Elinor Ostrom

Elinor Ostrom on the Market, the State, and the Third Sector

The remarkable achievements of the Nobel Prize-winning economist


When economists show that market arrangements fail, they usually make the simple recommendation that "the" state should take care of these problems. Elinor Ostrom has demonstrated empirically that "the" state may not be "the" solution. Her work argues for the wisdom of institutional diversity, looking to individuals to solve problems rather than relying on top down, one-size-fits-all solutions. The conventional wisdom assumes that natural resources and environmental problems should be solved in a centralized—and if possible, global—manner. Through innovative analysis in the field, in the experimental laboratory, and in theory, Ostrom's work has show that creative solutions to problems such as the depletion of common pool resources exist outside of the sphere of national governments. Hence today's announcement that she had received the 2009 Nobel Memorial Prize in Economic Sciences.

But there is more to Elinor Ostrom's work. In fact, one may say that, together with Vincent Ostrom, she has mounted a remarkable challenge to the mainstream views in economics and political science. As she described it herself, her work is a systematic attempt to transcend the basic dichotomy of modern political economy.

On the one hand, there is the tradition defined by Adam Smith's theory of social order. Smith and his intellectual descendants focused on the pattern of order and the positive consequences emerging out of the independent actions of individuals pursuing their own interests within a given system of rules. That was the "spontaneous order" tradition where the study of markets—the competition among producers and consumers of pure private goods leading to a better allocation of resources—occupied a preeminent place.

On the other hand, there is the tradition rooted in Thomas Hobbes' theory of social order. From that perspective, individual actors pursuing their own interests and trying to maximize their welfare lead inevitably to chaos and conflict. From that is derived the necessity of a single center of power imposing order. In Hobbes' view, social order is the creation of the unique "Leviathan," which wields the monopoly power to make and enforce law. Self-organized and independent individuals thus have nothing to do with making order. Most modern theories of "The State" have their origins in Hobbes' vision of Leviathan.

In Ostrom's view, the theorists in both traditions managed to keep not only the theories of market and state alienated from each other, they also managed to keep the basic visions of the two separated. Smith's concept of market order was considered applicable for all private goods while Hobbes's conception of the single center of power and decision applied for all collective goods. But what if the domains of modern political-economic life could not be understood or organized by relying only on the concepts of markets or states? What if we need "a richer set of policy formulations" than just "the" market or "the" state? Answering that challenge is probably the best way to see Ostrom's work on governance and common pool resources: It's an empirically-based contribution to a larger and bolder attempt to build an alternative to the basic dichotomy of modern political economy, an effort to find an alternative to the conceptions derived from Smith and Hobbes.

"The presence of order in the world," Ostrom writes, "is largely dependent upon the theories used to understand the world. We are not limited, however, to only the conceptions of order derived from the work of Smith and Hobbes." We need a theory that "offers an alternative that can be used to analyze and prescribe a variety of institutional arrangements to match the extensive variety of collective goods in the world." In response to that need, Ostrom has explored a new domain of the complex institutional reality of social life—the rich institutional arrangements that are neither states nor markets. These are for-profit or not-for-profit entities that produce collective goods for "collective consumption units." Examples of such "consumption units" abound. They are small and large, multi-purpose or just focused on one good or service: suburban municipalities, neighborhood organizations, condominiums, churches, voluntary associations, or informal entities like those solving the common-pool resources dilemmas studied and documented by Ostrom around the world. Yet, once the functional principle behind them was the identified, the very diverse forms could be understood as part of a broader pattern, and the logic of the institutional process involved could be revealed with relative ease. They could be seen as a "third sector" related to but different from both "the state" and "the market".

And thus Ostrom's study of governance is not only a source of inspiration, it is also a challenge to libertarians. In study after study, she has shown that the principles of individual freedom, responsibility, entrepreneurial creativity, and resourcefulness apply not only to the production and distribution of private goods, they also apply to a large institutional domain outside the market order. This "third sector," which is "neither state nor market," may in fact be as important a battleground for the preservation of a free and prosperous social order as the market itself.

Paul Dragos Aligica is a Senior Research Fellow at the Mercatus Center. He is the co-author (with Peter Boettke) of Challenging Institutional Analysis and Development: The Bloomington School (Routlege, 2009). He studied with Elinor Ostrom at Indiana University, Bloomington.

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  1. There is no Nobel Prize in Economics.

    1. Nor should there be, because these days only interventionists and socialists would actually get the prize.

  2. The 21st Century didn’t begin until Jan. 1, 2001.

  3. Hey, if Ostrom and others are happier embracing non-state governance mechanisms by calling them “non-market”, let them have at it.

    I seem to recall libertarians have LONG argued that absent regulations civil organizations would emerge that met many of it’s functions through voluntary mechanisms. For example, the Kosher food labelling system vs. the FDA.

    You can call the Kosher food labelling system “non-market” if you feel like it. But it is a functioning mechanism for governing food content that involves no coercion, no fines, and no state regulation. Ostrom’s research appears to demonstrate how and why it works.

  4. I would think they’d be better off giving the economics prize to Geithner or Bernanke, as an encouragement to keep up the good work of saving the global economy.

  5. Labels aside it seems like a pretty interesting idea. (obviously) I guess I will have to take my 5 brain cells, stop breathing for a few minutes at a time so I can use them all, and try to wade through papers concerning it.

