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Most of us have heard of Adam Smith’s theory of invisible hand. (If you haven’t, the gist of it is: Left to pursue our personal self-interest, we will also inevitably help the greater good as well.)

Here’s a lesser-known theory by WiIlliam Lloyd, a contemporary of Smith. It’s called The Tragedy of the Commons. It goes like this.

Many herdsmen over the centuries grazed their cows in the commons (ie. a space owned by no-one, and used by anyone). Herdsmen naturally tried to maximize the number of cows they had grazing there. Because of disease, tribal warfare and poaching, the numbers were still small enough that the commons was not overgrazed.

Eventually, social stability was achieved and veterinary practices improved, so that the former limits on growth were no longer in place.

When an individual herder would decide whether or not to purchase another cow, he/she had to factor in the cost/benefit.

The benefit was all those included in having another cow – increased milk production, ability to sire other calves, and money gained at slaughter.

The cost was increased grazing in the commons – but this cost was distributed among all the herders, ie., the overgrazing meant everyone’s cattle suffered a bit, not just the individual’s new cow.

You see the dilemma – each herdsman is motivated to maximize the number of cows they have, yet collectively, they rush towards ruin (overgrazing and hungry, unhealthy cattle).

OK, Readers, over to you: What’s the solution?
528135849_b28de394c6 Photo Credit: Erin

About the Author


Imagine if Canadians were known for being all over their money. Engaged. Proactive. Getting out of debt. Savvy. Saving. Generous. Nancy wants to help. Nancy started her own journey with money over 15 years ago, and formed her company “Your Money by Design” in 2004 to help others along the same path. It’s not the usual financial advising/investment stuff. It’s about taking control of day-to-day finances –managing monthly cashflow effectively, spending appropriately, getting out of debt, saving. If you're ready to take control over your finances, pop by her business site, YourMoneybyDesign.com

9 Comments

  1. Jeff Morgan

    Okay, I’ll play it with you.

    First, the Tragedy of the Commons illustrates what economics is all about, which is how do make choices and allocate scarce resources.

    However, there is one pitfall of reasoning in the Tragedy of the Commons. The tragedy assumes that advancement in veterinary practice occurs and that social stability occurs, but that no advancement occurs to make the commons produce more or to expand the area of the commons? Why not? Why the assumption that advancement occurs in some areas and not others? The consequence of this faulty reasoning may lead one to confuse the difference between a shift along the production possibility curve and a shift of the curve itself.

    Second, the Tragedy of the Commons presupposes that herders keep the cows for the same length of time. The best decision for the herders may be to keep breeding the cows and to start selling cows to the butcher at a younger age, or perhaps the herders should start specializing, which could increase the benefit to all concerned–something Adam Smith would agree with.

    Third, the Tragedy of the Commons suggests that the herders should look at cooperation to increase the benefit for each member of the group, perhaps along the line of game theory (or John Nash). A modern-day equivalent of this might be supply-chain cooperation and sharing of technologies that has occurred between producers and suppliers.

    There is one other thing that William Lloyd left out in his tragedy that is crucial to our discussion today. What, you may ask? Ah, the beloved role of government taxation. If the government raises taxes enough, it will force some herders to leave the business of herding. Of course the politicians could take credit for solving the problem of the commons, thereby justifying their salary and giving them the credentials to seek yet another term.

    But in having solved the problem of the commons, the government would not tell you that it created another problem, i.e., the problem of unemployment. What to do? Demonize the few greedy herders who are still in the business (aka, the big, bad, evil corporations), and then subsidize those unemployed herders by raising taxes still further.

    Any comments? (BTW, any resemblance in the preceding two paragraphs to the current administration in the USSA is merely coincidental!)

    [Reply]

    May 26, 2009
  2. We are seeing this happen now on a gigantic scale in the oceans. It destroyed the Newfoundland cod, and it is destroying untold populations of fish worldwide.

    What to do? An organization with an eye to the greater good needs to regulate. The herdsmen need to be herded.

    [Reply]

    May 26, 2009
  3. @Paul – Yes re: the oceans, including the arctic ocean very soon. And the air we breathe.

