Today’s jobs report contained two pieces of information that suggest policy may be a bit too expansionary.  First, payroll employment rose by a stronger than expected 272,000.  (The household survey was weak, but that data is viewed as less reliable.)  Second, nominal wages grew at 0.4% (an annual rate of nearly 5%.)  If you think in terms of the Fed’s dual mandate, both data points slightly tilt things toward the view that policy is too expansionary.  That doesn’t mean that we can be certain that policy is too expansionary, just that this claim is now a bit more likely to be true. The 10-year T-bond market reacted with a sell-off, which means that longer-term interest rates increased: Markets currently anticipate a Fed rate cut later this year.  This might occur because inflation declines, or because the real economy is in danger of sliding into recession.  Today’s news made both of those outcomes seem a bit less likely.  Wage inflation has averaged 4.1% over the past 12 months, a rate that is not consistent with the Fed’s “price stability” goals, even if you define price stability as 2% inflation.  Over time, wage inflation tends to run about 1% to 1.5% above price inflation.  Unfortunately, progress on reducing wage inflation seems to have stalled over the past 10 months.  The next two or three readings will be very important. I do not have strong views on where the Fed should set its interest rate target at the moment.  I do have strong views on past monetary policy, which has been far too expansionary over the past three years.  The longer these policy overshoots last, the stronger the case for switching to a level targeting policy regime, where the Fed would commit to make up for previous policy errors.  I had thought they intended to do that back in 2020, but it turns out that “average inflation targeting” was not an accurate description of their new policy regime.   This post is entitled “double trouble”, even though the payroll employment figure can be regarded as good news.  The figures are trouble for a Fed that seems to be hoping that they will soon be able to lower their target interest rate.  In my view, it’s a mistake for the central bank to root for lower interest rates, just as it was a mistake for the Fed to prefer higher interest rates back in 2015.  They should not favor either lower or higher interest rates; they should favor macroeconomic (nominal) stability.  Let the market decide what sort of interest rates are consistent with macro stability. PS.  This comment in the FT caught my eye: Jason Furman, a former administration official now at Harvard University, said the uptick in joblessness could be the most important part of Friday’s data release. “If we wake up next month and the unemployment rate is 4.1 per cent, I think that will get [the Fed’s] attention,” Furman said. “If you have an unemployment that is above 4, that would put a rate cut in play earlier.” In the 1970s, the Fed assumed that a rising unemployment rate was a sign that money was too tight.  That was not the case.  The Fed should never target the unemployment rate, as no one knows exactly what the natural rate of unemployment is at any given moment in time.  The Fed should target a nominal variable, preferable nominal GDP.  It’s often true that rising unemployment is a signal that easier money is needed, but not if NGDP is growing at 5%. (0 COMMENTS)

One of the first things you learn about in an economics course is the concept of trade-offs: You can’t have everything you want. This is relevant in the debate about electric vehicles. U.S. auto workers want to keep their jobs. Most U.S. drivers still prefer cars with internal combustion engines. Environmentalists want Americans to buy EVs. And free traders want, well, free trade. Something’s got to give. Or does it? There’s a path that would enable each party to achieve many of its objectives. First, end mandates and subsidies for EVs. Second, eliminate President Biden’s 100% tariff on EVs from China and allow duty-free imports. Free trade would give lower- and middle-income Americans the chance to buy relatively cheap imported EVs. More people driving EVs would make environmentalists happy. And ending mandates and subsidies would allow U.S. automakers to do what they do best: make cars with internal combustion engines. That in turn would keep U.S. auto workers employed and able to continue using their specific skills. This is from David R. Henderson, “How Electric Vehicles Can Make Everyone Happy,” Wall Street Journal, June 6, 2024. I’ll post the whole thing when 30 days are up. (0 COMMENTS)

Recently, a meme from one of Twitter’s many socialist denizens got a lot of attention. The message it seemed to deliver was that workers are undervalued, because they are paid for far less than they produce: The implication is clear, and is reflective of a popular talking point in socialist circles. The worker in this meme produces 3,000 of those plastic rings with each hour labor but is only paid enough per hour to buy 3 of them. That would imply he’s only being paid for one thousandth of the value of what he produces! Surely this is exploitation, right?  Well, no. There are two big points this meme misses that change the picture quite a bit. The first one is that the worker here can’t actually produce 3,000 of those plastic rings per hour. If he could do that, he’d just set up shop in his garage and make them himself, selling them directly and massively improving his income. He can only make 3,000 per hour because he works with machines built by others and paid for by others. His labor, by itself, isn’t sufficient to produce 3,000 per hour. It requires combining his labor with the massive capital investment the company put forth to make his labor more productive, taking place in the context of a business that also provides him with the work environment, raw materials, and tools, that handles the orders and sales, along with innumerable other aspects that are necessary to enable him to do what he does. In order for that worker to claim he specifically produces 3,000 per hour by his own labor, he has to massively discount and dismiss the labor and investment made by so many other people. His labor is important, sure, but it’s one small step in an incomprehensibly complex process involving the cooperation of countless workers that also go into producing those plastic rings.  