Wednesday, August 26, 2009

The Gridlock Book

Another book I finished recently and that I can recommend wholeheartedly is Michael Heller's The Gridlock Economy.  It's a brief meditation on the economic consequences of various forms of ownership and types of regulation, and it couldn't come at a better time, given how hysterical the ideological debate surrounding these issues has become.  Over time, we seem to have completely lost track of the fact that the reasons we have the social, legal, and economic institutions we do (or should) is because they work.  There is everything to be gained from thinking through the principals behind capitalism or communism or markets.  But in the end, our choices have to be primarily based on an empirical evaluation of whether these forms are producing what we want.  Heller's book takes a mighty step in this direction, philosophically, and then follows it up with a number of practical case studies and suggestions that put this empiricism into practice.

Let's consider private property.  There are people that see property as inherently natural and inalienable and there are others that see it all as robbery.  Heller sees it as a social technology.  A certain regime of property rights has particular consequences for how people behave.  If you want to see people behave differently, you should invent a new technology of ownership or tweak an existing one till you get what you want.  Within broad limits, we have a way to do this (called a government).  The apparatus may be broken right now, but that's a separate issue we'll come to in a moment.  Consider the wise words of Interfluidity:

The only bilateral contract is a gentleman's agreement. Binding contracts involve an implicit third party, the state which (through its courts system) stands ready to enforce the terms of private arrangements. The state is not, and cannot be totally neutral in its role as contract enforcer: Communication between contracting parties is always imperfect; the universe presents an infinite array of unforseeable possibilities; even very clear contractual terms can be illegal, repugnant, or contrary to the public interest.
... every contract is a negotiation between three parties, the two who put a signature at the bottom the document, and the state which will be called upon to give force to the arrangement when disputes arise or someone fails to perform.

Once you get past the basic philosophical admission that contracts are a three party system and that ownership will always have something to do with the state, that legal rights are fundamentally subordinate to the cooperative action they were invented to support, you can start to appreciate the cases where a given ownership system has produced terrible results.  The most famous of these is the well-known tragedy of the commons; if we all collectively own a piece of land, we are incented to take as much as we can from it and contribute as little as possible to its care.  This type of public ownership doesn't work (at least in many common cases).  Unfortunately, people mixed a healthy dose of ideology (not to mention anti-communist paranoia) with this empirical observation, and together the two hardened into a rigid doctrine recommending the privatization of everything. 

This, alas, also doesn't work in many common cases.  The bulk of Heller's book is devoted to examining such cases, which he terms tragedies of the anti-commons, and trying to uncover why they happen and how we might prevent them.  The simplest illustration of the idea is an ingenious Quaker Oats marketing scheme from the 50's called the Big Inch where they gave away deeds to square inch parcels of land in the Klondike.  The land was eventually forfeited back to the state because the freeloader brats didn't pay their real estate taxes.   This was just a funny story really, but you can imagine what would have happened if someone discovered oil or gold on it.  But there are a host of real cases where too many, rather than too few private owners caused a particular resource to go underused rather than getting overused:
  • Robber barons on the Rhine during the middle ages -- everybody sets up a toll booth and eventually nobody can afford to ship anything along the river.  Bad for commerce, and bad for the barons; all the castles now lay in ruins.
  • Patent thickets in drug development -- a scientifically viable research program might lead to the development of a drug whose path to market necessarily involves licensing the many patents that were involved in its discovery.  Negotiating a collective settlement amongst these holders, any one of which can block the entire process, is about like herding cats, so it's best not to waste your time developing this sort of drug.
  • Ownership of spectrum rights in the US -- The management of our spectrum is a disaster all the way around.  The largest owner is the military, who doesn't allow anyone to interfere with their bands despite the fact that you can't exactly run out and ask the enemy not to broadcast on that frequency.  Next come the broadcast TV networks, who got their spectrum for free and "own" it but cannot sell it.  They have no impetus to use it efficiently, or to let anybody else make use of it.  This incumbent position is what has delayed digital TV for so long, while in the meantime cell phones went digital quickly because the people who licensed that spectrum had to pay for it; they saw greater wisdom in cramming more signal through the same bandwidth.  Finally, you've got the big cell carriers who pay up front for the right to gouge us with their monopoly later, and have on occasion even bought spectrum to leave dormant, just to be able to block their competitors from improving their networks in key areas.  All of these factors contribute to the fact that the US has some of the highest cellular rates in the world, not in spite of the private ownership of spectrum, but because of it.
  • Certain real estate markets are famous for the way fragmentation of ownership makes it impossible to assemble a parcel large enough to build something useful on.  Tokyo and New York are particularly famous for this.  Heller divides the problems here into three types:
    • Block Parties -- where one small owner with a low value parcel can block a much larger construction project by refusing to sell.  Sometimes this is solved via eminent domain.  Sometimes it's just a bargaining tactic.  The point is that the problem is real, and yet we have no good way of solving it in general.  We have no simple mechanism for rejoining land split asunder, and instead just rely on ad hoc solutions that don't tend to be fair.
    • Share Croppers -- a common problem arises when family businesses or farms are divided amongst many heirs.  If just one heir wants to sell, the whole works often has to be sold because dividing the land is such a costly and difficult legal problem.  Apparently this has happened to many blacks' family farms, and is a major hurdle in using Native American land allotments now that generations of inheritance have made the pieces so tiny.
    • BANANA republics -- this stands for "build absolutely nothing anywhere near anyone" and I can tell you from first hand research it's a major source of profitability for certain companies.  Just try to get a cell tower put up or a landfill, power station, or transmission line built.  This isn't directly the result of overly fractured property ownership, but operates indirectly through the ability of many players in the legal system to block one another.  The benefits of even sensible property definitions at the physical level can be ruined by gridlock at the political level.
  • Property rights in post-communist Moscow -- apparently they decided that if a little bit of ownership was a good idea, a lot must be better, and they made the rights to buy a storefront separate from the right to use it, the right to rent it, the right to collect the rent from it, and the right to occupy it.  Needless to say storefronts stayed empty and for years everything was sold in the street.  This is another example where the divided ownership problem is not spatial but legal, but the underlying principle is the same; if the scale or type of ownership isn't adapted to the scale or type of practical use for an asset, then clear property rights can do more harm than good.   
  • Finally, he tells an interesting history of oyster farming that is too complicated to recount here.
Before you despair that we'll never get anything done again, let me point out that we can prevent anti-commons situations that lead to underuse, and in fact, Heller gives a number of historical examples where these problems were overcome.  A simple law and accompanying court ruling at the beginning of the aviation era were sufficient to guarantee planes the right to fly over your land above a certain height.  The Google book settlement may establish a legal regime sufficient to allow for all books to become searchable.  Vitamin A enhanced "Golden Rice" was brought to market by a WHO patent consortium scheme.  And folks like IBM and even Uncle Sam (with their airplane technology falling behind due to patent lawsuits after WWI) have created patent pools that aggregate rights and license them to everyone who is interested.

The overarching message of the book is simply that we need to put ideology aside go back to the basics when it comes to our regulatory principles.  The idea behind private property was that it would give everyone an incentive to use and take care of what was theirs, and that together these incentives would allow for a competition that benefited everyone.  Property, in fact, should be defined as the type of ownership and control that lead to this outcome.  The economy is dynamic though, and the type of property that we need to produce the things we want changes over time.  If Adam Smith's same logic is to apply, we have to make sure that our system of ownership and control changes along with it.  If we don't, we will all just end up stepping on one another's invisible toes.

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