    @Jeff – well we know we don’t want any gov’t intervention, esp. not taxes, so let’s eliminate that possibility. What motivation would any given herder have to limit the size of their herd? Why would they cooperate? And what would the mechanics of the “co-op” look like? As @Paul points out, there are crucial-to-you-and-me-and-your-kids examples in which we bump up against: our ability to grow exceeds the limits of the earth (eg. our capacity to traverse the ocean and pollute it, our capacity to create cars and drive them and pollute the air, our capacity to build cities which don’t have enough water for the residents). So, although I suppose the parable above could have different factors at play with different outcomes, the principle it’s illustrating (that individuals’ collective behaviours do not necessarily result in the greater good) remains.

    [Reply]

    May 27, 2009
  4. The libertarian perspective on this would be that the commons is the problem.

    If the commons is converted to private ownership, the problem goes away (since the owner then has a vested interest in managing the land and balancing it with the grazing cows). In your thought experiment, this could be achieved by auctioning off the commons to the herders (with the proceeds paying the society as a whole for the loss of the communal good).

    In a more realistic situation (like the oceans) this could be achieved by extending the marine boundaries of countries until there was no longer any international waters, or auctioning off parcels of international waters (and authorizing the new owners to use force to defend their property from poachers). You’d want the parcels of international waters to entirely encompass sites of value so that the owner has an interest in protecting them (otherwise you’ve just exchanged one commons situation for another).

    Mr. Cheap’s last blog post..3 Years of Peer-to-Peer Lending

    [Reply]

    May 28, 2009
  5. @Mr. Cheap OK, I’m with you, although … what about air?

    [Reply]

    May 28, 2009
  6. One libertarian think tank came up with these thoughts on air: http://www.payyourairshare.org/

    A better approach is presented here: http://www.la-articles.org.uk/FL-3-4-6.pdf

    Basically it amounts to reform of property laws, such that a companies polluting can be (correctly) viewed as damage to my property. Say I have a hunting lodge adjacent to their factory. If their pollution noticeably affects the air rights of my property, I can be awarded damages.

    There have been attempts to merge environmentalism with libertarianism (http://en.wikipedia.org/wiki/Green_libertarianism) however I think libertarianism handles environmental issues just fine without the adjustments.

    [Reply]

    May 28, 2009
  7. Jeff Morgan

    @ Paul: “What to do? An organization with an eye to the greater good needs to regulate.” Fair enough, but as the Latin proverb goes, “Who will guard the guards?” Who make sure that this organization, while well-intentioned, does not create more severe and varied problems than it actually solves. A lot of our problems arise from improper regulation; both over regulation or under regulation can be disastrous.

    @ Nancy: A world with no government-imposed taxes? This is obviously a thought experiment of the purest kind! 😉

    “What motivation would any given herder have to limit the size of their herd? Why would they cooperate?” It looks like you’re acknowledging the reality of greed as an organizing principle. So are you really a closet capitalist underneath that socialist cloak that you’re wearing? 😉

    Motivation: It can be anything. Why should we be satisfied with a 2000 sq ft house instead of upgrading to a 6000 sq ft house? One reason: We don’t want to spend all of our time cleaning and maintaining a 6000 sq ft house. A second reason: It costs too much to heat and cool. A third reason: You name it–anything will do. To some people those reasons are valid, to others, not at all. Motivation depends on the individual(s); some people perceive the trade-off as worthwhile, others as not worthwhile.

    Why would they cooperate? If they saw personal gain in the transaction, why wouldn’t they cooperate? Isn’t that one reason why people specialize and trade? But you’re now dealing with personal and cultural concepts that need to be addressed.

    @ Mr. Cheap: I’m with you for the most part, but could it be that private property is more of a western concept? In other cultures, private property may be eschewed–then what?

    [Reply]

    May 28, 2009
  8. Jeff Morgan

    Hey Nancy, I couldn’t resist. This one’s for you! 🙂
    http://www.facebook.com/home.php?ref=home#/profile.php?id=598716254&ref=profile

    [Reply]

    May 28, 2009
  9. if the grazing site is where much of the wealth originates, why not concentrate a lot of the resources on making it as sustainable as possible?

    and look for more grazing sites. hard to believe there is only one.

    and is grazing really the only way to feed cows?

    isabella mori’s last blog post..wordless wednesday willow

    [Reply]

    May 28, 2009

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