Tragedy of the Commons

Tragedy of the CommonsI think I first heard about the tragedy of the commons in economics class, the term dates back to the writings of William Forster Lloyd in 1833 and the commons he was referring to was the shared grazing land that might be associated with a village and could be used by all villagers or commoners to graze animals.

Shared grazing land works as long as each commoner shares fairly, as soon as one grazer adds more livestock than his/her share the resource becomes over-used and unsustainable. In an ancient village it worked through two pressures; the finite resource was enough for each commoner, and the commoners knew each other so social pressure would act to keep any greed in check.

In the modern world, and in the absence of any regulatory check, both of these pressures are absent. In this scenario individuals has a tendency to use as much of the resource, the commons, to their own advantage. The result is that the commons becomes depleted and ruined.  Each individual is incentivised to use as much of the resource as possible, meanwhile the costs are spread amongst all users.

In 1963 Harbin extended the concept to include environmental issues, positing that a finite planet can only support a finite population, and since then the term has been applied in discussion on the environmental and sustainability.

US and the Paris Agreement

It’s come up again this week in reaction to the US President’s announcement to withdraw from the Paris agreement.

Most sane people are horrified by this decision because science.  Most of the world’s scientists agree that climate change is real, and caused by human activity.

The real debate is how fast the change is happening and what we can do about it. In 2016 most of the world’s countries signed the Paris Agreement – 197 in total, with 148 ratifying it thereafter. Only two countries did not sign; Syria and Nicaragua. Syria because its leaders are under sanctions and cannot enter Europe. Nicaragua did not sign because, in their view, the agreement didn’t do enough. So although many articles are grouping Syria, Nicaragua and US into one group it’s unfair: only Trump’s America is rejecting the agreement out of a belief that they don’t need to do anything. †

The planet has become  “the commons” and we’re looking at fair exploitation of a finite resource. The Paris Agreement was an attempt to address that “fairness”. It is an agreement where states set their own targets, but since there is no supra governmental body to monitor countries’ performance they can be considered non-binding. The Paris Agreement is flawed, but not as flawed as the President of the US has claimed; his statements have been extensively checked by the Washington Post.

The Discussion on Climate Change

I’ve spent some time in discussion with online commentators, and those supporting the President’s decision do so for one of three reasons

Reason 1: God will fix it:
This screenshot is from a conversation on Instagram, the sender contacted me by DM after I asked her a question on a public post. (The sender went on to call me a stalker, if they read this no doubt they’ll find a worse epithet.)

To which Michelle Wolf had the perfect response:

Reason 2: The US is being treated unfairly, because China produces more greenhouse gas than we do.

There is some truth in this statement, on an absolute numbers bases China produces more greenhouse gases than the US. However it also has 4 times the population. In addition historically the US has produced more greenhouse gases than any other nation. Here’s a map showing the per capita use around the world from the EAA

The US has been exceeding its fair use of non-renewable energy for decades. If the Paris agreement seems unfair perhaps try thinking of it as redressing the balance.

Reason 3: The US is already a leader in sustainable energy

No, the US isn’t. There seems to be an weird belief that the US is the best at whatever is under discussion amongst some commentators.  China outstrips the US on building wind power capacity, by a factor of 3 (2015 figures).  If you think a per capita comparison is fairer, I took the data for 2016 total installed wind power capacity, divided it by the population and then the US has 205 MW per million people compared to 84 MW per million people in China. But before you exalt, 10 countries outperform the US including Uruguay.

I’m using wind power installation as a rough proxy for sustainable energy, it’s true there are other forms; Hydroelectricity where China also leads on capacity, and Solar Power, no prizes for guessing that China also leads there.

The US is not a leader in this.

Climate Change Impact

Climate change is already having an impact around the world.

Tuvalu has seen a rise in sea level of 20 cm., and with other low lying small nations has seen an increase in the number of serious storms they experience.  Mauritius has been facing this since 2013. Many African countries are vulnerable as temperatures rise and they may lack the resources to address changes. That refugee crisis we have now will be dwarfed if nations become unable to feed themselves.

