Putting the life back in science fiction

Are Markets Commons? Perhaps they should be managed that way?
December 19, 2013, 9:38 pm
Filed under: commons, economics, Speculation, sustainability | Tags: , ,

This isn’t my original idea. I’m reading John Michael Greer’s The Wealth of Nature: Economics as if Survival Mattered (Amazon link), and he makes the assertion that a free market, “in which buyers and sellers are numerous enough that free competition regulates their interactions,” is a form of commons, a resource that should ideally be free to all in a society. He goes on to point out that this is in contrast to those who think that all commons should be eliminated in favor of private ownership. The issue he’s getting at is that free markets cannot exist without regulation, something recognized even by Adam Smith, who noted in the Wealth of Nations that “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices” (reference).

I can see a long argument about how true this is, because it’s a provocative concept. Markets and commons are traditionally diametrically opposed in capitalist thinking, it’s hard to consider that they have anything in common. I’m happy to have that discussion, but there’s another related issue that, to me, is even more interesting: Can markets be managed as commons?

We don’t have any data on this, but the late Elinor Ostrom won the 2009 Nobel in economics for her studies of how commons are successfully managed. She found, through studying both successful commons (water districts, community forests, and the like) and unsuccessful commons, that there were eight “Design Principles” that distinguished the successful commons from the failures (Amazon link to reference).

Here are Dr. Ostrom’s eight design principles, as rewritten by David Sloan Wilson in The Neighborhood Project (Amazon link). I’m using Wilson’s version since it’s more general than the original.

1. Clearly defined boundaries. Members of the group should know who they are, have a strong sense of group identity, and know the rights and obligations of membership. If they are managing a resource, then the boundaries of the resource should also be clearly identified.

2. Proportional equivalence between benefits and costs. Having some members do all the work while others get the benefits is unsustainable over the long term. Everyone must do his or her fair share, and those who go beyond the call of duty must be appropriately recognized. When leaders are accorded special privileges, it should be because they have special responsibilities for which they are held accountable. Unfair inequality poisons collective efforts.

3. Collective-choice arrangements. Group members must be able to create their own rules and make their own decisions by consensus. People hate being bossed around but will work hard to do what we want, not what they want. In addition, the best decisions often require knowledge of local circumstances that we have and they lack, making consensus decisions doubly important.

4. Monitoring. Cooperation must always by guarded. Even when most members of a group are well meaning, the temptation to do less than one’s share is always present, and a few individuals might try actively to game the system. If lapses and transgressions can’t be detected, the group enterprise is unlikely to succeed.

5. Graduated sanctions. Friendly, gentle reminders are usually sufficient to keep people in solid citizen mode, but tougher measures such as punishment and exclusion must be held in reserve.

6. Fast and fair conflict resolution. Conflicts are sure to arise and must be resolved quickly in a manner that is regarded as fair by all parties. This typically involves a hearing in which respected members of the group, who can be expected to be impartial, make an equitable decision.

7. Local autonomy. When a group is nested within a larger society, such as a farmers’ association dealing with the state government or a neighborhood group dealing with a city, the group must be given enough authority to create its own social organization and make its own decisions, as outlined in items 1. and 6. above.

8. Polycentric governance. In large societies that consist of many groups, relationships among groups must embody the same principles as relationships among individuals within groups.

What’s interesting about these rules is that, superficially, it looks like these would be great rules for free markets as well. Look at the complaints such rules would solve:

— markets should have boundaries. People get really uncomfortable when everything is for sale, whether they want it to be or not. There’s a general idea that some things should not be for sale, while markets are the appropriate venue for other things. Similarly, not everyone wants to participate in “the marketplace” and the outsiders resent being forced in.
–Markets should be fair, the fabled level playing field. Most would agree that people should get special privileges only so that they can exercise special responsibilities, not because they have special connections. Similarly, corruption and gaming the system should be punished.
–Collective decision making. This one is tough, because everyone wants to constrain the fat cats, whether or not they’re in the market. Still, there are many complaints about top-down rulemaking, and with good reason. This is not to say that markets are all good at self-governing (and here I’m thinking about the body-counts in illegal drug marketing disputes), but to the extent that a market is self-governing, having rules that everyone agrees are fair is not a bad thing.
–Monitoring: this one is a no-brainer. Corruption kills markets, and they always need to be monitored to avoid people gaming the system. Interestingly, monitoring in commons can come either from within, from people hired to monitor the system, or from outside officials. Any and all of these can work, depending on the circumstances.
–Fast and fair conflict resolution: this one is another no-brainer. Things work best when disputes can be settled fairly and quickly, either be a tribunal within the market, or by higher authorities, so long as judgement is fast and fair.
–Local autonomy. This can be somewhat problematic when you think about Wall Street, but it’s the flip side of having collective decision making within a market. If the authorities are going to let a market make their own rules, they need to let the market govern itself. Note, however, that authorities can be intimately involved in both monitoring and conflict resolution, so long as the market grants that this is their legitimate role in the market.
–Polycentric governance: This is the idea that the relationship between individuals and a markets is mirrored between markets within a greater market, if such a hierarchy exists. I’m not sure how this might work, but it does embody the same ideas of group decision making (on the level of member markets), monitoring, fast and fair dispute resolution, and so forth. That’s not a bad way to handle commerce on a large scale.

