all right so you've decided to join your collective that's step one perhaps step two is how is this collective going to be run so we have lecture 10 here the information problem of collective action as a quick rewind over in the land of free enterprise prices uh coordinated action within an economy people responded to price changes it would conserve or produce more depending upon price signals that were sent to try to meet people's needs and desires but here we're going to look at a system where prices don't exist we're going to live in a system of top down whoever is the head of the collective is going to make some decisions for the collective or on behalf the collective how are they going to know what decisions to make all right so we're going to start here with a long-standing problem it was first recognized at least in literature in 1832 by a gentleman named william forster lloyd because he looked around the world uh and said why are the cattle uncommon on a common so puny and stunted what the heck's the common well back under the english system some land was privately owned and some land was owned by everyone land owned by everyone was called a common and so if you owned cattle or sheep you could put it out onto the commons to graze so if you didn't have land yourself it didn't prevent you from being a sheep herder or a rancher you just grazed on the public domain and so lloyd is looking at the system and asks hey i wonder why these cattle are so puny uh when they're trying to uh feed off of the uh common the uh grass that's uh owned by everyone when uh on the same same time uh privately uh uh grazed animals are uh plump and juicy and uh sell for a lot of money he looks at the state of the common itself and says hey why is this why is it not in good shape uh and why are why are uh the land management policies so different for a common uh property than it did than they are for uh private property so private property is what an enclosure was when someone put up fences to take land that was formerly commonly uh owned property and claiming it for themselves that was called an enclosure so what he did is identify something that's now called the tragedy of the commons where shared resource systems uh amongst individuals they all have access to the same resource allowing them to act in their own self-interest but they they behave in a way doing so that actually destroys the benefit of having a common resource as opposed to engaging in actions that are good for the community or the collective and it's going to happen time after time after time if you allow individuals to make choices with the use of commonly owned property and so it works through some examples here showing the tragedy of the comments all right so let's rewind the american frontier after the declaration of independence and the subsequent american revolution the signing of the u.s constitution a country known as the united states of america uh through some you know purchases sometimes with a purchase louisiana purchase from france they purchased land from russia in in alaska for instance so they have some land the federal government owns a lot of land at least they've laid claim to a lot of land there's still maybe some disputes between some native american tribes and the u.s government over who owns that land but for the sake of argument the federal government of the united states is laying claim to this land meaning there are not private owners of this land in the united states at this point the government owns land in fact to this day the government us government is the largest land owner in the united states so they've got all this land and on this land are a lot of things i mean trees and bison ice and these buffalo are running around on the plains and they're in great supply so if the federal government owns the land the federal government owns the bison and here so we've got this who's the government well the government of the people by the people for the people we own the land and we own the bison now if we own the bison the primary way you could drive value from a bison is by killing it because if you killed it you got to skin it so you got to use its hide and you could eat its meat for the record i'm quite fond of bison burgers uh leaner than uh leaner than beef uh but still pretty pretty tasty all right so maybe you want to make yourself some bison burgers and you wanted a nice uh warm coat and so you kill a bison that's how you benefit and you say well all right they're all of our bison so i benefit from this existence of the bison by by killing it um if i don't kill it i get no benefit from it someone else is going to kill it they're the ones who will get access to the burgers they're the ones who will get to wear the new coat and keep them warm so there's a sense in which if i'm going to reap these benefits i need me to get to it i need to go uh uh hunting now before the bison are gone that's exactly what happened bison which once were plentiful on the range fell victim to the tragedy of the commons people uh went out and shot uh bison in large quantities uh because you could only benefit by killing the bison and you could take the you could skin it they were killing bison so quickly they didn't even bother to use all the meat uh so they were wasting the bison this is what often happens when resources are commonly owned which leads to large amounts of waste bison were hunted really to the brink of extinction they were almost completely gone we got down to a couple hundred uh in the united states you think to yourself but we we kill way more beef cattle in a year than we are have ever killed uh bison uh and yet we're not gonna run out of beef cattle anytime soon what's up with this well it's a different economic system under beef cattle uh if you uh own your own calf and raise your calf and feed your calf and graze your calf on your land you can sell your cap and you can make money and you're probably going to breed these animals over time to make sure that you reap future benefits you engage in animal husbandry because you don't have an incentive to you put your brand on your cattle and no one else can come