But Americans don’t need to look overseas for examples, Louisiana is losing about a football field of land every hour. There several factors contributing to this but one is rising sea levels.

Alternative Explanation

Whenever big outrageous news is announced I look behind it for what else is going on. Hiding unwelcome news behind something attention-grabbing is a useful communication strategy. So what else has been going on in US politics?

The Other US Reaction

About 70% of Americans believe climate change is real, but have a harder time seeing that it will impact them. It’s the sort of risk question humans are terrible at answering,  one that has a big impact somewhere in the future.

Some extraordinary Americans have stepped up, from individuals to business leaders to civic leaders.

Michael Bloomberg, a long time activist on climate change has promised to find a way to support the operations of the the branch of the UN that coordinates the activities on the Paris Agreement.

The Governors of Washington, New York and California, which is about 20% of the US population have begun an alliance of states committed to the Paris Agreement.

Companies such as Apple, Ford, Exxon Moblie, Tesla, Disney, Microsoft, GE, IBM, Salesforce, Amazon, Intel, HP, Goldman Sachs, Google, Shell, Virgin have all stated their commitment to continue reducing greenhouse gas production.

There is also a certain amount of peer pressure in play, US companies may need to meet the regulation of their export markets. Consumer pressure also has an impact both in the US and around the world.

While we teeter on on the brink of another “tragedy of the commons” it seems that the single most powerful person in the commons has much less power than the combination of other commoners.

It turns out the president doesn’t have as much power as he thought. How about that.


† When he’s not being President of the country but merely chairman of a company that owns a golf course in Ireland that’s threatened by rising sea levels Mr Trump believes in climate change bigly.

Image:  Beef Research  |  CANFR  |  CC BY-NC 2.

The Gig Economy

We’re in the gig economy, we can order food, dinner delivered, or cookies delivered at midnight if you’re in New York. We can share our spare room for cash on AirBnB, our trips with Uber, or garden tools we’re not using.  We can have someone visit us to hang a picture, build a bookcase or unblock a drain. In France you can have someone do your homework. The people providing the platforms say it unleashes innovation and offers exciting opportunities, it’s supposed to be good for us.

The companies offering platforms to enable all of this are lauded as disruptive and for a long time new companies were launched and cited as “the Uber of X“, there is even a book called “The Uber of Everything” which has the positive-sounding subtitle “How the Freed Market Economy is disrupting regulated industries and delighting customers”.

I’m all for disruption, but sometimes the disruption isn’t where you expect. Take AirBnB, there are a lot of articles about how AirBnB is disrupting the hotel industry, and it’s a service I’ve used in half a dozen cities. But it’s not the hotel industry that’s feeling the impact in Amsterdam, hotel nights are on the rise up 7% in Q1 2016, and numerous hotels have opened since airBnB launched in 2008. What has been affected is the rental market, with hundreds of apartments taken off the rental market. Amsterdam is not the only place to see an impact on the stock of rental apartments, and the city has now put limits in place.

Uber started out as a ride sharing platform, and it has a lot of benefits in terms of lowering congestion, lowering car pollution, reducing parking problems in cities. It has, according to some reports, lowered the rate of drink driving. There are a lot of positives. But there is also a downside. The industry that Uber set out to disrupt is the taxi industry seeing it as over-regulated and ripe for reform. When I hear the term “regulated industry” I always myself “who benefits?” In the case of the taxi industry there was a certain amount of industry protection to stop new entrants into the market, which maintains higher taxi prices. However it also protected drivers, allowing them to have a reasonable work week, and it protected passengers because drivers were licenced – as opposed to the ‘random driver‘ you might get as your Uber driver. Uber drivers started out as freelancers, part of the gig economy, but many of them now depend on their Uber income and are starting to fight back with attempts to unionise in Seattle and New York.

If we follow the money, it’s accruing to the platform owners. Uber’s revenue in 2016 is around USD6.5billion and AirBnB’s reached USD1.7billion. These two companies are doing very well out of the sharing economy. But there’s one platform that’s doing even better, Facebook earned almost USD27billion in 2017 almost all from advertising.