  6. I’m slightly surprised Obama didn’t win. Not for anything so declasse as a substantive contribution, but for, you know, inspiring hope for a better economy.

  7. “The Royal Swedish Academy of Sciences said Ostrom’s ‘research brought this topic from the fringe to the forefront of scientific attention’, “by showing how common resources ? forests, fisheries, oil fields or grazing lands, can be managed successfully by the people who use them, rather than by governments or private companies”. Ostrom’s work in this regard, challenged conventional wisdom, showing that common resources can be successfully managed without privatization or government regulation.”

    She sounds like some kind of dangerous socialist to me, perhaps she needs some EKON 101 from the libertarians!

    “Ostrom is considered one of the leading scholars in the study of common pool resources. In particular, Ostrom’s work emphasizes how humans and ecosystems interact to provide for long run sustainable resource yields. Forests, fisheries, oil fields, grazing lands, and irrigation systems, among others, all exhibit the characteristics of common pool resources and Ostrom’s work has highlighted how humans have created diverse institutional arrangements over natural resources for thousands of years that have prevented ecosystem collapse. Yet, Ostrom is quick to point out that, while successes are abundant, humans are also responsible for countless ecosystem collapses.”

    Good lord she’s an EVEIL ENVIRONMENTALIST too!!!Doesn’t she realize the only way to protect the spotted owl is to encourage private ownership and a brisk trade in the pesky birds? She needs some EKON 101 guys!

    1. “EKON 101”? Well, I’m sure that is a compelling parody of the stawman market proponents in your head, MNG. Typical meaningless, inapt snark. I suppose it is easier on your liberal beliefs to project such thoughtless knee-jerk protestations onto those who disagree with you than to take their arguments seriously. Rather lazy, but certainly easier and more fun.

      1. Dude, it’s a long running joke on H&R, get with it.

        It started when liberals were constantly met with some variation of “basic economics 101 says ____” Of course the person saying this usually had not read an academic economics journal in the past five decades or been in more than one economics class for the same period, but there it was. Libertarians sometimes engage in this smug assumption that their ideology=accepted tenents of economics and so people who disagree are the equivalent of creationists. Of course economics has had a lot of non-libertarian nuance since Adam Smith…

        1. Libertarians sometimes engage in this smug assumption that their ideology=accepted tenents of economics

          No, just the only economic school that that works in practice and the only one history shows to be valid.

          This is exactly why it’s not accepted in conventional academics.

          The day PK makes a valid prediction will be the day PK capitulates, stops worrying about political favor, and learns to love the Mises.

        2. Good lord she’s an EVEIL ENVIRONMENTALIST too!!!Doesn’t she realize the only way to protect the spotted owl is to encourage private ownership and a brisk trade in the pesky birds? She needs some EKON 101 guys!

          The irony is that you do not understand her work at all.

    2. So, MNG,

      Do you come from a planet where libertarians don’t argue that voluntary collaboration and cooperation is preferable to government regulation?

      What color is the sky there?

      1. The sky is not visible. It is covered in flying unicorns and rainbows. With constant shower of taxable high fructose skittles falling from the sky.

        1. Im not entirely sure about all of this?

      2. Do libertarians argue against privatization in your world MikeP?

        1. When it isn’t apt, yes. In particular, in those arenas where people stomp on each others toes in commons that are not obviously divisible — also recognizable as where the Coase theorem finds high transaction costs — internally derived institutions that are neither firms nor parceled property rights will often offer superior results to traditional privatization.

          1. MNG, I think you chose to pick on the wrong person, i.e., someone who knows what he’s talking about.

        2. How exactly is she arguing against privatization? For these non-state mechanisms to exist the resorces would have to be held in some private, albeit collective, hands.

          Non-governmental ownership doesn’t necessarily equate to individual ownership. An organization or a co-op can own private property that is shared within it’s membership.

          1. How exactly is she arguing against privatization?

            Unfortunately, some of the proposals presented as “privatization” would be better described as “enclosure.”

    3. As I said, if it makes you feel happier believing that libertarians would be somehow opposed to non-governmental self-organized resource management mechanisms, please feel free to do so. As long as it keeps you from shooting the statist crack.

    4. You know what I like about MNG? It’s how his comments really make me think about stuff.

      1. He’s a sharper stone upon which to hone my debate skills, I’ll agree.

    5. Re: MNG,
      She sounds like some kind of dangerous socialist to me, perhaps she needs some EKON 101 from the libertarians!

      If this is what she actually said, she should at least take a course in epistemology:

      “[…]by showing how common resources ? forests, fisheries, oil fields or grazing lands, can be managed successfully by the people who use them, rather than by governments or private companies. Ostrom’s work in this regard, challenged conventional wisdom, showing that common resources can be successfully managed without privatization or government regulation.”

      Don’t the people that use the resources actually OWN them? So how is that NOT privatization? Isn’t Ostrom actually engaging in double-speak, by forcing a differentiation between private property per se and property owned by several private individuals?

      1. Yeah… Everything about what Ostrom said is totally fine. Private ownership, local decision-making… All perfectly good.

        No tragedy of the commons, no authoritarianism, no epistemological problems with central planning… all seems A-Ok to me.

      2. Epistemology? Are you kidding?

        Let’s say your neighbor parks his ugly car in front of your house. You offer him $20 to never park his car in front of your house again. He accepts — and never parks his car in front of your house again.