As is often the case, the flaw in this kind of thinking was pointed out by Adam Smith, in his well-known (but apparently not well-known enough) description of what ultimately goes into the production of a simple wool coat: The woolen-coat, for example, which covers the day-labourer, as coarse and rough as it may appear, is the produce of the joint labor of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country! How much commerce and navigation in particular, how many ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring together the different drugs made use of by the dyer, which often come from the remotest corners of the world! What a variety of labor too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labor is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smeltinghouse, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them…if we examine, I say, all these things, and consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilized country could not be provided. In the modern world, the web of activities and labor leading up to the production of those plastic rings is, if anything, incomprehensibly more vast than what Adam Smith describes in the production of a wool coat in the eighteenth century. All of that work, effort, investment, and cooperation is erased from existence by the kind of “reasoning” employed in this meme. While socialists may claim to be the allies of labor, in putting forth claims of this sort, they are ironically devaluing and dismissing the importance of the cooperative efforts of a vast amount of laborers. (0 COMMENTS)

Most economists expected a recession in 2023. This prediction didn’t even come close—indeed 2023 was a boom year. I’ve already discussed one implication of that fact; economists are lousy at predicting the business cycle, and should not even try.There’s another lesson to be derived from the 2023 non-recession; don’t put too much weight on statistical patterns that might look reliable at first glance. Readers of this blog know that I often push back on claims that the “yield curve” is an infallible indicator of turning points in the business cycle. David Beckworth recently directed me to a tweet showing that the yield curve has now been inverted for 589 days. Forecasters often claim that a recession is inevitable within 12 months of a yield curve inversion. This is not the case: I do believe that an inverted yield curve provides some useful information. It can be seen as an indicator that investors probably expect a slowdown in NGDP growth going forward.  But it’s not perfect. I did a recent post on “bad reasoning” regarding the lab leak hypothesis for Covid.  Recession forecasting is another example of bad reasoning.  Yield curve inversions tend to occur rather late in a business cycle.  And America tends to have recessions roughly every 5 years, on average.  Combining those two facts, it’s not surprising that recessions often occur within 12 months of a yield curve inversion.  But not always. Human beings are very good at noticing statistical patterns.  We are always on the lookout for patterns that help us to better navigate through the world around us.  And patterns are in fact often quite useful.  Yield curve inversion is often an accurate precursor of recessions.  But I also find that people become too overconfident with these patterns, assuming that just because a pattern has worked in the past, it will continue holding true.   The Fed is always trying to prevent recessions.  If a truly infallible indicator of recessions were to be established, the Fed would react to that by adjusting monetary policy in such a way as to make the recession less likely.  For this reason, it is unlikely that we will ever have a reliable technique for forecasting recessions. PS.  The yield curve did predict the Covid recession of 2020, but I suspect that this was just “dumb luck”. (0 COMMENTS)

My friend (although we’ve never met) and fellow economist Jon Murphy stated recently, in a comment on co-blogger Pierre Lemieux’s recent post: When there are two options moving you away from your desired path, choosing the one that moves you away slightly slower is not really any better. I challenged Jon, writing: Yes it is. Think on the margin. Jon is great at thinking on the margin. I thought he would agree. But he didn’t. Instead he wrote: I am, David.  My point is that both options as presented lead me further away from my goal.  That implies it is time to search out a new margin or do nothing. Commenter Vivian Darkbloom came in on my side of the issue, writing: Being on the 30 yard line is not the same as being on the 10 yard line! To which Jon responded: Agreed.  But when my goal is to be in the endzone, one play that drops me back to the 40 and another that drops me back to the 50 are both counterproductive. Yes, both are counterproductive, but in economics we often compare two bad alternatives and choose the less bad. Thinking on the margin works here too. 40 is closer than 50. Now, if Jon had argued that the two alternatives are no different, then he would have a point. But he made quite clear that that’s not what he’s arguing. Note: Pierre raises another issue in the comments, in response, and it’s a good point for Pierre to make. But it isn’t relevant to my response to Jon. (1 COMMENTS)