Other platforms began in one form and have evolved to others. Amazon began as a retail outlet and Netflix as a movie subscription service. Both have evolved into content creators each with a huge, somewhat overlapping, customer/subscriber base.  Although some local competitors exist, it would be almost impossible for a new entrant to compete with either platform on a global scale. This is fast becoming detrimental to those who work in creative fields.

For digital platforms the economics tend towards a “winner takes all” outcome, that is we end up with a single monopolistic player in each type of platform that evolves. This is because even if there’s room for several players in a market, ride-sharing for example, a platform can outspend –  or outsmart – competitors to acquire all the suppliers or all the customers. Once it has all the players on one side of the transaction it’s almost guaranteed acquisition of all those on the other side.

Stakeholder management theory says that a company must balance the interests of employees, customers and investors otherwise business model not sustainable, but in the case of platforms there is an imbalance of power allowing them to focus on the interests of investors, particularly prior to IPO when they must satisfy the demands of the Venture Capitalists. It’s taken new regulation to protect the interests of consumers, employees and others affected by the platform’s success.

The gig economy is good for business, it’s not so good for workers.

Right now I could order dinner to be delivered to me via Thuisbezorgd (the local incumbant), Foodora, Hungry, Deliveroo or Uber Eats. I predict that in one year’s time there will be just one platform.

Image: Lost in the Gig Economy?  | Tankesmedjan Futurion  |  BY-NC-SA 2.0 

 

Externalities

CM2016_10_externalities.pngI did just one university course in economics and learning about externalities was pretty much my favourite thing. Suddenly it explained a bunch of things that are wrong with how consumerism works. I still see externalities behind a number of environmental, business and humanitarian issues. In fact globalisation and our use of digital make things worse rather than better.

A quick definition; an externality is a consequence of an economic activity experienced by someone else. The consequence could be positive or negative.

The most common example of a positive externality is the beekeeper who benefits from the neighbouring orchard. Since both parties need each other this seems closer to a symbiosis in biological terms but for the economists it counts as a positive externality.

A common example of negative externality is rubbish; in the above picture the rubbish has a negative impact on the environment, on any business relying on the environment. However the neither the producer of the containers, the restaurant packaging it’s food, nor the consumer making the purchase and dumping the packaging take responsibility for disposing of the rubbish and the cost of clearing it will probably fall to a government entity.

We, as a society, try to limit externalities by putting rules in place to limit the effect, and by providing services – well placed rubbish bins on a beach for example. All of which is funded by taxpayers. This more or less works on a local level.

Globalisation

On a global level it doesn’t work out so well.

My mobile phone was probably manufactured in China and used components or elements extracted in a dozen other countries. Some research indicates that up to 50% of the pollution from a phone production occurs at the first step. There’s a long and complicated chain of manufacture but I’m pretty sure zero eurocent of the amount I paid for the phone made its way back to the mines in the Democratic Republic of Congo where coltan.  (Oh wait, I paid nothing for my phone.)

Digital World

Our digital world is creating brand new externalities we haven’t thought about.

Yep, the Pokemon craze is laden with externalities, that’s why museums, locations, city councils, traffic controllershealthcare officials and governments are making a fuss.

In the Netherlands one tiny town, Kijkduin, has been somewhat over-run by Pokemon players, they’re trying to get Niantic to change the game to reduce the number of Pokemon in the town, they’ve found the numbers overwhelming, and there’s a risk to a neighbouring nature area. The town has already put up more toilets and rubbish bins to cope with the crowds. The cost of that is an externality. It’s a cost the small town is paying for the consequences of Niantic’s popular game.

If I were organising events in the town with such a large attendance I’d need a permit, there’d be a fee, and I’d be the one paying for security and clean up.