To me, this is the bigger point: even if markets aren’t exactly commons, it certainly looks like the principles that lead to successful commons might lead to successful free markets. Additionally, it’s not particularly driven by any market ideology: both progressives and libertarians could agree on these design principles. Even the big government proponents tend to agree (in my experience) that the best regulations are the ones that people think are fair and fairly enforced. Trying to get such regulations written can be very difficult, but it’s often a major goal of regulation. What also makes this interesting is that, if you accept that markets may be commons, it’s possible to have a free market under a wide range of conditions—so long as the market is properly monitored and managed according to rules.

A truly free market won’t work, but a market commons may well be viable. What’s sad is how far Wall Street currently is from most of these design principles. Perhaps our financial markets are a lot less successful and sustainable than we might wish for? Perhaps they need (shock, horror) more regulation, not less, to last?

What do you think?


3 Comments so far
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Markets viewed as being like commons is an interesting idea, one I’ve never considered. However, I’m not entirely clear why markets are a “resource”. Normally we think of resources as finite and in need of attention to sustain then. Markets don’t seem to meet this criterion. Perhaps marketplace is more apropos in this context (vs. market as a system)?

Clearly the concept of operating guidelines is common, although which of the 8 rules is common to both may be up for discussion.

If we are worrying how the commons or market[place] can be broken, then in both cases “cheating” is a common theme. While self governing sanctions sound nice in theory, I think there are enough cases to show that this cannot work well – there must be external regulations and enforcement.

Finally markets probably should be kept open to everyone, which means that self governance that might include rules for exclusion, are potentially problematic.

Comment by alexandertolley

Thanks Alex. The resource question was bothering me too. The thought I’d had was that the limited resources are time and space, and those are primarily for the merchants. Most physical markets are limited in time and space (think farmer’s markets, but the old Wall Street Market is also so limited, as are business hours and space in any business district). Dividing up these resources so that one firm doesn’t monopolize them is a commons problem. The example of one firm monopolizing them is the stereotypical example of Walmart coming in and putting main street out of business. Certainly prices go down, but so does income to buy stuff, and left to themselves, Main Streets typically try as hard as possible to exclude Walmart from their local marketplace, and Walmart often comes in (at least locally) by going over the head of said market and making a pitch to the local mayor and council.

As for self-regulation, that’s another interesting issue where I’m not sure either. I’ve commented on regulation changes in front of our local city council, and the regulations are often better when experts (who are not always the bureaucrats) speak up. Of course, experts can speak up to make regulations that favor one side over another (see Walmart, above), so outside regulation is not always a good thing. We’d need to get outside a western-style regulatory framework to see whether self-organizing, non-criminal marketplaces exist and are stable in the long term. Right now, I just don’t know enough.

Comment by Heteromeles

In practice, markets are typically managed by a “market maker”. This is someone who keeps a stock of money and a stock of product, and he sells product if the price is high, and buys if the price is low. He normally does not need or use the product himself, he buys it only to trade.

In theory he can be depended on to do this, but occasionally he fails. Since he is the one who trades dependably, typically he sets the price. Or two prices, one he will buy at and a second higher price he will sell.

He watches the number of buyers and sellers, and raises prices when there are too many buyers and lowers prices when there are too many sellers. The “free market” is replaced by his judgement.

A market which is owned by a market maker is not a commons. It is a resource which the market maker manages for his own profit.

It can be argued that the market maker is helping his customers. Stochastic fluctuation in prices tends to even out, and it’s good for customers when prices are stable instead of quickly going up and down at random. The market maker stabilizes prices by taking a bite out of each transaction.

The major failure mode is when a big fluctuation in price is not random, but is going down. When there is good news and the price goes up because there are lots of buyers, the market maker can just take his profit. But when the price is going down and predictably will keep going down, the market maker must take a loss on each transaction, and has no immediate way to get his money back. He will be stuck with a lot of stock that no one will buy except at a low price. Maybe no one will buy regardless. When this happens it’s natural for him to stop trading. Just don’t let anybody buy or sell until the situation stabilizes at whatever low price it arrives at.

Sometimes organizations like NYSE make rules that their market makers must follow. For example, a NYSE rule was that when prices were falling (or rising for that matter) they could only be allowed to fall by one point per sale. So the market maker would have to make a series of buys at relatively high prices instead of just letting the price drop like a stooping hawk. Needless to say, if it’s at all extreme they will in fact close trading instead.

Traditionally, markets tended to become local monopolies. When there are two markets people can arbitrage between them. The weaker market must offer higher spreads because it must dance to the stronger market’s tune. No one prefers to pay higher spreads, so it becomes weaker still.

I think it might be better to manage markets as commons. When the guy who makes the rules for the market is himself trying to maximise the profit he can extract from that market, it seems plausible that something else might be better for the customers.

Unless of course it’s just too hard to manage the commons. A market that fails because it’s badly managed could be worse than a monopolist maximizing his profits while keeping the thing more-or-less functional.

Comment by J Thomas

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