improving productivity anywhere in the economy increases wages for everyone. Therefore the reason to have markets in healthcare, in trains, in education, the reason to have markets everywhere they can possibly be crammed in, is to make everyone richer by improving labour productivity.
QED.
Tim Worstall
The glory of politics and the water companies
You may have noted that we’re not wholly keen on politics as a method of running things. Here’s a good example of why:
In his first interview since taking up office, he told The Telegraph: “Every single river in England today is polluted... The public quite rightly are furious that they have to worry about letting their kids splash about in the river, for fear of what they might catch, because it’s polluted.”
Mr Reed said he will introduce a new system monitoring sewage spills, which involves independent scrutiny of the data, to stop water companies from “massaging the figures”.
Oversight of pollution doesn’t strike us as a bad idea at all.
Sewage was spilt 464,056 times last year, totalling more than 3.6 million hours, a record high since monitoring began, according to the latest data published by the Environment Agency.
Water companies are permitted to release sewage into rivers and seas during exceptional circumstances, such as extreme wet weather, to stop it backing up into people’s homes.
That’s because monitoring has hugely expanded in recent years - added to the vagaries of weather which has led to a run of those extreme circumstances. But the thing we think should be noted. As far as anyone knows the situation in Scotland is worse, far worse. But the monitoring is far - far - less intense. And as far as it is possible to see the state owned and run Scottish Water is not to be subject to this greater oversight of pollution issues.
The Bill, which will be brought to Parliament in September with a view to getting it on the statute books by Christmas, will also require water companies to install “real-time monitors” at every sewage outlet, with data that can be independently scrutinised by water regulators.
England is close to this anyway. Scotland is nowhere near it. As far as it is possible to see this bill will apply only to England.
Mr Reed said he will introduce further laws aimed at “fundamentally transforming” the water industry.
This will include setting up a “partnership” between the Government and water sector aimed at raising billions of pounds of private sector investment and encouraging water companies to make long-term plans for investment in their infrastructure.
We already have this. OfWat already determines allowable investment levels in the water companies. One of the reasons they don’t invest more is because OfWat won’t let them.
Finally:
“When I was younger, we’d go to the beach and I’d go in the sea and no one worried about it,” Steve Reed recalls. “We’d go to a lake somewhere and I’d go swimming. No one had to think about it twice – you just assumed the water was clean enough to go in and it was.”
He went on to describe how this care-free approach is a far cry from the attitude of families in modern-day Britain.
“Today parents worry about letting their kids in the water for fear of what they might catch. I want to get back to a position where you don’t have to think about that, you just know that the water is clean,” he told The Telegraph.
The water is hugely, vastly, cleaner than it used to be.
As we say, we’re not great fans of politics as a way of running things. For all of the proposals make perfect sense in that political sense. They’re all also close to or over the nonsense line in a real sense. The lack of investment is because the regulator won’t allow it, the water is cleaner than it’s been since the 18th century - and probably the 16th - and the biggest polluter is the state owned company that isn’t subject to either the bill or the increased monitoring.
Lots of action and little to nothing useful being done - you know, politics?
Tim Worstall
We really don’t think this works as a plan
Colin Hines tells The Guardian how it all should work:
Labour could achieve this by redefining growth as the increase in economic activity directed towards rebuilding public services and turbo-charging a green transition in every constituency. This must include retention and recruitment in these sectors through adequate pay levels, and in the process also boosting the businesses connected with them.
We’ll all get rich by building each others’ windmills. At good union rates too.
We think that lacks a certain something as a plan. Quite apart from that little redefinition of growth as being whatever it is that Colin Hines wants rather than what everyone else wants. That little redefinition being a significant logical problem.
There’s a reason we use “at market prices” in our calculations - definition even - of GDP and therefore economic wealth and or growth. For market prices are the best guide we’ve got to how people value the output, the production, from our economic engine. The entire aim is, after all, to increase the self-perceived well being of the populace. We thus have to measure how well we’re doing by using some measure of how well off the populace think they’re being made. The value of production, of their consumption, that is.
Change that valuation to whatever it is that Colin Hines thinks is worthwhile and we end up with an economy that makes Colin Hines rich - he’s getting what he wants - but that might not quite coincide with what the other 66,999,999 people in the country thinks makes them richer. That being, obviously, why we use market prices as our best attempt at an objective valuation of what the populace desires.
Tim Worstall
Mission critical plans with strict conditionality
A useful example of why direction from the top does not work:
It is the latest sign of a wobble over hydrogen, a so-called superfuel that has been championed as a solution to decarbonise everything from transport and heavy industry to home heating and power generation.