The philosopher Daniel Dennett passed away recently. While his work was focused on things like consciousness and the philosophy of mind, his ideas can find applications in other areas of life, including economics. There’s one idea in particular he described in his book Intuition Pumps and Other Tools for Thinking I want to highlight here – what Dennett calls a “deepity.” Dennett describes a “deepity” as a seemingly meaningful comment that is actually marred by ambiguity. There are two different ways to interpret the statement. On one interpretation, it makes a meaningful and substantive claim, but that claim is outright false. On another interpretation, the claim is true, but only trivially true.  This has some similarities with the “motte-and-bailey” fallacy Scott Alexander has described before: So the motte-and-bailey doctrine is when you make a bold, controversial statement. Then when somebody challenges you, you retreat to an obvious, uncontroversial statement, and say that was what you meant all along, so you’re clearly right and they’re silly for challenging you. Then when the argument is over you go back to making the bold, controversial statement. Both ideas are similar in that they refer to claims that oscillate between interpretations, but there are a few differences. In the motte-and-bailey, it’s not necessarily the case that the bold statement is false – it’s just that the bold claim actually being advanced isn’t being defended. Motte-and-bailey is a sneaky argumentative tactic to bypass defending a claim. A deepity, as Dennett described it, is more akin to a trick you can play on yourself. Deepities can trip up our thinking when we unknowingly transfer the truth value of the trivial interpretation over to the substantive interpretation.  That said, here are two examples of deepities in economics one often finds. The first is the idea that imports reduce GDP, and the second is the idea that price increases are a result of greed.  For the first example, I’m actually being generous in allowing there’s a sense in which this claim can even be trivially true. It’s only in what Pierre Lemieux has called “a narrow bean-counting sense” – if we look at the accounting identity for GDP, we see that GDP = G + C + I + X – M. That is, GDP is equal to government spending, plus consumption spending, plus investment spending, plus exports, minus imports. While exports are an addition to GDP, imports are subtracted from GDP, therefore doesn’t that just obviously mean imports reduce GDP? Well, no. While I’ve complained on more than one occasion that many economic misunderstandings come about because economists are just bad at naming concepts (public goods!), in this case I have to acquit the profession of that charge. What GDP conveys is right there in the name – gross domestic product. That is, it’s a measure of things that were – wait for it – produced domestically. Imports, by definition, are things that are not produced domestically. While it’s trivially true that imports are subtracted from the GDP accounting identity, that’s because what GDP measures, by definition, excludes imports. The subtraction occurs to prevent double counting. Recently, I spent $5 on some avocadoes that were imported from Mexico. That $5 would appear in the C portion of the above identity – it was $5 of consumption. But since the avocadoes were not produced domestically, that $5 is subtracted from the GDP calculation as M. That doesn’t mean GDP was “reduced” by $5 in any meaningful sense. It means this $5 in consumption wasn’t part of GDP as defined. The substantive claim being made by the “imports reduce GDP” crowd is the idea that Americans would have a higher standard of living if we exported more and imported less. But this is outright false. Exports (again, by definition) are things American workers spend time, money, and resources producing and foreigners get the benefit of consuming. Consumption is a benefit, and production is the cost of acquiring that benefit. (Indeed, as Adam Smith wisely said, “consumption is the sole end and purpose of all production.”) Exports are what the citizens of a nation go through the cost of producing but don’t get the benefit of consuming. Because exports are produced domestically (by definition) they are part of GDP, but that’s very different from saying more exports and fewer imports would improve living standards or make citizens wealthier in any meaningful way. Another way to show this is to rearrange the GDP accounting identity. Say you want to live in a society where the citizens benefit from high levels of consumption and investment. You get C + I = GDP – G – X + M. That is, lots of exports and few imports means low levels of consumption and investment, and lots of imports and few exports means high levels of consumption and investment. The second deepity, that greed explains price increases, can be interpreted in a way that is trivially true. Producers want to make as much money as they can and will therefore prefer to sell at higher prices in order to make more money. But this claim is often trotted out to explain things like price spikes, and in this more substantive context, the claim is clearly false. A desire to make more money rather than less is a constant. Price changes are a variable. Explaining a change in outcome by appealing to factors that have remained the same is an explanatory dead end. As an example, not long ago eggs sharply increased in price in the United States. Does “greed” explain this price increase? Trivially yes, but substantively no. If egg producers used to sell eggs for $3 per dozen and then raise the price to $6 per dozen, how does “greed” explain the change? If greed is the reason to sell at $6 per dozen, then why were they ever selling at $3 per dozen to begin with? Were egg producers altruistically motivated in the previous era, then suddenly all simultaneously got greedier, before all suddenly becoming less greedy again? The economist Justin Wolfers once tweeted out a rather striking graph of egg prices: The same reasoning that says the massive spike in prices toward the end of the graph is explained by “greed” would, if applied consistently, also imply that the precipitous decline taking place shortly thereafter is explained by a massive decrease in greed. Or, instead of trying to explain changes by appealing to the unchanged, we could try to explain changes by appealing to other factors that also changed. Such as, say, changes in the supply-and-demand situation brought about by the spreading of an avian disease that substantially reduced the egg supply in the short term.  Those are two common examples of economic deepities. If there are some you can think of, dear reader, do by all means share them in the comments! (0 COMMENTS)