        You have just created an oral deed for something neither of you own, you made a transaction based on that deed, and both of you are better off for it.

        Now that, strictly speaking, is simply Coasian bargaining between two people over an unowned resource. For something more complex, consider two neighboring cul-de-sacs. Adults like parking cars in the streets. Kids like playing football in the streets. But football and cars don’t go together well for either adults or kids.

        So folks from both streets get together and propose that all cars be parked on one of the streets so football can be played on the other. The street with more adults is where the cars are parked. The street with more kids is where the football is played.

        Again, a resource entirely unowned by any of the participants was allocated by mutually cooperative agreement among the interested individuals. Collective decision: no government involved. In fact government authority may be intentionally usurped by such an agreement as those on the parking street agree not to whine to the city when a car is parked in the same spot for 3 days, contrary to city ordinance.

        1. Re: MikeP,

          Let’s say your neighbor parks his ugly car in front of your house. You offer him $20 to never park his car in front of your house again. He accepts — and never parks his car in front of your house again.

          You have just created an oral deed for something neither of you own[…]

          Mike, I OWN the front of my house, and he OWNS his car. Otherwise, we would have NEVER made such an arrangement. The fact that the front of my house is considered by the government as “public” makes no difference to MY reasonable expectations – it is still MY front of the house.

          Ownership does NOT come just because of a piece of paper issued by some government or public notary (i.e. a deed). You SHOULD read Economics and Ethics of Private Property, by Hans Herman Hoppe.

          Again, a resource entirely unowned by any of the participants was allocated by mutually cooperative agreement among the interested individuals.

          Again, you misunderstand the concept of private property. Could a homeowner MAKE his NEIGHBOR take the neighbor’s car out of the way for the kids to play if the car were in the front of the neighbor’s house? What if he refuses? Would his refusal still mean the cul-de-sac is publicly-owned? Can the other neighbors be justified to block his access to HIS driveway? Try that yourself with YOUR neighbors . . .

          The answer is that the neighbor considers his side of the street (the front of HIS house) as HIS. Unless there is a benefit at the margin to moving his car, he is NOT going to move his car especially if he has no kids. Clearly, the so-called collective ownership disappears the very moment one of the neighbors parks his car on someone’s else “spot”.

          1. I suggest an experiment: tow away the car of someone else who parks in front of your house. You will quickly find that no one owns the spot on the street in front of your house, regardless of your expectations.

            Of course if you live in an extremely tightly parked neighborhood in a city, there may be customary ownership of the spot in front of your house. But, again, that is a custom internally developed within your neighborhood and unless you’ve informed city enforcers of the arrangement, they will not recognize your claim should a dispute about it arise.

            1. Yes, exactly, which is why agreements you’ve outlined above tend not to exist. Because if someone parks in front of your house (or in the special kid’s only zone), and you have him towed away, you will be arrested and thrown in prison for theft.

            2. I suggest an experiment: tow away the car of someone else who parks in front of your house.

              I cannot tow away his car, since the government already decided it is not mine – in pretty much the same way it decided I do not really “own” my house or 30% of MY income. However, the point is that I still consider the front of my house as MINE despite what the government decided, which is why the arrangement you indicated first cannot be over something I absolutely do not own – that’s a fallacy.

              1. Fair enough. If you tautologically consider anything you believe you can negotiate as your property, then I suppose everything within Ostrom’s work still follows. It’s just her words you have a problem with.

              2. Why do think you own the street in front of your house?

                When I bought my house, the boundaries of what I was buying was clear. It isnt like the street is running thru a right-of-way. In that case, I would agree with you. The “original” owner of my lot, when it was a big farm (80+ years ago), divided it into a bunch of little lots, none of which included the street that was built onto his land. He didnt sell me (thru many intermediate owners) the street. I dont own the street. And if I thought I did, I would be insane.

          2. Moreover, one of the things that is problematic about public ownership is precisely the way it wrecks the potential for those kinds of agreements. Just for instance, if you can’t control who is and isn’t allowed to park in in front of your house, because it’s “public property” then there’s no way to enforce the agreement among the neighbors. And an interloper can simply park in all the “free” parking in the kid’s zone and call upon the state to defend his “right” to park there. Which they probably will, and they are probably even legally bound to do.

            1. It’s OK that there’s no way to enforce it. Not every arrangement has to be backed by a contract, courts, and laws. It’s not gonna be bulletproof, but it will be better than no arrangement at all.

              There’s no law which requires recycling, yet 90% of my friends do it anyway. It has become a social norm. Basically, if someone in my circle doesn’t recycle, they are shamed over it.

              Same deal with disposing of used engine oil after changing it in your car. Nobody dumps the stuff in the storm sewer anymore – not because it’s illegal, but because it’s a pure douchebag move.

              Not sure whether this gets to the heart of Ostrom’s work, but just pointing out that not all arrangements have to be economic or legal.

              1. Except me. Some of my friends have tried to shame me over it. But they failed.

    6. She sounds like some kind of dangerous socialist to me, perhaps she needs some EKON 101 from the libertarians!

      I think you would be hard pressed to find a more strident wing nut libertarian then Ostrom.


  8. Er shooting the statist heroin. You smock crack. You shoot heroin.

  9. Being a “tree hugger” I’m a huge fan of self organized resource pools in the private sector. Especially a resource as renewable as trees.

