Reciprocity, reputation and trust

2008 Nobel Laureate Paul Krugman famously said, “most work in macroeconomics in the past 30 years has been useless at best and harmful at worst.” Who am I to argue with that?

The definition of a classic is that most people have heard of the book, but very few have actually read it. The same must be true of the work of most Nobel Laureates — we are aware that they must be famous, but not sure what they are really famous for. I have read the work of Oliver Williamson, the 2009 joint Laureate in Economics, because I studied the theory of firm carefully in trying to understand why corporate governance. However, I confess that until the recent announcement, Nobel Laureate Elinor Ostrom was not on my radar screen.

I commend her award, as she truly has contributed significantly towards our understanding of collective human behavior. Professional economists, like scientists, are tribal in behavior, because they hold onto their theories and beliefs religiously against all comers. The free market orthodoxy has proven very hard to dislodge, because discrepancies found in real life are either “pooh-poohed” or dismissed as defective scholarship. But this current crisis of massive financial market failure has shaken the economics profession to its roots.

The foundation of free market economics stems from the Scottish Moral Philosopher Adam Smith's assertion that the pursuit of individual selfishness can lead to public good. To free market believers, if government gets out of the way, individual freedom to do selfish things would create the greatest prosperity. This is exactly what Wall Street has preached and practiced, leading to the greatest crash since the 1930s.

In 1968, ecologist Garrett Hardin wrote an influential essay called “The Tragedy of the Commons” that challenged the Smith assertion. He demonstrated how the selfish behavior of individual farmers created overgrazing of the common fields and therefore destroyed the public good and the environment. We have observed how wanton destruction of forests for short-term gain has denuded our ecological heritage and led eventually to global warming. Hardin's paper stirred up a storm that eventually gave Elinor Ostrom her Nobel Prize.

Basically, there were two conventional solutions to stop the Tragedy of the Commons. One was the imposition of the State to enforce rules to stop encroachment of the public good; the other was privatization of the commons. The free market school favored privatization, but as experience has shown, privatization has tended to become “privatization,” in the sense that some privileged few has gained from the privatization exercise. The late political scientist Mancur Olson became famous for his assertion that even the “stationary bandit,” the strongest of the contenders for power, can protect the public interest because he has the most to benefit from the public good.

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