A recent NYT article provides an almost textbook example of how bad reasoning can fuel conspiracy theories. The author claims to provide five pieces of evidence suggesting that Covid escaped from a lab in Wuhan, China. In fact, none of the pieces of evidence are at all persuasive, and some are factually inaccurate. Here I’ll focus on the first piece of evidence cited, the inferences that we should draw from the fact that Covid happened in Wuhan. The article shows a graph of the “hundreds of large cities” within about 1500 miles of the bat caves where Covid is thought to have originated: Then we are led to believe that it would be an amazing coincidence if Covid were to naturally emerge in the one city in this region that just happened to have a major virology lab.  But is this claim true? In 1994, I got married in Beijing.  Our honeymoon was spent in Wuhan and Chongqing.  Is it an “amazing coincidence” that my honeymoon was spent in the city where Covid originated?  As we will see, the answer is no. A more pertinent example occurred in 2014, when virologist Eddie Holmes visited the animal market in Wuhan where Covid first spilled over to humans.  He snapped a picture of a cage with a raccoon dog, and speculated that this is the sort of place where a future pandemic might emerge: What’s even weirder — it turns out that one of the co-authors of the study, Eddie Holmes, had been taken to the Huanan market several years before the pandemic and shown raccoon dogs in one of the stalls. He was told, “This is the kind of place that has the ingredients for cross-species transmission of dangerous pathogens.” So he clicks photos of the raccoon dogs. In one photo, the raccoon dogs are in a cage stacked on top of a cage with some birds in it. And at the end of our sleuth work, we checked the GPS coordinates on his camera, and we find that he took the photo at the same stall, where five samples tested positive for SARS-CoV-2. I don’t know about you, but that seems like an even more major coincidence than the virus emerging in Wuhan. The NYT article is wrong; Wuhan is not just one of hundreds of large cities, it’s a Chinese megacity.  Southern China has four megacities (Wuhan, Chongqing, Chengdu, and Guangzhou/Shenzhen), or five if you view Guangzhou and Shenzhen as separate metro areas.  They are all hundreds of miles from the so-called “bat caves”.  Pandemics are far more likely to emerge in these places than in the hundreds of other Chinese cities.  These cities have many affluent shoppers, and huge animal markets that attract exotic species from all over China.  Also dense populations and lots of visitors from elsewhere.  Places that are magnets for people and trade. But let’s say I am wrong, and that there is nothing special about these four Chinese megacities.  In that case, the lab leak proponents face another problem.  Unlike with Covid (aka SARS-2), there is absolutely no dispute about how SARS-1 crossed over into humans back in 2002.  It first showed up near a wild animal market in the Guangzhou metropolis.  So people who reject my claim that southern Chinese megacities are special have merely traded one amazing coincidence for another.  Now they have to explain why Covid emerged in the giant city of Guangzhou, and not one of hundreds of other southern Chinese cities.   Here are the facts: SARS-1 is known to have crossed over in an animal market that was roughly 900 miles from the bat caves.  There were intermediate animal hosts. SARS-2 first showed up in people that worked and shopped in an animal market about 1000 miles from the bat caves.  The famous virology lab was in a completely different part of the giant metro area. Please apply Occam’s razor. Most Americans have very limited knowledge of Chinese geography, and are therefore easily persuaded by the sort of argument provided in the NYT.  So consider an American analogy.  Imagine a pandemic emerges among people who work and shop near an animal market in Flushing, a Chinese area of NYC.  Pandemics are known to have previously begun in such markets.  Then someone on the internet points out that the pandemic began in “New York City”, which also happens to contain a hugely important virology lab at Columbia University.  Maybe there was a lab leak, and the infected scientist just happened to go way across town to do some shopping at an animal market in Flushing, thereby infecting other people.  Does that seem like a very plausible “conspiracy theory”? Throughout history, many global pandemics have begun in southern China.  Even by Chinese standards, the southern Chinese are famous for eating a wide variety of exotic animals.  Southern China has a dense population, often living in close proximity to animal life. Yes, the NYT article also contains other “evidence”, all of which is equally weak.  Those other points have been refuted here and here and here. (0 COMMENTS)

In his Wall Street Journal op-ed calling for libertarians (“we,” he writes) to vote for Donald Trump, Walter Block’s central argument is that Joe Biden “is much further from us on the political-economic spectrum than Mr. Trump” (“Libertarians Should Vote for Trump,” May 28, 2024). This argument is debatable. Walter only intends his recommendation for libertarians in “swing states,” which raises a first set of problems. We first need to identify the “swing states,” which can be many combinations of them and which anyway are only known after the election. But I want to focus on the “distance” criterion implied by his “further from.” I will suggest that such a distance is not easy to make sense of and that an obvious alternative criterion does not point to Trump. If the social world has only one dimension, that is, if there is only one political issue along one dimension (one axis), and if each voter has  one preferred point (“ideal point”) on that axis, we can (perhaps) find