    The one interesting discussion in the tree field is the CO2 usage of old growth v. new growth. But that’s another story.

  10. I don’t think she is arguing for more statist/large scale collectivist measures. If anything, I see her theories pushing for devolved power structures. That’s something that most libertarians would be in favour of, I think.

    There is nothing wrong with co-ops or community based ownership of resources or property as I far as I’m concerned. So long as these institutions are voluntary, I think it’s fair enough.

    1. Even if these co-ops or communities structures are not voluntary. I think a small scale community-based “state” it is a more manageable environment for libertarians than a top-down federally run economic system.

  11. Does one of you have a title of something published in paper … or digits, I suppose, if nothing in paper, in which is Nobel Prize paragon expounds upon her thesis? An ISB would be nice as well, although I suppose I could go to amazon-dot-com and “search” by her name – if I must – *sigh*. Interesting idea, should be a good read.

    1. Well, you could always read her book, “Governing the Commons,” which is available from Amazon.com and probably will be reappearing in bookstores momentarily if it isn’t there already.

  12. Paul Dragos Aligica[…] explains why Professor Ostrom’s groundbreaking work represents a systematic attempt to transcend the basic dichotomy of modern political economy.

    Yes, that would be plain old statism versus statism with a veneer of pseudo-scientific validity – THAT dichotomy.

  13. I would recommend her 1990 “Governing the Commons” as a good start, but also 2005 Understanding Institutional Diversity. Those would give you a good idea of what her research is about. She also has some papers about polycentricity and decentralization.

    1. Amazon’s got that, too. Also “Rules, Games, and Common-Pool Resources.”

  14. Irrelevant commentary (sorry): my Composition professor told us to write an essay that argues that a certain advertisment is morally wrong. WTF? How can an ad be wrong, it’s an AD. All it does is displays a product, gives a price and some facts, and persuades you to buy something. He claims to be a libertarian. You know what his first claim for this was? I hate the Republican and Democrat parties, so I’m a libertarian. Idiot. Libertarians aren’t based on hatred for the other ideologies, they have there own seperate ideology based on libery and constitutional law. I’m also sort of tying in the ideas of objectivism into this “ad arguement”, which is why I don’t find any ads these days immoral. He doesn’t get it. He doesn’t even believe in capitalism and claims to be libertarian. In essence, when the class was arguing, he said there should be a law regulating business on some sort of ethical standards. WHOSE ETHICAL STANDARDS? That’s what everyone wants to do! Impose there ethical standards! That’s what the ethics of objectivism and libertarianism oppose: forced ethics. He is an idiot. And I’m sorry this space was taken by my rant.

    1. Just write the essay on why ads can’t be immoral. Fuck his instructions.
      If he’s any good as a professor he’ll like it.

    2. A fraudulent ad is morally wrong.

      An ad that encourages immoral behavior — say one that supports present notions of health care reform — might be morally wrong.

      Do you get to pick the ad, or does he?

    3. “And I’m sorry this space was taken by my rant.”

      Having libertarian sympathies, I argue that taking that space may have been unethical, but it should not be illegal.

  15. The best bit about these two is that they’re not Krugman. It’s good to have someone else to talk about.

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  17. I think it would be more constructive/instructive to talk about how the PREFERENCE for broad-regulation based solutions to problems get IN THE WAY of the private solutions that would normally develop.

    The reason we don’t see a lot of private solutions is that our entire legal system is clogged with an almost infinite number of inflexible laws, a horribly inefficient justice system, and extremely excessive liability (you can sue for anything and win nowadays e.g. the hot-coffee-McDonald’s-story).

    Is it difficult to know how much your country should be logging its forests? Well that’s only a problem because they were arbitrarily made public property years ago. Nowadays with GPS and all this electronic crap we have private companies could easily run huge forest resources and “over-logging” would never be a problem – nobody’s is going to over-log his own forst. Indeed, I believe that one of the reasons that Americans (and Australians and Canadians) are so rich as a people is quite simply from homesteading. For once in history governments GAVE their PEOPLE land. How the hell else are you going to prosper as a nation? How’s THAT for “ownership of the means of production”, all you Marxists out there?

    Another big thing is our land use and utilities laws. All our land use laws are designed simply to raise the value of houses by creating an artificial scarcity. How else do you explain 20-acre zoning? And our utilities laws are DESIGNED to keep utilties monopolies. Without ridiculous land use and development laws, utilities could be handled at the housing-subdivision level. Developers could easily put in the appropriate lines and conduits, and whole communities/housing co-ops/homeowner’s associations could bargain with MULTIPLE utility companies over prices and service.

    Without our land use and development laws, half the crap the hippies complain about wouldn’t be problems. America would have much fewer suburbs and many more dense cities – so we wouldn’t use even half the fossil fuels we do now – especially if you consider we could be using nuclear power. If we just let companies build and own roads and bridges and subways and public transportation, transportation would be cheap and ubiquitous and the city governments wouldn’t have to spend an arm and a leg on them. And in a world of dense cities like this, there would be no wal-marts or home depots or big box stores that hippies complain about, because having a few centralizied locations wouldn’t be advantageous in a world of few cars where you can walk everywhere.

    Another way to put it is, it’s the laws, stupid.