take your cattle no one else can derive a benefit from this cattle by merely coming in and killing it it's your cattle so you have an incentive to use it in a sustainable manner it's not in your economic interest to deplete your cattle um you might get paid a lot up front but it means you can't breed the animals into the future you will lower your long-term expected income um let's do another example let's look at the seas let's just say well everyone owns the ocean nobody can own the ocean and so nobody can own the fish in the ocean that's a recipe for disaster because then you tell people hey if you're a fisherman the way you get benefits from a fish is by catching it and sure you could eat it yourself or you could sell it to other people so whether you're a fisherman or fisherwoman um you your incentives go catch fish now now problem is that's everyone else's incentive is to go catch fish now and so they're going to deplete the fish and catch fish in an unsustainable rate not allowing the fish to respawn and create future fish now if you had a property right over the fish then it would not be in your incentive to run through the fish and prevent them from breeding because you caught all the fish this year well this is an active problem the world is currently facing if we act as if nobody owns the oceans no one has property rights to these fish and anybody can catch fish anytime they want you're going to over fish the oceans and we have been overfishing uh the oceans so governments have tried to respond and in a sense fencing in you know offense analogy is going to be a little hard here in an ocean but defense in the ocean commons by selling private property rights to fishing quotas where the government says yes you can go catch fish but we're going to limit the number of fish you can bring in in any given year there is a quota for instance on alaskan king crabs and you can only catch so many if you're a good fisherman and could catch more in a season doesn't matter once you hit your quota you have to stop why is that the case you might say but no these are this is commonly owned property well no here's rule number one in commonly owned property we're still going to have to put restrictions on the use of commonly owned property otherwise you're going to fall victim to the tragedy of the commons and all these otherwise renewable resources will not be renewable and so the future generations won't be benefiting so here's what we have already there has to be some type of rationing mechanism many who are concerned with free enterprise and don't like it as a system heat the fact that prices ration goods and services oh that price is too high it's causing me to not buy the good or service i'm choosing to have to ration in response to that price signal and so they say i don't want to ration i want everything i want all my needs and wants met this very second and rationing is bogus and they say well let's move to a a commonly owned property system because then i can have all my needs and wants met well no moving to a commonly owned uh system does not get rid of the idea of scarcity there's still a limited number of resources available to the collective at any given point in time and you would need to have some type of system to make sure that those that are sustainable are sustainably used and so rationing will be done by edict by quota by government decree as opposed to by the price system but make no mistake rationing has to take place either way just because we own things collectively does not mean there's an infinite supply of any of it imagine if we have all property held in common and now let's think about bicycles so let's say that there are 10 people for each commonly owned bicycle all right great i have access to a bicycle i am an owner part owner of this capital known as a bicycle okay there's still only one bicycle so even if you're an equal owner with nine other people in that bicycle that's fine yeah you're part owner of a bicycle how do you know who gets to ride it at any given point in time the bicycles are still a scarce resource more people want access to that bicycle than there are bicycles so how do you determine who gets the bicycle which hour of the day for how long which day of the week do you work on our schedule you can have the bicycle between midnight and one each day if that's what you want i mean if that's the uh the lottery system and you just get assigned 12 to one uh in the morning every day that's when you get the bicycle ouch or maybe if it's 10 people sharing the bicycle you can get two a little over two hours maybe two and a half hours a day your time is between midnight and 2 30 in the morning you have access to the bicycle is that as good as having your two hours from eight to ten thirty so you can get to work or from eight to nine and then in the afternoon during rush hour uh five to six that seems to be like the most viable time to own the bicycle you actually have to use it to get somewhere well shoot just because the bicycle is commonly owned doesn't mean we have to solve the rationing problem or the scarcity problem we still have to figure out a way to tell people when they can't have access to these resources when they cannot have access to these resources just flipping a switch saying we own everything commonly does not mean all your needs and wants will in fact be met scarcity still exists now if we're trying to figure out and set rules for who gets the bicycle when how would you construct a set of rules that are well fair is fairness what you're going for you want the lottery system where you can have a bicycle for an hour at a time and we're going to just draw lots to see who gets it when are we gonna allow you to trade which hour you got in case someone really did want it between midnight and one in the morning and you didn't are you allowed to trade with them or do they have to stick with what's assigned um how do you know who needs the bicycle most maybe you'd like to be able to ride it to work but you live two blocks away from work and someone else lives five miles away from work and if they don't have a bicycle to get to work they have