where “we” are compared to Trump and Biden, and measure who is closer to “us.” The simplest example of such an issue is “the” tax rate. We could conceivably determine the ideal tax rates of Trump and Biden and measure the distance between “our” own ideal point on the axis and theirs. Yet, even in a one-dimensional world, many issues are difficult to map onto real numbers on the axis. For example, how could we compare a Biden promise to implement three measures against the Second Amendment with one favorable measure promised by Trump? Moreover, the proposed exercise assumes that all libertarians share the same ideal point on the axis. The real world’s choice space is defined on more than one dimension. There is more than one political issue. Not all voters, even libertarians, are single-issue voters focusing on the same narrow issue. Consider Block’s example of Ross Ulbricht of Silk Road fame, now in prison for life. Block tells us that Trump promised to commute Ulbricht’s sentence. If liberating Ulbricht were the only political issue, Trump would be closer than Biden to many libertarians. If international trade were the only issue, Biden despite his attempt at plagiarism would arguably be closer to many libertarians. On a lot of issues, libertarians will have different preferences and make different trade-offs. Minimizing the distance between “us” and the presidential candidates becomes impossible. Furthermore, determining what a politician’s real preferences are compared to his strategic promises and how the latter will be affected by his evolving political constraints is, to say the least, very difficult. The difficulty deepens, I would add, if we imagine an ignorant, incoherent, narcissistic, and unpredictable candidate who typically only gets along with vassals and minions. Besides all that, we must not lose sight of a simple but often ignored reality: the tiny probability that an individual vote will be decisive, that it will “swing” anything. It never happened in a presidential election and is unlikely to ever happen. A rational individual will not vote with the intention to change the election’s result. Even if Block’s WSJ piece persuaded 1,000 “swing” libertarians to vote for Trump, any one of them will know that his vote only reduces the hypothesized 1,000-member decisive group to 999. He may prefer to spend his time milking the cows or watching the New York skyline. The best a rational voter can do is to vote (or not vote or spoil his ballot) in order to express a moral opinion in favor of the candidate, if there is one, with whom he shares important moral values. (See Geoffrey Brennan and Loren Lomasky, Democracy and Decision [Cambridge University Press, 1993].) For a libertarian, these values will be those conducive to the maintenance of a free society. Moral congruence may not look easier to evaluate than issue distance, but at least it chases a real rabbit. This suggests that the best a libertarian voter can do is to vote for the candidate, if there is one, who shows the moral character most representative of what a politician in a truly free society would be (while of course remaining a generally self-interested human being). We should leave some room for reasonable compromise but, at the limit, we may think of the required moral character for a royal president as modeled on the ideal of the head of state in Anthony de Jasay’s “capitalist state.” The less radical might look at the ethics defended by James Buchanan in Why I, Too, Am Not a Conservative. In this perspective, whoever is a candidate with an acceptable libertarian moral character, if there is one, it is not Donald Trump. ****************************** A caveman politician with his distinguished fans (By DALL-E, under the guidance of Pierre Lemieux) (0 COMMENTS)

  George Mason University professor of economics Daniel Klein has asked me to post this. First, a little background. Dan noted a passage from Adam Smarick at our sister publication Law and Liberty. Smarick, a senior fellow at the Manhattan Institute, wrote, “Who Will Lead Us?” Law and Liberty, June 3, 2024. Here’s the passage: [O]ur Framers continuously noted the importance of virtue in the maintenance of a republic. George Washington wrote in his farewell address, “Virtue or morality is a necessary spring of popular government.” John Adams wrote, “The only foundation of a free Constitution is pure virtue” and “public virtue is the only foundation of republics.” Benjamin Rush argued, “Without virtue there can be no liberty.” Benjamin Franklin wrote, “Only a virtuous people are capable of freedom.” James Madison wrote, “To suppose that any form of government will secure liberty or happiness without any virtue in the people, is a chimerical idea.” And Samuel Adams argued, “He therefore is the truest friend of the liberty of his country who tries most to promote its virtue.” Dan then commented, “May we include Adam Smith as an honorary founding father?” Dan pointed out that in The Theory of Moral Sentiments he wrote: What institution of government could tend so much to promote the happiness of mankind as the general prevalence of wisdom and virtue? All government is but an imperfect remedy for the deficiency of these. Whatever beauty, therefore, can belong to civil government upon account of its utility, must in a far superior degree belong to these. On the contrary, what civil policy can be so ruinous and destructive as the vices of men? The fatal effects of bad government arise from nothing, but that it does not sufficiently guard against the mischiefs which human wickedness gives occasion to. I agree with all that. I also want to point out, though, that markets often give a strong incentive for people to be virtuous. I wrote a whole chapter on this in my 2001 book, The Joy of Freedom: An Economist’s Odyssey.   (0 COMMENTS)