  18. Correction:

    *Nowadays with GPS and all this electronic crap we COULD have private companies could easily run huge forest resources

  19. Thanks to all for the titles. Now I have a Christmas gift list!! heh.

  20. “”over-logging” would never be a problem – nobody’s is going to over-log his own forst.”

    Actually, people do overuse their own private resources all the time. IE, they go for short term profit, over long term sustainablity. On a small scale that’s fine, it’s their property, they can waste it if they want. On a large scale it can cause problems. For example, see the recent financial crises, which has a lot to do with poorely designed incentives, and people putting short term profit over long term sustainablity.

  21. *Actually, people do oveuse their own private resources all the time. IE, they go for short term profit, over long term sustainablity

    no they don’t. That’s just silly. Nobody’s going to exhaust their own resources and completely put themselves out of business later. It may happen every once in a while with a sole owner who doesn’t have any kids he wants to pass the resource down to and no stockholders/investors he’s beholden to – but in the grand scale people don’t deliberately put themselves out of business. That’s just a silly thing to suggest

    1. Actually, I am more than willing to seek short term gain at the expense of long term sustainability. I’m too big to fail. You will rescue me.

      1. Wait! Are you saying that government intervention is actually the cause of resource misallocation?

        Every government economist I know says otherwise!

  22. Indeed, those times you do see people unsustainably exhaust their property, you invariably find that their future property rights are in question. They reap while they can against the risk that they can’t reap in the future at all.

  23. Yes, people behave irrationally all the time, and go for short term profit.

    Do you really believe nobody at Lehman or Bear Sterns (or anyone number of other insitutions) knew that the stuff they were selling/buying was toxic?

    And yes the people at the top were owners too, usually with many millions in stock options.

    What about all those people that used to clear cut? Or overgraze (yes even on their own land).

    What about farming on fragile land that ends up as sand?

    Sure, most people don’t say, yes, I’m going to go out of business in two years, but their actions speak louder than words.

    1. They acted entirely rationally. Of course they knew it was toxic. They judged the risk in the light of a good chance of a government bailout.

      Some lost the bet, most won.

      When you are betting with other people’s money you double down regardless what the cards say.

      AIG acted very rationally, and the results showed how rationally.

      The problem was, and is still, being caused by people acting entirely rationally in response to distorted (synonymous with ‘managed’) markets.

  24. The difference between the players in the financial crisis and, oh, every private forest in the United States is that the latter provides a well understood resource stream that can be predicted years and even decades in advance. Observations from the latter are not really applicable to the former, no matter how much you try to shoehorn them in.

    As for clear cutting, whenever I’ve seen it, it has been on government lands. With good reason. The private logger has no idea when or if he might be invited back. I don’t know an example of overgrazed private lands. Do you?

    Farming on fragile land is usually an accident, such as when farming methods that worked great in the Dakotas failed miserably in Montana. If the farmers knew the methods were unsound, they wouldn’t use them.

  25. The activities might be different, but the actions are similiar. People going for short term profit, over long term gain.

    Does it happen all the time, no. But it does happen.

    You guys are making the same type of arguments that Greenspan did about capital markets. That people would always behave rationally in their own self interest, and thus we would get the problems we did.

    To bad in reality people do behave irrationally, and they do “herd”. Thus we get bubbles, and yes irresponsible use of physical resources as well. Even when it’s totally privately owned.

  26. It is completely different. In one you know exactly what the future income stream is. In the other the future income stream is highly volatile and, in fact, highly dependent on the base provided by the present income stream.

    Thus when you can provide greater leverage to your scarce capital by converting vanilla mortgages into mortgage backed securities, with no change in risk or exposure, you will. And when government companies are buying any and every mortgage you can get through approval and bring to them, you will approve and resell a lot of crappy mortgages.

    This appears irrational in that those at the top of these companies, who are most invested in them, were not paying attention to the economists and modelers who were warning that the risk profile was getting out of the envelope. But to the worker on the phone, it is entirely rational. He makes bonuses by following bad incentives — even when the original source of those incentives is Mssrs. Frank and Dodd.

    Logging companies simply don’t have problems anything like this: loggers aren’t incentivized to bring in harvested trees that they weren’t asked to cut down.

    Thus we get … irresponsible use of physical resources as well. Even when it’s totally privately owned.

    Sigh… Cite?

  27. *thus we would NOT get the problems that we did.

  28. Oh, I won’t argue that the people peddeling those loans weren’t behaving rationally. If reward people for selling crap, they will sell crap.

    And yes loggers will just log whatever you tell them to.

    Here is a great example of farmers over grazing on private land

    “China faces similarly difficult challenges. After the economic reforms in 1978 that shifted the responsibility for farming from state-organized production teams to farm families, the government lost control of livestock numbers. As a result, China’s cattle, sheep, and goat populations spiraled upward. While the United States, a country with comparable grazing capacity, has 97 million cattle, China has a slightly larger herd of 115 million. But while the United States has only 9 million sheep and goats, China has 366 million. Concentrated in China’s western and northern provinces, sheep and goats are destroying the land’s protective vegetation. The wind then does the rest, removing the soil and converting productive rangeland into desert.”


    1. You know what’s missing from your example about overgrazing on private land? Any evidence whatsoever that the land being overgrazed was private.

    2. In fact, as one could completely predict, here is the first thing I found in a search:

      China faces similar overgrazing problems, especially in the northwest, where there are no land ownership rights and no fences to limit overgrazing, says Brown. As a result of economic reforms in 1978, there has been little incentive for individual families to limit the size of their flocks and herds, so livestock numbers have soared, he argues.

