Monday, August 23, 2010

Gridlock Economy: When Too Much Ownership Kills the Market (Part 2)

In the first part of my post, we have discussed the difference between the Common and Anticommon Tragedy and also some examples that may be familiar to all of us. In reality, gridlock exists and it causes major problem to the society. So the one million dollar question is: "what can we do to solve the issue?"

Step 1: Identifying Gridlocks
Certain actions can be done, but first thing first, we need to identify those gridlocks before we can solve it. Gridlock is a waste to the society simply because it causes resources to be underused. What really troubles me is the fact that gridlock is mostly hidden. Have we ever thought that the cure of cancer might be already in front of our eyes today if not because of the fight between companies having small patents over genetic samples? Or do we realize how much our economy suffers because of there are too many robber barons along the road to investment, i.e. the regulators? In most cases, the Anticommon Tragedy is a pure human tragedy made by the one and only, men.

To be honest, I am not surprised that most of us are not aware of the gridlock. Try typing Anticommon and you will see a red underline below the world. Yes, even our beloved Blogspot hasn't recognized this word. Or try the word "underuse", and you will definitely find another red underline. How can we spot these issues if our sophisticated computer doesn't even have the terms stored in its thesaurus? So, let us try to familiarize ourselves with these terms, try to understand that there is a possibility that our important resources are being underused and therefore do not produce the maximum benefit to our society.

Learning from other societies, cultures and countries might also be helpful in identifying gridlocks. You know the old saying "the grass of our neighbors always looks greener." In certain cases, the grasses are indeed greener. Learn the best from them, and ask why the same thing does not happen here? Why resources are being allocated more efficiently in some part of the world and not in other parts? Simple but true, isn't it?

Step 2: Unlocking the Grid

To unlock the grid, Heller provide 3 basic tool kits that can be used: prevention, treatment, and alternative medicine.

Prevention

Prevention involves monitoring and isolation of gridlocks. Monitoring means that we spread the information on such gridlocks to the public and the relevant authorities that might help to unlock the grid. It seems trivial but it holds a very important position, as there would be no use to identify the gridlock without having no one to tell anything about it. A good example of this monitoring is the gene patent issue. By informing the regulator on the difficulties made by so many small patents, the US regulators raised the standards for obtaining such patents with a hope that it can reduce useless small claims that prohibit development in producing the cancer cure.

Isolation of gridlocks is useful when the gridlocks have occurred already. In this case, we need to prevent the gridlocks from getting bigger while trying to find the right treatment. A good example: suppose the government issues a type of permit that causes certain natural resources to be underused by the people (say, the government issues too many permits). After identifying the gridlock, the government can isolate the problem by locking the issuance of any new permit.

Treatment

Treatment involves: (i) tune up existing laws, (ii) create assembly tools, (iii) get the label rights, and (iv) pick-up sticks. The first treatment basically deals with changing the laws to battle the gridlock. The problem with this method is that it may cause drastic changes to the society. We can go back to the patent issues as an example. We know that patent is needed to give incentives to business people to create and protect their ideas in order to gain benefit. But, we also know when there are too many patents for, gridlock may occur. To solve the issue, a radical change to the law may be needed, but reforming the law will need the agreement from all stakeholders and like or not, some deals will need to be made between the stakeholders and the law maker.

The second treatment deals with pooling rights together. Since gridlock is caused by too much fragmented ownership, pooling the rights to lesser parties seems a very good idea, such as via merger and common ownership. Of course this must be supported by the law in order to prevent the tyranny by the minorities so the gridlocks can be solved through mutual agreements.

The third treatment basically means that in order to make people aware about gridlocks, it is necessary to label the issues properly. A good example is the use of the "antitrust" term. Heller suggests that the term should be changed into "competition", because in his view, the "antitrust" term creates an idea to the society that monopoly and merger are always bad for social welfare In fact, there are cases where monopoly and merger are necessary to prevent resources from being underused.

The last treatment involves coercion and should only be used when other methods are not workable. It is basically a solution where the government wipes the existing rights and start over. Of course this means that the government must provide just compensation to the people who lost their rights. As an example: with respect to the above case of too many permits issued by the government, it is possible that the government annul the entire issued permits and start over the process. Yes there would be losses here and that's why a thorough calculation must be made before this solution can be conducted.

Alternative Medicine

Lastly we have the alternative medicine that gossip, shame and reputation method voluntary agreement, and philanthropy. Gossip, shame and reputation method talks about the social control that we do on day to day basis, mouth-to-mouth information. In practice, this method may work effectively to solve the gridlock issue without too much intervention from the Government. Many people consider their reputation as a very important issue and therefore this will affect their decision on whether becoming part of the solution or the problem within the gridlocks.

Voluntary agreement is quite clear though may be difficult to attain in the first place. After all, it is because of gridlocks that parties are having difficulties to reach a mutual agreement. Nevertheless, we have seen some examples of the actual implementation of these voluntary agreements, such as copyright pool made by singer-songwriters through a single organization in order to license copyrighted music for public performances.

The last alternative method is philanthropy which is self-explanatory. We've seen some good examples like philanthropy organization that buys patents for pooling purposes in order to ensure that those patents would be useful for the public. As the costs might be very high, such work might only be done by the Government or philanthropy organization that do not think too much about profit.

Conclusion

To sum up, we understand that in contrast to the common "common tragedy", there also exists the "anti-common tragedy" which is caused by too much fragmented ownership, either in the form of resources, assets, or even authorities. In any way, gridlock is a waste to the society since it causes resources to be underused.

Certain solutions can be made to solve the gridlock, including identifying the gridlock, ensuring that the people and the relevant authorities are aware about the gridlocks, isolating the gridlock, revamping the laws, promoting assembly of rights, establishing the correct labels, starting over the distribution of rights, using gossips and private contracts, and lastly, promoting philanthropy. That's all for the Gridlock Economy. I hope this would be useful and most of the credits should go to Michael Heller for his innovative book.

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