Elinor Ostrom Introduction The commons are the typical example in which self-interested individual actions do not aggregate into beneficial collective outcomes, as judged by members of the community themselves. They are the main counter-example to Adam Smith’s logic of the invisible hand, according to which self-interested consumer and producer behavior in markets lead to efficient aggregate outcomes (again, as judged by the people themselves). Examples of tragedies of the commons include: over-grazing pastures, ocean over-fishing, depleting ground water resources, deforestation of communal forests, global warming, under-production of flood protection, free-riding on public irrigation systems (and lack of contributions to repairs), traffic jams on public roads with no congestion pricing, shirking in worker-managed enterprises, under-production in collectivized communist farms, voter rational ignorance in democracies, the difficulty of revolutions in autocratic regimes, etc. Tragedies of the commons are so ubiquitous in daily life that it’s tempting to ultimately frame any kind of social problem as a type of tragedy of the commons. Two salient features are that they are situations in which it is relatively easy to create the problem (and there are individual-level incentives to create the problem), and it is relatively difficult to organize a solution and profit from delivering a solution. Furthermore, people will often disagree about what exactly needs to be done to fix the problem. Gordon Tullock referred to such problems as “social dilemmas” in Volume 8 of Liberty Fund’s Selected Works of Gordon Tullock, where he highlights the widespread prevalence of conflict and the difficulty of solving such problems purely by means of voluntary cooperation (Tullock 2005). Governments appear as a possible solution to many social dilemmas because (a) they involve lower organizational costs than the purely private solutions, and (b) they can eliminate free riding by forcing compliance. Indeed, in his initial “Tragedy of the Commons” essay, Garrett Hardin (1969) had argued that we only have two possible solutions: privatization or government control. And considering that the nature of the examples typically precluded privatization, he provided a de facto argument in favor of centralized government control. “What incentives and knowledge does the government have to set up a good property rights regime, rather than an exploitative one?” Following the Coasean revolution in law and economics [see Ronald Coase], property rights economics adopted a more sophistical argument than Hardin’s (Alchian and Demsetz 1973; Barzel and Allen 2023; Demsetz 1967). At its best, property rights economics opens the door for explorations of various processes by which property rights regimes are created. Here is where the work of Elinor Ostrom and the Bloomington School provides the best example (Tarko 2017). At its worst, property rights economics remains stuck in Hardin’s box and it is used merely to argue that the task of government is to set up property rights, such that markets can then operate without free riding, and, hence, solve the problems. This is still a step up from Hardin and it has produced important ideas, like cap-and-trade, but it leaves out the key political economy question: What incentives and knowledge does the government have to set up a good property rights regime, rather than an exploitative one? Or in the case of the more simplistic solution proposed by Hardin, what incentives and knowledge does the government have to properly manage a commons? Government solutions of any kind, including the task of setting up property rights regimes, always come with the danger of government abuse and therefore the problem of getting the incentives right. As James Madison famously put it: “In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself” (Federalist #51). If a government is strong enough to curb private violence and solve various social dilemmas by forcing everyone to contribute their “fair share” (hence eliminating free riding), it is also strong enough to abuse its power over those it governs (Buchanan 1975; North, Wallis, and Weingast 2009). The Ostroms thought the concept of self-governance is helpful precisely for trying to pinpoint the conditions under which governments are more likely to solve problems rather than make matters worse. As Vincent Ostrom (1997) has argued, the stakes of this debate are high: “Democratic societies are necessarily placed at risk when people conceive of their relationships as being grounded on principles of command and control rather than on principles of self-responsibility in self-governing communities” (p. 4). One under-appreciated mistake down this path of property rights economics is to think of government as analogous to a firm, and citizens as government’s customers. The concept of the firm, as a type of team production, explains the need for hierarchy inside the firm to help solve worker’s shirking (Alchian and Demsetz 1972). However, the team production model should not be applied to societies as wholes, because societies are not integrated teams working together for a common goal. Instead, we should understand citizens as co-producers of rules. Co-production is a term that implies a merger between consumption and production. As Vincent Ostrom put it, we need, A Tocquevillian science of association—a body of knowledge that helps us to understand the nature of social order, and the forms of social interaction that lead to mutual advantage—is the foundation for choosing among the institutional alternatives open to us. Now, it remains to be determined whether human beings can actually use such methods of discussion, reflection, and choice to fashion the future course of human civilization. (Vincent Ostrom, interviewed by Aligica 2003) The concept of self-governance Robert Dahl has highlighted the fundamental problem of self-governance as follows: “to live in association with others necessarily requires that [one] must sometimes obey collective decisions that are binding on all members of the association. The problem, then, is to discover a way by which the members of an association may make decisions binding on all and still govern themselves” (Dahl 1989) (p. 89). Similarly, James Buchanan wrote about the “paradox of ‘being governed'”, and pointed out that “the individual does not enter into social contract [with others] for the purpose of imposing constraints on himself”, but in order to “secure the benefits of behavioral limitations on their part” (Buchanan 1975) (p. 136). Living with others brings about significant benefits, but it requires building consensus about how to govern collective affairs, and about what counts as a collective or private affair, i.e., about the legitimate scope of collective decision-making and, conversely, the extent of the private sphere. Building such a consensus is often far from trivial. It takes time and effort to discuss matters and to negotiate various possible schemes for compensating losses, and, ultimately, consensus might still be impossible due to some irreconcilable values. In the same book about social dilemmas, Tullock also emphasized that conflict is costly, and “[r]egardless of the outcome… the use of resources for this purpose is offsetting and therefore inherently wasteful. Social contrivances for reducing such investment of resources are, on the whole, desirable” (p. 5). How can we discover such institutions setting up the conditions for cooperation and diminishing conflict? The Ostroms thought the answer is to think about how to best enable self-governance. We can define self-governance as the capacity of a community to live under rules of its own choice, and to produce social-economic outcomes that most members of the community find desirable (Tarko 2021). Self-governance is valuable because it enables a more economically efficient system in the most general sense of the concept: i.e. a system that maximizes preference satisfaction not only with respect to the delivery of various private goods and services, but also with respect to the overall nature of society. Recent Econlib Articles by Rachael La Rose and Byron Carson show how coproduction works in generating public health safety during infectious disease outbreaks.1 As Tom Christiano put it, “[t]he citizens ought to play the role of defining the basic aims the society ought to pursue and the legislative institutions ought to be concerned with reconciling the different aims of citizens and defining broad means for implementing these aims” (Christiano 2005). Co-production and team production From the point of view of economic theory it is interesting and relevant to compare co-production to team production (Aligica and Tarko 2013). The concept of team production was proposed by Armen Alchian and Harold Demsetz as a way of explaining why firms have hierarchical structures in which managers monitor workers (Alchian and Demsetz 1972). The idea is that most goods are produced as part of a collaborative team, which makes it difficult to measure the labor productivity of each worker purely based on output (the output involves the combined efforts of many workers, which masks the individual efforts of each worker). Such teams face a tragedy of the commons in which each worker is tempted to shirk, leading to decreased output for the team as a whole. The role of managers is to monitor workers in a more direct fashion and ensure maximum productivity. The key difference between co-production and team production is that “[w]hereas team production involves cooperation for the goal of producing something for an outside consumer, in the case of co-production the good is consumed by the members of the production team. For this reason, the problem of monitoring can be solved more easily in the case of co-production because the agents have a vested interest in having the good produced in the appropriate quantities and qualities.” (Aligica and Tarko 2013) For example, in the case of typical manufacturing, workers are motivated primarily by their wages, and not by benefits from the product. By contrast, in the case of an irrigation project, the contributions to the project are motivated primarily by their own use of the irrigation system. This does not eliminate the temptation for free riding, but it does provide a stronger reason against it. “Advocates of centralization confuse co-production with team production and, consequently, inappropriately apply the firm model to public administration.” (Aligica and Tarko 2013) This Ostromian perspective adds an important participatory element to the concept of self-governance. Citizens are not understood as mere passive consumers of public services provided by governments, in a direct analogy to the market. In a self-governing system, citizens’ participation to the governance of various commons, and solving various social problems, involves more than just voting every few years. This perspective has gathered some attention in the policy arena, for example in discussions of the reform of public services in the United Kingdom (Boyle and Harris 2009). Furthermore, alongside the concern with incentives, Edward J. Lopez (2022) has argued that co-production is also useful for understanding the concept of individual sovereignty and citizenship in terms of creating a better capacity for informed collective decisions. As López (2022) put it, we should think of “communities [as coproducers of] knowledge governance”. Applying models that work well for understanding markets (i.e., governing the production of private and club goods) to the governing of the commons (i.e., common pool resources and public goods) can seriously back-fire, and lead to what Elinor Ostrom called “crowding out citizenship” (Ostrom 2000). As Vincent Ostrom also put it, “Democratic societies cannot be fashioned without such roots of self-governance…. For this reason, the basic architecture of modern societies must, as Tocqueville has argued, draw upon a science of association to fashion rules of social interaction that apply from the level of the village to the level of the nation state and beyond.” (Aligica 2003). Conclusion Robert Bish argued that Ostroms’ project tries to respond to two forms of pessimism, one from Max Weber about the inevitability of hierarchical bureaucratic organizations, and one from Alexis de Tocqueville