      This is, incidentally, apparently the source for your example.

  29. Kroneborg has no idea what he’s talking about

    as people here have repeatedly shown, the financial leaders acted completely rationally, but based on RIDICULOUS government policies. And I’d like to add it wasn’t just a matter of government providing false security – banks HAD to make tons and tons of loans BY LAW, or they weren’t ALLOWED to be in business by the government. The Community Reinvestment Act, after the Clinton administration started enforcing it, made it so that banks had to answer to special commitees and show they were making “enough” loans to “serve the community” if they wanted to continue building bank branches. There are no actual objective goals or quotas written – the power to “allow” banks to continue doing business was solely with the commitee.

    Clear-cutting was done on public lands or other lands that the logging companies didn’t own. It probably isn’t rocket science to sustainably harvest on a certain amount of private land. Just don’t cut trees above a certain size, because they make the most seeds for re-seeding and probably have the best genes since they managed to get so big, and don’t cut trees below a cetain size so they can grow later to be bigger, plus small trees don’t make good quality lumber. And maybe clear all the little shrubs and stuff, like you would with weeding a garden, and maybe fertilize and/or till the soil when you leave. Hell, when the season comes you could have vacuum harvesters vacuum up the seeds and then plant them throughout the forest. I’m not in the timber industry but I’d imagine you could do lots of different methods.

    Great example with that overgrazing you got there. Except that you forgot that grazing usually isn’t done on private lands (at least not in most other countries)! Remember “grazing” is when you let the animals walk along the country side and forage for grass themselves. You don’t think all that land the herds cover is all private, do you? And even when grazing does occur on private land, the local laws often require landowners to allow right-of-way for herds, which also causes erosion. This “irrationality” you describe really only describes yet more bad property laws, doesn’t it?

    Nothing in economics says that people are always completely rational actors. It only says that they maximize their own utility and that they don’t suck at it as statists like you would like us to believe.

    Of course people can be short sighted and over-use their own resources – but the point is MOST of the time they don’t.

    Oh and you also don’t know what you’re talking about with the farming thing – you can’t change the structure of soil other than adding organic matter, which farming tends to do. You can’t “make sand” on farmland.

  30. Wrong, when you lose vegetation, wind can blow the top soil away.

    Also yes government policies did effect the financial crises, although the community investment act is the smaller part. The bigger parts where the Fed, and the GSE’s.

    That being said, the banks share plenty of blame. 30x leverage, and plenty of toxic assets.

    You should expand your horizons beyond just one source of info, maybe you will learn something. This site has some great info on it, but also takes a very narrow view.

    I suggest


    as a good place to start

  31. You should expand your horizons beyond just one source of info, maybe you will learn something.

    On that topic, have you got another cite for unsustainable management of private land?

  32. Sure, another example could be the farming practices that in part led to the dust bowls of the 1930’s


    Just to be clear, I do believe that in general private ownership leads to people being more responsible, than in commons situations.


    I take issue when people make blanket statements like private people will never over log etc. Because I think those types of statements leads to the complacency that allowed our current financial crises to happen.

    The idea that the market price is always “right” even when it’s in a huge bubble, or that people will never take stupid risks or behave irrationally.

    1. With regard to the Dustbowl, as I said above…

      Farming on fragile land is usually an accident, such as when farming methods that worked great in the Dakotas failed miserably in Montana. If the farmers knew the methods were unsound, they wouldn’t use them.

  33. nobody ever said that NOBODY will EVER over-use their own privately owned resources. Pay attention

    Our current financial crisis and market bubbles are both easily understood when you look at the silly laws at the time they happen. The commenters here and libertarians everywhere have time and again described how ridiculous government policy leads economic “downturns” (they’re not really downturns – the market is just crashing down to where it was supposed to be in the first place)

    Our current economic crisis was not caused by an “that’ll NEVER happen” mentality that as I said not even libertarians hold, let alone the majority American populace. Most Americans today do NOT believe in trusting businesses to behave rationally – to say that they do and that that caused the economic crisis is silly.

  34. Actually that’s exactly what you said.

    “nobody’s is going to over-log his own forst.”

    And many Americans might not think business will behave right, but a lot of people in power did/do. IE Greenspan etc. In fact he even admitted that he was wrong about it (to a certain extent).

    They thought the market would be self regulating, and that people looking out for their own intersts would not allow this situation to happen, but it did.

  35. Right. Because you don’t understand that I was speaking generally or for the majority. There’s no way you could have guessed that when I said “nobody’s is going to over-log his own forest.” that I meant the majority of the time, not completely univerally. Any time anybody says any general statement, they always mean it universally unless they specifically add a qualifier to it. Like if someone says “It’s cloudy in England” they literally mean that there are NEVER any days when the sky isn’t covered with clouds. Of course.

    If you’re not going to be honest, then you’re going to lose your arguments.

    Yeah we’ve all heard about what Greenspan said, except that Greenspan was in a REGULATORY position. Regulation /= free market (that’s does not equal). If Greenspan really thinks that this economic downturn means that market equilibriums can all of a sudden break apart without any specific external force, then he’s freggin retarded, and if you believe that too, you’re freggin’ retarded too. Greenspan isn’t the king of economics. Hayek and many others have long predicted that these sorts of things would keep happening – and they were right. So here’s your warning when this happens again within the the next 30 years, don’t slap your hand against your head and go “DOY! GEEZTH – I HOPED THISTH WASTHENT GOING TO HAPPEN!”

