The great economist Adam Smith believed that the subject of economic science is social economic development and the growth of the welfare of society. Moreover, the development of the economy is based on the material (physical) resources of society, the use of which leads to the creation of wealth and wealth of the people. The methodology of Adam Smith’s teaching is based on the concept of economic liberalism, the main provisions of which are as follows: the interests of individuals coincide with the interests of society, the “economic man”, by the definition of a great economist, is a person endowed with selfishness and striving for an ever greater accumulation of wealth; an indispensable condition for the operation of economic laws is free competition; the pursuit of profit and free trade are evaluated as activities beneficial to the whole society; there is an “invisible hand” in the market, with the help of which free competition controls the actions of people through their interests and leads to the solution of social problems in the best way, maximally beneficial both to individuals and to society as a whole.
A. Smith put the idea of a natural order as the basis of his worldviews. He proceeded from the fact that people, providing each other services, exchanging labor and its products, are guided by aspirations for personal gain. But, pursuing personal gain, each person, he believed, contributes to the interests of the whole society – the growth of productive forces.
Unfortunately, such a worldview was too idealistic and naive. 43 years after the death of Adam Smith, in 1833 the parable of William Forster Lloyd introduced the concept of “Tragedy of Commons”. Then, in 1968, this concept became world famous thanks to an article in the famous journal “Science”, written by Garrett Hardin, called – Tragedy of Commons. With all due respect to Adam Smith, his worldview has been disapproved.
What is Tragedy of Commons?
One popular example of an explanation of this term is a thought experiment about Fishermen and the Lake. Let’s imagine that there is a lake provided for four fishermen for general use. There are 12 fish in the lake. Let’s also imagine that one pair of fish produces one fish (offspring), which grows the next day. Also, it should be added that the lake initially has 12 fish, and the lake is full. How much fish does each fisherman need to catch in order to use it rationally and maximize their provisions? If you do not take into account the tales of Adam Smith, each fisherman must fish one fish a day in order to have a long-term prospect of fishing. Since they fish one fish per day, 8 fish will remain. Each pair of fish will produce one fish, and the next morning the lake will be filled again. If at least one fisherman catches one more fish, then the number of pairs capable of breeding will be disrupted, and the fish population will never return to the previous number. And in the end, there will be no fish left in the pond, and the fishermen will starve. This situation is a classic example of the community tragedy that William Lloyd described in 1833, while discussing the issue of overgrazing in over-use areas. More than a hundred years later, ecologist Garrett Hardin again raised this issue when he described what happens when a large number of people share a limited resource, such as pastures, a fishing lake, living space and even clean air. He argued that such short-term personal interests, aimed at satisfying only their own interests, would lead to problems of the whole society.
Consider another example. Imagine this situation: we have 2 farmers who have a common field. They grow cows and compete with each other. If one of the farmers increases the livestock of his livestock, he will significantly increase his income. But, unfortunately, the common field is not infinite, and if both farmers decide to increase their livestock, then very soon the fertility of this land will dry up, making it useless for both farmers. This is also a description of the “tragedy of communities” – a situation widely known in economic science when the rational behavior of each individual individual contradicts their “common” interests.
So, it is beneficial for each of the farmers to increase the number of their livestock, because he cannot be sure that his competitor will not do the same. To better understand the problem and motivation of each participant, we need to parse a similar problem from game theory – the prisoner’s dilemma.
Prisoner’s Dilemma and Blonde Paradox. A Little Bit About Game Theory
What is game theory? This is a section of applied mathematics that studies the resolution of conflicts between players and the optimality of their chosen strategies. In this case, a game is understood as any conflict of interest, in which 2 or more players participate. From the point of view of the Austrian economic school, game theory can be considered as one of the branches of the science of human behavior – praxeology (Murray Rothbard mentions this in his main economic work “Man, economy and state”).
But back to the prisoner’s dilemma. What does it consist of? Imagine a situation where an illustrious couple of robbers were caught by police officers. They are interrogated in different rooms, and the severity of the punishment depends on what they say. If both are silent, then they will be convicted only for the robbery on which they fell, and each will receive 2 years. If one of them decides to hand over the other and tell the police about the previous robberies, putting all the blame on his teammate, then the one who told about the other will be free, and his partner will sit for all 10 years. If both Bonnie and Clyde turn out to be informers, then everyone will receive 5 years for their crimes.
In general, the situation is quite realistic. Let’s look at this situation through the eyes of one of the players. Clyde thinks: what if Bonnie does not stand up and snitch? Then I will get 5 years if I insist myself, and 10 if I remain silent. In this case, it is profitable for me to snitch. What if she doesn’t knock? If I insist, I will leave today, but if I keep silent, I will sit for 2 years. In this case, it is also beneficial for me to snitch! It turns out that Clyde is profitable to snitch on a partner in both cases! Bonnie argues similarly: as a result, both partners act rationally and receive 5 years each. What conclusion can be drawn from this game? Guided by their individual interests, Bonnie and Clyde receive 5 years each, while a better option would be for everyone not to snitch and get 2 years.
Another example where personal interests are an obstacle for the whole group is the Blonde Paradox, which was perfectly illustrated in the film “Mind Games”. A girl enters the bar, and 4 men immediately pay attention to her. If all 4 men go to get to know her, then they will simply interfere with each other, and nobody will get it. Then they will go to her “girl friends”, but they will push them away, because they do not want to be the “second option”. If no one notices a girl, then they will not interfere with each other, they will go to meet her friends, and everyone will be in a pair.
Interpretation of This on the Economy
The situation described in the prisoner’s dilemma is easy to project on the actions of individuals in the market.
Entrepreneurs, guided only by their own interests (and they have only one interest – the pursuit of profit), may miss effective solutions leading to economic growth. Then the intervention of a third party, for example, a state, which, having seen the optimal solution, will make adjustments to the economic activity of its wards, is necessary. Roughly speaking, a third accomplice will appear in the game with Bonnie and Clyde, who will set the condition: whoever knocks, he will not last long. In this case, both Bonnie and Clyde will do the most effective for both.
However, in this situation it is not so simple. The key difference between the market and the prisoner’s dilemma is the market process.
Imagine that the situation with Bonnie and Clyde is repeated from time to time. After serving 5 years, they are released and again unsuccessfully rob the bank. Interrogation again, they again offer a deal with the investigation. Again surrendered each other? Well, again 5 years in prison, freedom, a new unsuccessful robbery. Do you think there is at least one good reason why Bonnie and Clyde will continue to take each other from time to time? Obviously not. The model that we described can be called a repeating or evolutionary game. With the increasing number of cycles in the game, the likelihood that Bonnie and Clyde will finally stop handing each other up also increases.
Surprisingly, the answer that every person would be the first to come up with turns out to be true – to agree.
If conditions allow, the field can be divided and privatized. If any additional difficulties arise, then part of the field can be left common, having worked out certain agreements. Fortunately, the ability of individuals to find convenient and effective solutions for all is much higher than many economists think.