to to walk there well who need do you base do it based on need you base it on where the bicycle would be best used uh who would get the most bang for their buck for the bicycle so everyone has to have equal access to the bicycle there are a lot of rationing questions that need to be answered and a very practical sense if we're all going to own scarce resources how do you actually divvy these resources up it's not so simple as to say everyone has equal access to the bicycle is it first come first serve is it uh uh again a system of assigned times um not always straightforward uh a second problem once you figure out how to share some stuff is the fact that not everything can be shared there are things that get depleted with their use i always find it interesting to think that uh people use the phrase oh i'm gonna share food with you um food is one of those things you don't really share if i eat the burger you can't eat it now i'm not saying i can't cut my burger in half i eat half the burger and you eat half the burger but we haven't shared a burger we've each claimed a property right to half of a burger i didn't share my half a burger i hate my half you ate your half um you you this idea of eating it in tandem is a little just hard from a biological uh sense so uh sharing access to food is is a little different you're going to be depleting the food if i eat it you don't get to eat it oh so there has to be some type of rationing mechanism for these goods you know sometimes there's a finite number of goods to go around and while they'll still exist we have to figure out who gets it when and other resources that will actually be depleted with use energy food um who gets who gets these uh do you hand them out in equal amounts i mean one of the additional problems let's say we're talking about food you say well we'll just uh we'll just add up all the food we've produced um you know divide it out by the number of people we have so um just take everything and divide it by 100 and just hand it out everyone gets to equal the same food basket uh you know that fruit basket's made up of you know some number of bananas and avocados and cucumbers and pickled beets and well you don't grow a pickle you grow beets we'll put beets in there so we're all going to give you just an equal share of every product food product that exists is that efficient i mean what if you get food in there that you're allergic to so if i get an onion in my basket you could say i'm treated equally than everyone else except that i'm allergic to onions so that's not actually good for me you're putting poison in my my basket but if you don't give me an onion then you're robbing me for my equal share of this thing called food and so food is all not the same food they're different types of food there are different qualities of food even if you had 100 bananas some are browner than others some are riper than others how do you div how do you divvy it up equally so that everyone has the equal ripeness of each fruit or vegetable what if you don't want to eat vegetables all you want to eat are carbs or is there a way to sign up in the system where you are only delivered carbs in your equal food basket but then how would they be equal baskets are you allowed to trade the food in your basket when the government hands you your basket of equal stuff than everyone else is that allowed in a system of free enterprise could you sell uh the onions that you didn't want or could i sell my onions then all of a sudden it's a free enterprise system it's not a system of uh government top down control do you have the property right to the food in your basket all right well shoot there has to be some type of mechanism to engage in this trade of potential food or resources how do we organize these resources so that they go to their highest need highest want if there are no prices around how are people going to express their preferences hey i don't like beets i don't want them in my basket how do you let that information be known so when in a very practical sense countries like the soviet union decided to go down the central planning uh line of thinking here so they created a communist system that said the government will make decisions on what to produce how to produce and who gets stuff they thought well we'll just do everything by decree we'll we will have a group of people sit around and we'll determine uh hey how much steel do we want to produce this year hey bob uh how much deal we're going to produce this year and bob will come up with some number like all right bob says it's the number produced all right how much rubber are we going to produce and put in a rubber number you sit around you know imagine some smoke filled uh room around the table hey uh how many bananas we growing this year that's so a target for bananas and we'll move resources around to figure out how many bananas and they they set a shopping list as it were and then once you figure out what they wanted for the year they determine what resources they have to try to make that happen so if we're going to produce this much steel we need this many workers over in steel uh plants this year we need this many people uh going picking bananas and kind of work backwards on the system um well how do you know uh if you know for instance factory a needs more rubber to to uh to engage in the production quotas that you've assigned them uh and factory b needs more iron and turns out each factory has a surplus of what the other one has how do you know how much rubber should be traded for a bar of iron i mean there aren't prices out there all this is government just dictating here and there and in a practical sense these economies found that coordination between individual actors be they companies be they individuals being different government agencies no one really knew how to assess how much of one thing was worth something else nothing's got a price on it there are no prices that are determined between supply and demand in a marketplace so nobody knows what anything is worth relative to people's preferences and so socialist economies found this actually to be problematic and invented their