Across the West, politicians have pledged to meet ambitious climate targets partly through developing different sources of the fuel, such as “blue” hydrogen made from natural gas, and “green” hydrogen derived through electrolysis of water.
Collectively, they have pledged to produce millions of tonnes of hydrogen in the coming decades – despite there being no proven path to doing so commercially.
If it were possible to produce green hydrogen in volume then pipe it to every house we’d indeed have a glorious solution to climate change. Even better if we could do so economically. That’s proving between hard and impossible. The big problem is not, in fact, in the creation, it’s in the storage and transport.
Well, OK. But politics - in the grip of those mission critical with strict conditionality plans - has demanded that it be done at vast cost. Which just isn’t how technological advance happens.
The envelope of what can be done expands as technology advances - or changes if you prefer. What people want done also changes according to knowledge, fashion and sheer obstinacy. The trick is in matching what can be done with what people want done. This means constant and continual experiment.
That is, not some baby-kisser deciding what will be done, but that mess of markets of everyone trying everything until we see what works.
Now, we at times have praised the idea of green hydrogen. Largely because of some actual work in the field, one of us has worked at the, ahahaha, coal face. We as a result think it’s still a pretty neat idea. But not in the manner that politics has decided it should be dealt with. Rather, hydrogen might - note the might - be useful as a local and medium term (so, days to weeks) storage system. Electrolysis to storage to fuel cell. Akin to batteries that is. Equally, once we have green hydrogen to Fischer Tropsch it up to such things as jet fuel could make sense. This is not, really not, the same as thinking that we can pipe H2 to every house in the country to run gas stoves or water boilers.
But we also have the necessary humility here. Which is to agree that while it’s all a very neat idea we do require proof of that contention. The only way we’ll gain that proof is it everyone tries everything then we see what works and do more of it.
Markets that is. Not Ministers, bureaucrats or committees demanding vast industrial combines based on a technology that no one knows will work or not.
We’re very sceptical of political ability to do anything. But especially so of the ability to decide upon technology. As here, the system always does seem to plump for what might not, in fact, be possible at all. Whereas the correct idea is to find out what is possible and economic - at which point, of course, no urging, forcing nor subsidy is required as that proof of what is possible and economic is all that is required for general adoption.
That logic is a fundamental problem with the very idea of politics guiding all. That’s before we get to the problem of the plans being pulled from fundaments.
Tim Worstall
We’re really very sure that the point is being missed here
The first point being missed here is that this is theft:
Landowners will receive less in compensation when they are forced to give up land for house building, under a tough new Planning and Infrastructure Bill.
As part of its plan to “get Britain building”, Labour will toughen up the rules around compulsory purchase orders.
It will mean that the amount of compensation paid to landowners will be “fair but not excessive”.
We agree that we are projecting a little here. But there’s long been muttering that compulsory purchase should be at current permitted use prices, not potential permitted use prices. This is, as we say, theft.
For the current market price of a piece of land is both current permitted use and also some element of potential permitted uses. Some estimation of the value if permits were changed times the perceived probability of those permits changing. Options have value - there are vast financial markets worldwide that prove that contention - therefore to pay only current permit value without that potential is theft.
But horrific though theft by the government is this is still missing the point. For what they want to stop having to pay is that uplift in value from gaining planning permission. Which is that missing the point entirely. We all want a system where there is no uplift in value from planning permission. We want so much planning granted that there is no scarcity value to gaining planning. So, wibbles about how to tax - or how not to pay for - the very thing we want to abolish in the first place is to very much miss that point.
Increase the supply of planning so that planning has no value. In short, abolish the Town and Country Planning Act 1947 and successors. Blow it up, proper blow up - kablooie.
Tim Worstall
We’re sure someone promised us joined up government at one time
We also guess that hasn’t arrived as yet.
"I am determined to create wealth for people up and down the country. It is the only way our country can progress, and my government is focused on supporting that aspiration."
So says Sir Keir and jolly good, excellent in fact.
Therefore, and obviously, we’re going to go about increasing the incentives to do the hard work to create wealth. Lower corporation tax, reduce inheritance tax, cut capital gains tax, lower the rate of income taxation and so on. For if we desire people to put in the hard work to create wealth then we would want to increase the incentives to do that hard work then - allow people to keep more of the wealth they create.
We are, aren’t we?
We’re not?
So that Blessed Day of joined up government has not, as yet, arrived then, eh?
Tim Worstall