The Tragedy Of The Commons

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If the twentieth century has taught us anything about economics, it is that free markets work better than any other kind. Heaven knows virtually every possible substitute has been tried in the eighty years since World War I ended, and they have, without exception, failed to work. Indeed, the more they have departed from the free market model, the more they have failed to create wealth and improve living standards.

There’s a very simple reason free markets work. They automatically send signals—billions of them every day—to buyers and sellers alike, keeping them informed about supply and demand. The buyers and sellers then adjust their own actions, and these in turn affect the supply and demand. This all-pervasive economic feedback mechanism acts something like the governor on a steam engine, making the market run smoothly, while it helps allocate resources with an efficiency no bureaucracy could hope to match.

To illustrate the importance of this web of signals, let me suggest a thought experiment in which the web breaks down. Suppose a local supermarket served a thousand families. One day its management decides to try a new system. Instead of every customer paying for groceries as they are purchased, the expenses are pooled, and at the end of the month, each family gets a bill of a thousandth of the total. What would then happen?

For one thing, many of the signals that prices send would be blunted. In a normal supermarket, if the price of, say, oranges suddenly soars because of a frost in Florida, many buyers will switch to something else. But with the price increase spread among the thousand families, there would be little incentive to give up fresh oranges for frozen juice or Texas grapefruit. And, as individual buying decisions would have only a very limited impact on individual monthly bills, the incentive to be frugal in order to save money for some other, nonfood purpose would vanish.

Of course everyone comes to exactly the same conclusion, and the inevitable result is a sudden, sharp, and continuing escalation of total food costs for all the families involved. To be sure, the supermarket here is only theoretical, but this was exactly how the country, in very large measure, paid for routine health care for many years. Only instead of each family’s paying its share of the communal bill, they sent the bills to their employers instead. Since buyers cared not at all about medical costs, sellers, such as doctors and hospitals, were only too happy to increase them, year after year.

This is an example of what happens when costs are “socialized”—in other words, spread among everyone, rather than borne by the individual. But what happens when, instead of costs, the ownership of resources is socialized? The result very often is what economists call “the tragedy of the commons.” The name derives from the old common land that medieval peasants used to pasture cattle, gather berries and nuts, drive swine, and such.

The problem is, if ownership is held by everyone, but each individual is allowed to exploit the asset freely, no one has an incentive to conserve the resource. Frequently, the result is disaster.

The greatest “common” of them all, of course, is the world’s oceans, which cover about 72 percent of the earth’s surface. By ancient international law and treaty they and their resources are free and open to everyone. For much of history, that worked very well. But twentieth-century technology and increasing population are rapidly resulting in a tragedy of the commons of epic proportions. Perhaps this impending tragedy can best be understood by looking at the history of that singular beast the Atlantic cod.

The cod is not very prepossessing, but as a commercial product it is a wonder. It is easily caught, and its flaky, white, nonfatty flesh is relatively boneless and simple to preserve by drying and salting. Dried cod (often known by its Spanish name, bacalao ) is about 80 percent pure protein. Equally important for its commercial potential, dried and, especially, salted cod has a very long shelf life. In a world without refrigeration, that was a quality without peer, and cod became a staple of the Western European diet for centuries.

The cod lives generally from twenty to three hundred fathoms deep and prefers the relatively shallow waters of offshore banks. Many seagoing European nations, from Norway to Spain, sought to exploit this abundant and versatile food resource, but it was the Basques who found the mother lode. The Basques, who live in northern Spain and the southwest corner of France, had hunted for whales for centuries, searching far across the Atlantic. In the late Middle Ages they began to bring back cod as well, but nobody knew where it was coming from.

It was the profits from cod fishing that encouraged the Pilgrims to try to settle in New England.

The traditional European codding grounds were in the North Sea and as far west as Iceland, but the Basque fishermen were not to be found there. Instead, each spring the Basque fishing fleet would set sail and, in the fall, return laden with cod, already dried and salted and ready for market. Fish can’t be dried on a ship’s deck, however. So where were the Basques finding and drying their fish? The Basques, needless to say, weren’t telling.