own prices known as shadow prices these are not prices determined by supply and demand they were prices still put on things arbitrarily by government officials they would look and see if there were shortages of things in which case they'd raised their price if there were surpluses of things they would lower prices on them prices in terms of how much of that product could be traded for another product she had to have government officials constantly keep an eye on shortages and surpluses and trying to adjust these shadow prices so that you don't end up with producing too much you know steel that's just sitting there not used for anything or pretty gay i produce rubber and it's sitting in a pile somewhere so you've got to figure out some type of mechanism to coordinate economic activity the information still has to be collected and disseminated we need diverse actors to know have information regarding just uh which resources are over currently oversupplied which are under supplied which products people want to buy which prod or have access to which they don't actually want to have access to what's the what's the produce uh point of producing uh an automobile that has a very low reliability and that people don't actually want well we met our quota i did my job the government said produce this thing called car and we produced a thing called car it's not the color that people want it's not reliability that people want but hey i did my job i produced something called car that's all they said i had to do i therefore i'm not going to get sent to the gulag to be worked to death in prison george bernard shaw famer famous uh uh writer one and thinker uh once said that the problem with socialism is that it takes too many evenings what the heck did he mean by that it takes too many evenings there's a big information problem uh with socialism that you take for granted in a market-based economy in a market-based economy there are prices and these prices as we said change on a daily basis for many products based on signals that individual consumers and suppliers are sending in the system so if lots of consumers decide all of a sudden they want blueberries the price of blueberries goes up that sends a signal to others hey wait a second if you don't really love blueberries we're going to make it really expensive on you to buy these blueberries so you might give it some second thought you should probably be conserving blueberries if you don't really like them sends a signal to blueberry growers hey look at what the profits over here if you supply more blueberries to the market we'll make you wealthy those signals work to clear the market in blueberries people want more blueberries we're now incentivizing more people to grow blueberries and the blueberry demand is is met and people are happy but in a system where there are not prices there are not real prices we have to have these government officials going around and making prices up and that's what takes time in george bernard shaw's world it takes up too many evenings you're caught you have millions of prices to set you imagine the top economic price setting committee in the soviet union in charge of setting millions with an m prices every day how do you set millions of prices in a changing environment where people's tastes and preferences change where scarcity changes maybe some weather event reduces the amount of wheat they're able to produce this year you got to be on top of that you've got to be collecting your data how are you going to go in and dictate which the new price what the new prices should be how are you making sure that that price is the right price today how do you know how much wheat is supposed to be traded for iron ore it's complicated it's uh it's in a sense trying to do a complicated math problem uh without a calculator you got to use the pencil all the time you're actively ignoring information in the market by not allowing real prices to signal uh information between buyers and sellers so this process of gathering information um it's time consuming but how else do you make a rational informed decision that doesn't waste resources that actually produce products produces products that people want uh uh actually made and to the quality that they would like made well this was a chief intellectual argument back in the 1920s for in 1930s about why central planning and communism and socialism would or would not work it's called the socialist calcul calculation debate uh on the one hand you had an economist ludwig von mises who is from austria arguing this is just too much information you'll never be able to centrally plan because uh you're you're never going to be able to know what people's personal uh preferences are people's personal preferences change on a daily basis you'll never be able to gather that information in absence of prices how will they ever be able to transmit that knowledge to you how will you know what they want how do you know if there's a shortage or weather event in one area of the country there's no price signals to tell you uh and so there's just going to be too much information to try to come up with for any one individual to make a decision that lasts very long in terms of its relevance and professor lerner on the other hand he was over in poland was arguing no we we can do enough advanced math uh you know that we could figure this out it's just a dynamic programming model uh we'll get to some big mathematicians working on this and we'll figure out exactly scientifically what needs to be produced uh who's going to produce it and who gets the stuff it's nothing more than a big math complicated math problem you said we'll get it figured out so there's an academic debate on whether you could even get this stuff figured out uh or not uh well let's think about how this uh might work on the information gathering all right so absent price signals how do you know what people want i mean again if you it's pretty easy to know what people want going out looking at prices uh if prices are high on blueberries people are pretty good at odds people want these blueberries certainly relative they want them relative to the number