Lecture 10: The Information Problem of Collective Action

Introduction

Collective Decision-Making: Exploring how a collective is organized and run without price signals.
Contrast with Free Enterprise: In free enterprise, prices coordinate action. In a collective, decisions are made top-down.

Concept Origin: Introduced by William Forster Lloyd in 1832.
Commons vs. Private Property:
- Commons: Land owned by everyone, leading to puny cattle due to overgrazing.
- Private Property: Enclosures are fenced private lands leading to better land management.
Tragedy Defined: Shared resources are overused, leading to depletion and waste, as individuals act in self-interest.

American Frontier:
- Federal government owned land and bison.
- Bison hunting led to near extinction due to the tragedy of the commons.
- Contrast with private cattle, which are sustainably managed.
Fishing and Oceans:
- Overfishing due to lack of ownership leads to depletion.
- Quotas introduced to manage fish stocks sustainably.

Scarcity in Collectives: Resources are limited even in a collectively owned system.
Rationing: Needs a mechanism, whether by price or decree.
Example of Bicycles: Shared bicycles still require rationing due to limited availability.

Not All Resources Shareable: Some resources, like food, are depleted on use.
Efficiency and Preferences:
- Equal distribution can be inefficient (e.g., allergies, differing preferences).
- Can individuals trade resources?

Information Problem:
- Absence of prices makes it hard to know what to produce and how much.
- "Shadow prices" in socialist economies attempt to simulate market signals.
Socialist Calculation Debate:
- Ludwig von Mises vs. Lerner: Debate on whether central planning can match market efficiency.
Challenges of Coordination:
- Gathering and sharing information across sectors without prices.
- Historical failures: Soviet Union, Maoist China.

Collapse of Centrally Planned Economies:
- People’s needs and wants unmet due to central planning inefficiencies.
- Transition to mixed economies observed in China and Russia.
Lesson: Centralized systems struggle with the complexity and dynamic nature of preferences, information, and scarcity, leading to inefficiency and eventual reform towards market-oriented systems.