    Another way to put it is that Greenspan complaining about the free market not working is like a dumb homeowner renovating his house knocking down a load-bearing wall without placing supports first and then, when the house falls down, complaining that his house was built badly.

    And by the way. Greenspan never really said it like that. Frankly his words bely a failure in the ability to regulate the economy in the first place. I can’t find the exact quote – but I remember he said something like “I was going on the assumption that I could control it, and it would work out – but I was wrong.” Something like that.


  36. We don’t really know whether the market is self regulating, now do we?

    First, the government regulates the market. It does such a great job regulating the market that it encouraged all sorts of institutions to turn regular old simple debt into highly leveraged securities so they could get lower capitalization requirements and use that out-of-thin-air wealth to generate even more debt.

    Second, the government was — and continues to be — the single strongest force behind new and high risk debt origination. Private markets were simply following the money. The government was leading the way.

    Finally, the players who found themselves tied in high leverage knots were not allowed to fail. It’s hard to say something is self regulating when the principal mechanism of that regulation — failure — is not allowed to operate.

  37. addendum – the bad spelling in my capitalized quotation was meant to express someone talking with a lisp

    also – I don’t mean that before this crash I was expecting the crash. Our whole financial system never made sense to me, and I always wondered what the hell the point was or how it supposedly worked (usually while I was driving). But like most people, I just believed what most economists were saying – the assumption that our pseudo-free-market system was mostly on the free side and that the way it is set up is a consequence of that. And that it indeed worked.

    I should have known better. My father certainly did. He pulled out like $20 million out of various real estate investments (we work in real estate). Like he describes it, “this country is famous for major crashes”. Now we seem to be one of the few survivng developers.

    None of this is some huge secret. Just think about it. Why the hell should stock prices keep going up? Since when did an “investment,” also known as a form of SAVING, mean that the thing being invested in should INCREASE in price?
    Why do people invest in the stock market? To make money as the price goes up. Why does the price go up? Because people are investing in it. Am I the only one who realizes the retarded circular logic in this!!?

    The same goes with houses. Why, when the prices of everything else goes down (excluding inflation) as technology advances and infrastructure is built, do the prices of houses keep going up? This is one the least densely populated countries in the world for Christ’s sake! Are we running out of room!? The only thing that can keep this happening, is law-produced artificial scarcity. You get a lot more tax benefits with a house, so for the same monthly price as renting (or a little more), people prefer to live in houses – plus the retarded circular logic again factoirs in. And townships help this along with land-use regulations. But this can’t keep happening forever people! The price can’t keep going up! Hence the crash!

    Anyway, I wasn’t even done raving, but I’ll save my time and stop here. Kind of want to hear what other libertarians have to say.

  38. Why do people invest in the stock market? To make money as the price goes up. Why does the price go up? Because people are investing in it. Am I the only one who realizes the retarded circular logic in this!!?

    The price goes up because, with the capital gleaned from selling shares of itself on the stock market, the company can improve its product or productivity to gain more revenue from its customers. As it generates more earnings per share, the price of each share on the market rightfully increases.

    The speculation you decry is a part of it — but not a very large part unless there is a bubble.

  39. yes but my understanding is that dividends – returns from the companies profits – are an afterthought in the stock market. The prices you pay far exceed the dividends. People are usually in it to make money from the rise in price.

    To put it another way, just as the price of everything in the economy goes DOWN because of competition, so should the price of stocks hover around what they’re worth in the long run in dividends

  40. Everybody – libertarians included – just need to get used to the fact that the idea that a few certain kinds of things should magically just keep going up in price is nonsense. Whether it’s houses or stocks.

    1. You need to distinguish between “going up in price” and going up in value.

  41. oh yeah – to put it yet another way – the interest rate doesn’t keep rising, does it? No – like I said, logically, it stays around what it’s worth in the form of the returns it will bring in the long run.

    TRULY Competitive markets drive prices down towards costs ALWAYS.

  42. Per capita real income is the main metric that keeps going up in modern western societies. There is no reason whatsoever to imagine that stock prices don’t follow what are effectively economy-wide per-person productivity gains.

    And yes, in the past the dividend was why you owned stock. Today productivity grows so quickly — most visible in stock market prices — that most people would rather reinvest their dividends back into the companies. Companies respond by simply cutting out the middleman — and the taxman — by reinvesting the income themselves instead of paying it out as dividends. If people want to monetize the putative dividends, they sell the stock and take the gains.

  43. ha -HA! So we agree then? The price can rise – BASED ON THE GROWTH OF THE COMPANY. That is, as the company becomes more profitable, the dividends are higher, and then people are willing to pay more to get those bigger dividends.

    But that’s the problem. The prices were shooting up like a freaking rocket. People are investing to make money almost SOLELY on rising prices. Do you really believe profitability and productivity were rising that quickly before the crash? The crash itself proves that they were not. I mean, technology has made some nice strides – all these new cell phones are cool – but was there THAT much of a leap? When somebody invents a teleportation machine, sure, be prepared to see a huge leap in stock prices and the economy as business is transformed. But the coolest productivity-increasing technology I’ve heard of besides the telecommunications is those optical sorters that can blow away defectve pieces of things on assembly lines. Sure, saves some labor costs, but ain’t exactly a revolution in productivity.