of blueberries that are out there but if there are no prices how do you know what people wanted you're gonna send them surveys hey every day you need to you know when you wake up have your cup of coffee next thing before you go to work take surveys tell us everything you want to buy today well you need a little longer lag in the process tell us everything you want to buy three weeks from now so three weeks from monday what are you buying let us know so we can make sure we produce it um well do you know what you want three weeks three months from now i mean have you figured it out yet you don't have to in a market economy but in a planning economy you got to get it planned to get there so how do you get that information are you asking people constantly to fill out surveys hey what do you want a week from tuesday what do you want 27 mondays from now what uh how how how do you get the information or or maybe you just said we don't care what people want we know what people want we know what's best for people we're going to create housing units just this big apartment condo complexes we're going to assign you an apartment that looks like everyone else's apartment we're not going to give you a thermostat we know what the ideal temperature is we will have a central heating pipe that goes through and heats to the level of heat or cooling that we think is appropriate that's not made up that's how my colleague who grew up in ukraine under the former soviet union lived he his mom and his sister all lived in an apartment assigned by the government in a row of apartments in a big apartment building just like everyone else's apartment no thermostats none of these choices were left to you nor did they really care what you wanted they had a one size fits all model we have something called apartment we have something called heat pipe we determine uh what's best for you so maybe this process is in fact easier if we don't care what your preferences are or care what your needs and wants are we'll just tell you what's good for you and then we can have a one-size-fits-all policy on what to produce how to produce and who gets it if you were interested in people's preferences not only is it difficult to know their preferences apps and prices but it's difficult to know the intensity of their preferences how do i know intensity or preference in a market well in a free enterprise system i can say i can test a preference by saying i'm going to put a price a quarter blueberries at three bucks and if so i'll walk into the supermarket i'll see oh quarter blueberries is three dollars yeah i like blueberries it's worth it to me to pay three dollars i buy the my blueberries next week i roll in same quarter blueberries is ten dollars i say oh i like blueberries but i don't like them ten dollars worth well now i have just revealed to society my preference my intensity of preference on blueberries my intensity and preference is at we know what three dollars or i like them at ten dollars i don't like them um so somewhere in between uh is my is the price a maximum price i'm willing to pay for blueberries some information otherwise if you don't have a price system how do you know what that information is how do you know what consumers want how do you know when their preferences change yeah i wanted blueberries yesterday but i don't feel like them today how is a central planner supposed to get that information outside of living inside your brain tracking all of your steps forever all the places your eyes go to seek out [Music] information unless they're inside you how how do they know what you want in a market system you reveal your own preferences by your actions you look at prices you respond to prices you make choices and that sends signals to everyone else through the price system in a command economy in a collectivist central planning type of economy there's no way for you uh to have a feedback mechanism where you are indicating the strength of your preferences and what those preferences are and how they're changing to the powers that be what about the information sharing so there's the collecting side of information are we sending out surveys every day are people just clicking on uh you know big government-run computer systems say hey this is what i want but how do we share those signals again between apps and prices how do you know which in a scarce amount of uh natural gas or oil how do you know which uh factory is supposed to get that oil today i mean everyone's got targets this is a target this company's supposed to be producing automobiles this one's supposed to be producing hammocks how do you know who gets the scarce resources doing actually engage in the production today how do you transmit information between people and industries how do you determine what to produce how what to produce how to produce and who gets it how do you even come up with those decisions is it just a random small group of people making whimsical decisions oh i feel like uh automobiles or what we should produce this year as people starve to death i mean that is one of the problems with the the system if information is hard to gather and hard to share how do you know even if people are starving to death uh this was a great problem in uh soviet russia where millions did starve to death millions with an m of people starved to death in maoist china you could ask yourself well was this what the government wanted did the government of the ussr of china did they want to starve millions of people and maybe the answer is yes or you could say well they didn't want to starve the people they just didn't know any better they had trouble coordinating and communicating information between people in absence of prices and therefore the result was we didn't grow enough food and millions of people starved to death now uh there is some equality of outcome and starving to death if you starve to death and i started death that is an equal outcome so if equal outcome is all you're looking for then maybe the socialist system gave us exactly what we wanted everyone's dead equally in the end how would you uh express your preferences on product differentiation