about the collapse of democracies due to the gradual loss of civic virtues. On the first one, Weber observed that in operation, a bureaucracy becomes rigid, mechanical, and unable to adapt to changing conditions. It is not an ideal way to organize government. In contrast, his model of democratic administration is more responsive to citizens and more adaptable. However, in spite of the desirable characteristics of democratic administration, Weber believed it was not feasible on a large scale, but rather had to be limited to smaller governments. He was pessimistic about large-scale bureaucracies, but did not believe there was an alternative. Weber did not seem to have contemplated Vincent’s polycentricity, or federalism, as the way to govern a large society. (Bish 2014) One of the key points of the research on polycentricity has, indeed, been to show, first, that, empirically speaking, large scale governments are not in fact hierarchical, but polycentric, and, second, that, from a normative point of view, we should not try to turn them into hierarchical organizations (Tarko 2017). We can say that, although this point is still not widely understood, the Ostroms did indeed successfully counter Weber’s pessimism. The bureaucratic administration is not an inevitability, but a choice made due to a misunderstanding of the nature of complex institutions. Which brings us to the second issue: Tocqueville did not believe citizens understand how democratic administration and multicentered systems work; hence, citizens seek solutions to problems with a single-sovereign bureaucratic approach. Tocqueville believed that the faith in single-sovereign solutions would eventually suffocate the energy of citizens and destroy democratic administration. (Bish 2014) The Ostroms indeed took this possibility very seriously (V. Ostrom 1997; Vincent and Elinor Ostrom, interviewed by Aligica 2003). Bish recalls that Vincent was concerned with what he perceived to be a decline in public participation in civic life, something that went beyond simply participation in governance, and the increasing nationalization of activities that had formerly been left to civic associations or state and local government where citizen participation was much more likely. (Bish 2014) For more on these topics, see Tragedy of the Commons, by Garrett Hardin. Concise Encyclopedia of Economics. Property Rights, by Armen Alchian. Concise Encyclopedia of Economics. Peter Boettke on Elinor Ostrom, Vincent Ostrom, and the Bloomington School. EconTalk. “The Failure of Market Failure. Part II. The Public Goods Dilemma,” by Anthony de Jasay. Library of Economics and Liberty, Nov. 6, 2006. Their attempt to counteract this tendency ranged from their police and water management studies in the United States and to the management of common-pool resources across the world. The study of common pool resources was part of this broader concern with Tocquevillian self-governance: “My hope is… that the examination and analysis of common-pool resources in the field, in the experimental laboratory, and in theory, contribute to the development of an empirically valid theory of self-organization and self-governance.” (Elinor Ostrom, interviewed by Aligica 2003). Footnotes [1] Rachael Behr LaRose, “Orthodox Jewish Healthcare During the COVID-19 Pandemic,” Library of Economics and Liberty, Mar. 4, 2024, and Byron Carson, “Public Health from the People,” Library of Economics and Liberty, Feb. 5, 2024. References Alchian, Armen A., and Harold Demsetz. 1972. “Production, Information Costs, and Economic Organization.” The American Economic Review 62(5): 777–95. Alchian, Armen A., and Harold Demsetz. 1973. “The Property Right Paradigm.” The Journal of Economic History 33(01): 16–27. Aligica, Paul Dragos. 2003. Rethinking Institutional Analysis: Interviews with Vincent and Elinor Ostrom. Mercatus Center. Aligica, Paul Dragos, and Vlad Tarko. 2013. “Co-Production, Polycentricity, and Value Heterogeneity: The Ostroms’ Public Choice Institutionalism Revisited.” American Political Science Review 107(04): 726–741. Barzel, Yoram, and Douglas W. Allen. 2023. Economic Analysis of Property Rights. 3rd edition. New York, NY: Cambridge University Press. Bish, Robert L. 2014. “Vincent Ostrom’s Contributions to Political Economy.” Publius: The Journal of Federalism 44(2): 227–48. Boyle, David, and Michael Harris. 2009. “The Challenge of Co-production: How equal partnerships between professionals and the public are crucial to improving public services.” New Economics Foundation. Buchanan, James M. 1975. The Limits of Liberty: Between Anarchy and Leviathan. Indianapolis: Liberty Fund, Inc. Christiano, Thomas. 2005. “Democracy and Bureaucracy.” Philosophy and Phenomenological Research 71(1): 211–211. Dahl, Robert Alan. 1989. Democracy and Its Critics. New Haven: Yale University Press. Demsetz, Harold. 1967. “Toward a Theory of Property Rights.” The American Economic Review 57(2): 347–59. Lopez, Edward J. 2022. “Individual Sovereignty and Coproduction of Knowledge Governance” in Governing Markets as Knowledge Common, edited by Erwin Dekker and Pavel Kuchař. Cambridge University Press. North, Douglass C., John Joseph Wallis, and Barry R. Weingast. 2009. Violence and Social Orders. New York: Cambridge University Press. Ostrom, Elinor. 2000. “Crowding out Citizenship.” Scandinavian Political Studies 23(1): 3–16. Tarko, Vlad. 2017. Elinor Ostrom: An Intellectual Biography. London: Rowman & Littlefield. Tarko, Vlad. 2021. “Self-Governance, Robust Political Economy, and the Reform of Public Administration.” Social Philosophy and Policy 38(1): 170–97. Tullock, Gordon. 2005. The Social Dilemma: Of Autocracy, Revolution, Coup D’Etat, and War. Indianapolis: Liberty Fund. *Vlad Tarko is Associate Professor of Political Economy at University of Arizona. This essay is based on the author’s forthcoming chapter in Polycentric Governance from a Philosophical and Political Perspective, edited by Pablo Paniagua and David Thunder (Rowman and Littlefield). This article was edited by Features Editor Ed Lopez. (0 COMMENTS)