So when globalisation and digital collide the potential externalities grow, and right now we don’t seem to have a good way of handling them.
Image: Pollution 2  |  Kim Etherington  |  CC BY-NC-ND 2.0

Book of the Month: Throwing Rocks at the Google Bus

Throwing Rocks at the Google Bus

Douglas Rushkoff

Like many people I tend to use the products of the digital revolution more easily than I think about the economics of it. I see the astonishing figures of acquisition value for companies that have yet to make a profit and something seems odd – but I’ve never sat down and examined what. I suspect I’m not alone in this. Rushkoff’s book examines the financial industry, particularly around digital startups to show us just what is wrong with our economy, and offers the beginnings of some solutions.

The main  argument are that our existing economy is set up to serve constant growth, and the wealth generated in that economy accrues to a minority at the top, leaving the majority worse off.

BOTM Googlebus quote1

The book begins with a discussion of an unusual protest; local residences of San Francisco’s Mission District lay down on the street in front of some of the Google buses that were used to ferry employees from their homes to the Google campus. This is a symptom of the dysfunctional economy.

Growth

We have all bought into the growth myth; we need and deserve more – in financial reward for our work, the size of our homes, the shininess of our possessions or the pool of money for our pension. But in nature things grow to maturity and then stop growing, they reach a size that’s appropriate for their physical limits and their ecosystem. An oak tree doesn’t keep growing, it maintains itself over time, growing new leaves each year, but the size remains more or less constant.

Companies have a growth imperative, the market expects growth in their market capitalisation to give investors a return. Which is why the market gets excited about huge audiences on Pokemon Go, and gets jittery when Apple iPhone sales stagnate.

In the theories of business that I learnt in business school a company had to manage multiple stakeholders and keep them all happy to ensure long term success. Put simply a company must keep employees well-trained and motivated to make customers happy, ensuring income for the company to return to investors over a longer term. Stakeholder theory says that the needs of all three must be kept in balance and that neglecting the needs of one will affect the other two.

Rushkoff explains that in today’s market there are relatively few investors in the sense of people wanting to own a piece of a company and be vested in its success. Instead the market is full of traders, those who trade shares amongst themselves and might never know what the company makes or what is on its balance sheet. The most advanced of these is using sophisticated technology and complex algorithms and trading on minute shifts in share price. This trading is done digitally, using microseconds of difference in share price enabled by digital, and the activity is so removed from actual business activity according Rushkoff, that it is creating a distorted market.

The startup economy takes all this to the next level, it effectively gamifies investment.

Startup Economy

In the start up economy it’s venture capitalists doing the investing, and they are not interested in the long term profitability of your company, they’re looking for a maximum return “on exit”, which is either your company being acquired by a larger company or an IPO. Here’s a simple breakdown of how the funding works and the share of return at the IPO stage. Venture Capitalists invest significant amounts in multiple startups and expect some to fail. Conversely the ones that succeed need to do very, very well.

The drive for high valuations of startups is less about the net present value of the company, and more about the expectations of the venture capitalists. The VCs expect a return on their investment not of percentage points, like a traditional investor, but in multiples.

History of Money

Rushkoff points out that it wasn’t always this way. In simpler times we bartered our goods directly, and then as trading grew in the bazaar towns developed a form of script allowing more exchanges. Quality was ensured by a set of guilds who could control a trade. As the bazaar emerged Europe enjoyed rapid economic expansion. However, he suggests, the nobility feared losing their system of value creation, as feudalism broke down, and instituted measures to limit or eliminate local currencies.

The discussion of the changes in how money functioned in the past points to ways that it could function in the future.

Potential Solutions

Money has two functions, measuring accumulated assets and transactional, the system we have now works far better for the former function and not that well for the second. Solutions revolve around changing the currency system in various ways.

  1. Local currency; eg the Massachusetts Berkshares
  2. Free money; eg; the Worgl currency
  3. Cooperative currencies; eg; Fureai Kippu
  4. Local bank; reforming banking to enable local investment
  5. Crypto currency; eg Bitcoin, which frees up money for transactions.

Rushkoff also points to some different models of business building, where businesses are established specifically not to grow – or at least not to grow beyond their chartered purpose. He asks that new entrepreneurs think of more in the stakeholder model that delivers long term sustainable growth.

