Showing posts with label Economics - Gridlock. Show all posts
Showing posts with label Economics - Gridlock. Show all posts
  • 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 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 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.


    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.
  • Gridlock Economy: When Too Much Ownership Kills the Market (Part 1)

    I am always happy to find new enlightening ideas, and I found them recently in a book titled "The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives." This book made by Michael Heller, a Law Professor from Columbia Law School, introduces the concept of the tragedy of the anticommons, i.e. a condition where due to over fragmented ownership of a resource (i.e. ownership of a single resource is distributed within too many owners), such resource is highly underused to the extent that it cannot provide any benefits to its owners nor the society. It is the opposite of the tragedy of the commons ("Common Tragedy") where a resource is overused to near extinction because no one have ownership over such resource and therefore no one cares about the sustainability of such resource.

    In Part 1 of this Article, we will discuss the basic concepts of the Common Tragedy and the Anticommon Tragedy. Later in Part 2, we will discuss further issues related to Anticommon Tragedy and the proposed solution to solve such issues.

    A. The Common Tragedy: What and Why?

    First thing first, the concept of Common Tragedy is made on a solid logical foundation. Imagine if the human race never acknowledges the concept of ownership and therefore each and every man can use any resources that are visible, accessible, and usable to him. What will happen? Logically, everyone will try to exhaust such resources as soon as possible for fear of being preceded by others. There will be no incentive to conserve the resources in this case, simply because each person doesn't know whether other people will do the same. Why bother conserving if there is no mechanism to prevent other people to take the parts that are being conserved by you? As simple as that.

    A simple example to this Common Tragedy is the crisis in tuna's supply. The fact that there is no clear licensing for fishing the tunas in the open seas has caused the tunas to be over-fished by the fishermen. As there is no one to supervise such fishing activities, those fishermen simply exhausted the tunas to near extinction level. Can we stop this crisis by simply stop eating tunas? Am not sure if that will be an effective solution. So what's the proper solution for this?

    B. Solution for The Common Tragedy: Private Ownership

    Yes, the best solution for the Common Tragedy is actually private ownership. Forget the utopian world of Karl Marx! If that utopian world could ever exist in this world, our overall life would be worse than ever.

    In general, private ownership provides the best incentive to people to protect valuable resources. After all, each person will do his best to protect his own interest and will not let other people take his rights easily. Let me give you a simple example. Suppose you purchase a land in a city. Soon after you secure all necessary legal documents, you will most probably put fences and maybe even guards to protect the land from illegal trespassers. You will not let unknown people to try using the land for their own benefit. In short, you think for the best interest of yourself, and by doing so you also protect the economic value of such land.

    In this case, what would be the role of the state? The state may act as a guardian, a night watcher who will ensure that each man will play in accordance with the rule of the game.

    C. Understanding The Anticommon Tragedy

    However, while private ownership may be the best solution for preserving resources, it doesn't mean that this solution is perfect. The problem comes when there is too much ownership over a single resource. As I said before, each owner will act to his best interest and will try to maximize his benefit from his part of ownership in such resource. What would happen then? Each owner will most likely block the other owners from using the resource to ensure that they can get the maximum benefit. Sure, they can talk among themselves and reach a mutual understanding on the management of the resource, but what if the number of the owners is very big, so big that the transaction costs of doing good faith negotiations would be too expensive? Here comes the Anticommon Tragedy.

    One of the most interesting examples of Anticommon Tragedy is the problem faced by the pharmaceutical industry. I am very sad to know that the cures of some major sicknesses, such as AIDS and cancer, have not been invented yet not because our inventors are too stupid to create them, but because of a very serious dispute on intellectual property rights. There are so many patents for each individual element that is needed to make a cure and each patent holder blocks the cure inventor to use such patent without paying a very high price. As a result, the company feels that pursuing such cure becomes not viable and stop its effort to make one. In this case, the society as a whole becomes the main victim.

    Or let us see another simple example regarding a plot of land. Suppose that you enter into an agreement to purchase a land from an old landlord. However, just when you're about to close the transaction, he died suddenly. Apparently the landlord was a millionaire and had lots and lots of heirs, and you know what, that plot of land quickly falls into a dispute between heirs. In this case, you'll be trapped spending a lot of time to negotiate with each heir, finding the right price to satisfy each of them. You might end up getting nothing from this condition as you will realize it is almost impossible to satisfy all of them. In Ronald Coase's theory, the transaction costs are just too huge to follow up the transaction.

    Gridlock can also occur in regulatory agencies, that is when there are too many regulators to deal with. One major example would be our beloved country Indonesia. When an investor try to invest in Indonesia, it must deal with many authorities, each having their own jurisdiction and don't even think to see any slight evidence of good coordination between them . This situation create a high cost economy to investors. Not only that they are being confused with the number of authorities, each authority may block the license necessary to conduct the investment. Imagine if you have secured all necessary licenses, all but one, and then you realize that your whole investment fails due to that one particular problem. This type of gridlock is truly a dangerous one.

    Looking at the examples above, I am sure that you will consider the Anticommon Tragedy as a very interesting issue. Now, what can we do to solve this issue? Stay tune in the second part of this post :).

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