Forces Governing Commons
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TL;DR Free-rider problem can cause communities to destroy the resource that they depend upon. Likelihood depends on eight different forces that are at play: what kind of rewards rule violations bring, what is the cost of violation, how effective monitoring is, reward for monitoring, whether participants have significant skin in the game, whether they have similar interests, how many participants there are and whether the community has shared norms.
After understanding categories of goods, let’s discuss one tool for evaluating how well you can expect things for governing goods, common goods in this case, to work based on how the environment is set up. The tool seems intuitively to be quite generalisable to other types of goods as well.
Nature of Commons
Many things in life and society are commons (resources belonging to or affecting the whole of a community) such as clean air, fish in oceans, underwater resources, trust in society etc. Anyone can access the resources but once it is used, no one else can any more use it until it is replenished.
All commons suffer to some degree of free-rider problem. Some people do not want to participate into the creation and upkeeping of the common resource. If they cannot be excluded from use, they have no incentives to participate. When other people notice free riders, their motivation diminishes. When all choose to free-ride, the collective good starts decaying and is finally destroyed.
This is how rational people can create outcomes that are not rational from their collective viewpoint.
Power flower – forces that affect motivation to co-operate.
(Note: The analysis of commons is from Elinor Ostrom: Governing the Commons, Cambridge University Press, 1990. The diagram as such does not exist in the book. The simplification and visualisation is by yours truly.)
Some resources renew or replenish themselves whereas others can only be used one. Minerals and fossil fuels on the ground come to an end sooner or later and the mine has to be closed. Timber, fish and taxes replenish unless the overuse is too coarse and the whole resource is destroyed.
Cost of violation refers to the punishments for violating rules and requires that there is effective monitoring in place that finds enough of the violations to make it affect individual behavior.
Lack of effective monitoring and ability to administer sanctions (i.e. low cost) creates opportunity for violations.
Monitoring also has costs. Thus, building an absolute monitoring system often is too expensive. Then there are also exceptional situations like draughts or other catastrophes when relaxing or breaking the rules makes sense or is a necessity. When constructing automated, smart contract-based organisations (DAOs), they need safety valves for those exceptional situations. At the same time, safety valves present loopholes into the system.
In a self-organising common where monitoring is done by the participants, there needs also to be adequate rewards for monitoring. Otherwise people offload it to the infamous someone else.
Skin in the game can also be called long-term view or switch-over costs. For individuals that have shared past and expect to share future, it is important to maintain reputation as reliable members of the community. For example, individuals that live side by side and farm the same lot year after year. They expect their children to continue. In other words, their discount rate is low. In well working communities extensive norms have developed what is proper behaviour. Reputation for keeping promises, honest dealings and reliability is a valuable asset in a stable, well working community.
Similarity of interest If participants have differing interests, reaching consensus becomes harder. For example, if fishers in a common fishing area use quite different technologies (traditional vs. ultramodern) or if fishers from local area and fishers from far abroad share same waters, in these cases groups do not have same interests.
Shared norms are another great influence as seen from above. Religious beliefs or roots in the community can limit greatly person’s ability to act selfish.
If there is easy opportunity and huge rewards for exploitation, the temptations can overwhelm, and people stop caring about the end-results. The gains in substandard lending leading to financial crisis in 2007-8 resulted in tens (sometimes hundreds) of millions as incentive to top executives in those organisations (and great rewards for others lower in the hierarchy as well). The opioid crisis in the US killed between 1999 to 2017 about 400,000 people and made billions in profits.
Number of participants also has a big effect. It is much easier to agree when the number of participants is compacts but as the size grows, it becomes more and more difficult to reach an agreement. There are however exceptions. If the sharing can start with a small group first – say agreeing on water rights on small segment of common water canal – and the transaction costs of bringing in more members are small, the group can grow large. One can also view democracy as a mechanism of limiting the number of participants through a participatory process. In election a compact group of people are selected to figure out solutions to common questions.
Principles for Governing Commons
Ostrom also defines 8 principles for governing commons:
Define clear group boundaries.
Without clear community boundaries, the use becomes a free-for-all. This leads to overuse and collapse.Match rules governing use of common goods to local needs and conditions.
There is no one-size-fits-all approach to shared resources. Rules need to be determined according to the needs of participants and ecological limits, or they fall out of touch with people and become irrelevant.Ensure that those affected by the rules can participate in modifying the rules.
People will be more likely to follow the rules if they participate in writing and modifying them.Make sure the rule-making rights of community members are respected by outside authorities.
If community agreed rules are not recognized as legitimate within the official jurisdiction (national etc.), friction is inevitable. Without legal recognition, outside groups can subvert them through official channel and the community cannot escalate problems to higher-level authorities when internal sanctions are not enough to solve problems.Develop a system, carried out by community members, for monitoring members’ behaviour.
Once rules are established, communities need a way of checking that people are following them. Feedback is also needed for community to ensure that made decisions were solid ones.Use graduated sanctions for rule violators.
Outright banning of rule breakers tends to create resentment. Graduated systems of warnings, fines, and reputation loss are less disruptive, and keep the punishments proportional to offense.Provide accessible, low-cost means for dispute resolution.
No issue should be ignored due to the high costs associated with addressing it. Process for overcoming issues needs to be cheap and straightforward.Build responsibility for governing the common resource in nested tiers from the lowest level up to the entire interconnected system.
Some resources can be managed internally, while others call for wider regional cooperation. This leads to nested layers of decision-making.
Differences in other Classes of Goods
As you remember there are 6 asset classes in all. The other 5 have different characteristics and one would assume changes to the model are needed for optimal use.
Anti-rival assets (symbiotic and network goods) actually increase in value the more people use them. This is opposite how commons work as they get destroyed with too much use. There is a lot of experimentation and thinking in the web3 world how the governance of crowdsourced anti-rival assets should work. No one seems to have found the secret sauce so far.
Other differences relate to information access. In common fishing waters or grazing grounds all participants have easy access to the quality of the resource. There are many services that are quite opposite. Pension funds for example reveal their quality decades later with little information back to participants meanwhile. This is an area where professional organisation is needed to deal with the professional insurance organisation to ensure good quality as otherwise there is too big a information asymmetry.
Dispute limitations the power flower works surprisingly well on other classes of goods as a quick tool for understanding where problems may lie. The use may not be perfect but if it helps to understand and later come up with ideas, then it has earned its use.
We’ll delve into examples next week. Stay tuned.