You can see a discussion of the book at the Commonwealth Club;

The book explains all the history and the theory very clearly, I think it’s a must read for digital professionals, economists and those with an interest in sustainability or social justice. There are plenty of examples throughout the book – most real and a few hypothetical. The book answered a lot of my “how does that work?” economic questions, but also made me curious at how do we solve this for ourselves and for future generations.

I look at the overwhelming wall of opposition, the “vested interests” and the conflicted interests – after all even as I see the sense of this revolution I am relying on the growth of investments to pay for my future, and the solutions offered seem too small and too vulnerable. For real change it will take government regulation to change, in the meantime I’ll look for alternative models that I can employ today.

Why no Wifi?

I took an overnight trip to London last month, I stayed in a nice hotel, not far from Trafalgar Square. A hotel that uses “classic luxury” as a descriptor. They wanted to charge me to use their wifi, in fact on check out they tried to charge me for 3 minutes internet time.

Opposite the hotel was a Costa Cafe, with good coffee, nice staff and free wifi. So I wandered across the road, ordered a large latte and used wifi there.

So why couldn’t the hotel provide free wifi? I pondered this as I sipped my coffee. To start with I was a bit annoyed and was working up to a good rant, but on reflection it makes sense.

The cafe has a lot of competition, several other cafes in walking distance and a bookstore with wifi. So if providing wifi attract more customers, or encourage customers to stay longer – and order a second cup, it’s well worth the costs. It’s a matter of beating the competition.

Hotels with a large proportion of business travels have customers who are less price sensitive since it’s often their company paying, and not funded from their own pocket. The extra charges for wifi will be picked up by expenses.

I predict a change; free wifi is becoming an expectation in any public space and I know one Asian-based businessman who includes it as criteria in selecting a hotel. No free wifi, no booking.

Pay what you think it’s worth

Years ago my parents when to a concert to raise money for musicians in Sarejevo, the tickets were free. You had to donate to leave. It was brilliant, everyone there was already ready to show support and by the time they’d heard the music they were in a good and generous mood. I’ve always wondered what the ticket “price” really was. I’ve also wondered if anyone else had tried this model.

Today I read of some other cases that have; a taxi driver, a chiropractor and a law firm.  It is another alternative payment structure like “freemium” – where a free model is available, but you pay a premium to get all the features.

I think it works under two conditions.

(1) when you are providing a personal service where clients and supppliers meet each other during the profession of the service, where both parties trust each other and have learnt to communicate. In other words where there’s an existing relationship.

(2) where it’s easy to compare the market price for the service, in the Concert example the attendees were all regular concert goers so knew roughly the price of a ticket. I’m currently having rather massive dental work done, it’s time consuming and complex. Although I know what a regular treatment costs I would probably underestimate the costs of this work.

I think it’s less likely to work where the service is anonymous, for example a retail relationship where it won’t be necessary to return to that supplier, or a service provided by an anonymous corporation – for example an insurer.

I’d like to be wrong, but I suspect without the relationship our own self interest will take over.

photo cello

The Logic of Life

The Logic of Life

Tim Harford

Explaining the logic of life for all time seems daunting, but Tim Harford tackles it with characteristic simplicity and shows that we’re more rational, in more situations than we realise.

CM200903_booklifeHe begins with gambling and addiction, both of which have elements that can be explained by the economist’s favourite; gaming theory. He tackles the world of dating, and finds we’re rational even when we’re romantic. The fields of work is also examined, including the very rational reasons for your boss earning so very much more than you do.

He dares to discuss racism, and depressingly finds that there is also a rational component to some racism as he discusses Thomas Schellings model of segregation. The model suggests that if even a slight preference for one’s own race exists across a population then segregation is inevitable. Sounds implausible? It’s demonstrated in the video below.

Where the book is weaker, and he admits that the evidence here is thinner, is in the last chapter where he looks at the broad sweep of history.

All in all it’s a good book, with plenty of information to help you astonish your friends. “Did you know that cities are less polluting than rural areas?” ought to get the debate rolling.