or would you say that this is a beef you have with a free enterprise system the people like product differentiation and that's just wasteful people shouldn't want to drive different colored cars it'd be much cheaper if everyone drove the same color car it'd be a cheaper mass production of these cars for that matter isn't it wasteful to have different models of cars if we just had something called car and with one color and one make and one model it would in fact be cheaper to produce said thing called car so maybe are we wasting resources in society by individuals saying no but i don't want to wear the same clothes as everyone else i don't want to drive the same car live in the same apartment in maui china you didn't have choices over clothing and colors of clothing everyone wore the same colors and same type of clothing it was cheaper to produce and so how dare you want something different that's wasting resources you can obviously see there's there's a clash here between individual freedom individual choices individual preferences and collective preferences collective decisions the desire for everyone to be exactly the same same haircut same clothes same house same car anytime you read a dysutopian novel or watching this utopian movie they're often filled with these images of people looking and dressing having to act like the same that they are the same that's the how most of these uh books are are framed well where are they getting this from because that's the ideology that oppo is opposed to individuals making decisions for themselves either it's moral for you to be a unique individual and pursue your own needs wants desires and interests and preferences or it's immoral and we should all be just submitting our will and desire to a centralized authority who knows what's best for us we can all wear the same pair of shoes for instance i was in a prague a few years ago with my family and prague used to be behind the iron curtain so they were ruled by a communist system a company's economic system and in that system uh people in prague could only buy one type of tennis shoes there weren't multiple brands there's not nike and reebok and whoever else there was just one and only shoe brand so everyone wore the same type of shoes now again so that that pair of shoes may feel good to some people it may not feel good to others but you didn't have a choice there's only one type of shoe when we were there they were still selling this type of shoe not because that was the only shoe available now all kinds of shoes were available but some people still had nostalgia for the good old days when everyone wore this one type of shoe and no one had a choice uh well um so maybe some of you think this is a great system hey everyone's exactly the same we're going to all look alike dress alike live alike wear the same type of shoes we will conform and have a quality of outcome here's the thing um the soviet economy stopped being a communist economy and you say well why did that happen did people because this was not some invasion the u.s didn't invade western europe not invade the soviet union why did he give up on this idea of socialism and communism well it's because their own people got tired of their needs and wants not being met people saw that in other parts of the world in western europe and united states and japan for instance that individuals got to express their needs and wants and desires and everyone's needs wants and desires are a little bit different i might i might like schnitzel you might not well how do you know how much schnitzel the government should produce then if you get schnitzel in your government uh food basket well aren't you thinking that's a waste of resources you would have rather had pie you wanted a second apple pie instead and if you had a choice you had a second apple pie and left the schnitzel out people got tired of this and saying my but i don't have what i want my life is not being lived to its fullest i'm not allowed to make decisions that are in my own best interest central planners either didn't know what people wanted or simply didn't care what they wanted it's just too complicated to figure it out and people got tired of that so um the goal of producers kept being to not get into trouble hey as long as i fulfill whatever government quota they said and it can't be sent to the gulag so if they say produce a certain amount of nails we'll just produce one really big nail that's really heavy and we met our quota it was like it was a popular cartoon in the former soviet union about this big nail and that's how you meet your quota it became a system that people were trying to game it's a system of trying to not get into trouble as opposed to one where you're trying to gain wealth and happiness through voluntary wealth creating trades it's a different type of system and it did as a historical fact in the soviet union collapse how did china you say leave this economic system model how did it stop starving millions of people it adapted not completely politically but adapted its market to more of a free enterprise type model it's still not a very free economy but much more free than it was and as a result they were allowed to get people's needs and preferences met to a much higher degree than they did before so reform had to change cuba same idea they're reforming more people can own private property now people do get tired of not having their needs and preferences uh met and and it's not because uh people in the system necessarily weren't caring people who wanted to meet people's needs and preferences there is an acute information problem when you rule out a price system when you try to have collective decision making you need vast amounts of information from millions of people that changes on a daily basis and there's yet a mechanism designed where that information can be costlessly transmitted to decision makers so this is this is the big hang-up it's the big intellectual hang-up and it's the big practical hangout that we ran into as a world when we have tried to put collectivism writ large on an economy with central planning in a socialist or communist type of system