    This crash is a CORRECTION; the prices went down to where they SHOULD have been. People kept believing in this nonsense idea that the prices should just keep going up rapidly simply BECAUSE the prices were going up, and that indeed drove the price up as people invested. But then it hit a wall – affordability. Just like with the mortgages. People aren’t made of money. It had to stop somewhere – and when it did, it inevitably crashed.

    Seriously, nobody’s ever been able to explain to me the whole stock market thing in a way that truly makes sense.

    It’s like somebody comes up to you and offers to sell you public shares of… I dunno… a boat.
    “Hey, would you like to own part of this boat?”
    “Uhh maybe. Does partial ownership mean I can use it sometimes?”
    “OK, then do I get any say in how it’s used”
    “Well, technically, but you’ll never really have much of a vote compared to all the other people who own way more of the boat”
    “OK then do I get some of the profits when we start a ferrying business”
    “Well, a tiny bit of it. But it’s hundreds of times less than the initial price of a share, since you’ll own just a small fraction and we’ll use most of the profits for reinvestment in more boat improvements and maybe more boats later, etc.”
    “So if the dividends are so much less than the initial price that I’ll be dead before I break even on my initial expenditure, then why should I buy it?”
    Then you protest “But why the hell would they by my shares in the first place?”
    “That doesn’t make any freggin sense”

    And indeed nobody would fall for such a scam normally. But that’s what the stock market evolved into

  44. Please, if you can explain how the stock market supposedly works to me in a way that makes, please try. When I was in High School I asked my econ teacher. I’ve asked other people. Nobody could explain how completely circular logic is supposed to work out in the real world.

    The only thing that would make sense is if people were buying stocks and holding on to them to make money from the dividends, but I’ve always been told that’s not the case; that most people are trying to make money off the rising price.

    1. The dividends are plowed back into the company. To a first order approximation, they are the rising price.

      1. In case this still isn’t clear, consider…

        The liquidation price of a company is its assets minus its liabilities. One of its assets is its cash. When a company makes a profit, two of the many things it can do with that profit are (a) pay it to the shareholders as dividends and (b) hold it as cash.

        If a company earns $1 per share and pays it as dividends, then a shareholder who bought one share at $10 per share gets $1. If the company instead adds the $1 to its cash holdings, then its assets have increased $1 per share, the liquidation price of the company increases $1 per share, and, rightfully, the stock price increases approximately $1 per share. The shareholder can if he chooses sell his share for $11, and take the $1 gain as his putative dividend. If he really gets a kick out of dividends, he can buy another share for $11 and sell it for $12 next year, repeating ad infinitum. Note that the price of the stock does increase and should increase this whole time.

        In reality, the company tries to do something more productive with its profits than let them sit in an account. If the company didn’t, then people — who could sit on cash just as well as the company — would sell their shares and put the money into a company that did do something productive with its profits.

        Long history shows US companies to be among the most productive places to put money. The bottom line is that we should not be surprised that stock prices rise. We should, and do, expect it.

        1. OK – but not that quickly

          based on your example, it should only rise as quickly as the dividends and/or profits do

          people DON’T want to spend more money on things. If I’m spending more money on something, I want to be getting more out of it. This basic law of economics is true, except in the case qhere everybody has a completely irrational idea as to the thing being bought.

          The price of stocks, if it weren’t for this nation-wide irrational idea, which is somewhat promoted by the fact that taxes have made it impossible to just save normally, would follow the companies’ profits and dividends.

          1. based on your example, it should only rise as quickly as the dividends and/or profits do

            Based on my example, that is the minimum that it should rise.

            Of course a company will do better than a freaking bank account. Otherwise, everyone would keep their money in bank accounts — that incidentally wouldn’t be loaned to anyone, since no one could garner a return greater than the account’s interest rate — and per capita real income would not increase.

            Yet per capita real incomes do increase. The reason: companies make real returns on their equity, debt, and profit. That will find itself represented in rising stock prices.

  45. This crash is a CORRECTION; the prices went down to where they SHOULD have been.

    Did anything I say imply that this wasn’t the case? There was a credit bubble. The stock market responded — not as badly as the debt securities market, but it did respond.

    But if it is, as you seem to think, impossible for that value to be real, then presumably you believe we are in for another correction, and that the Dow will lose 90% more to go back where it was 30 years ago, or 98% more to go back where it was 60 years ago.

    If the market is currently priced where it should be priced, then the market is working over the long run, no?

  46. If you meant the majority of the time, and not “all” the time, then I guess we are in agreement on that. People and markets will act irrationally, and often sacrifice long term gain for short term profit.

    Also, maybe my Greenspan comments weren’t clear. Greenspan, and others in government, as well as mainsteam economic theory, and the ridicoulous “efficient market hypothesis” all pretty much said that markets would be self regulating, and the less regulation the better. I. There position was that everyone acting in their own self interests would thus result in the correct price. Of course this totally ignores the fact that people herd, or behave irrationally.

    Please note that I am NOT making the argument that more regulation is the answer to everything, but I will make the argument that the right regulation, and a proper market structure/incentive structure can greatly reduce the chances of these types of things happening.

    Finally, Mike agreed on the not being allowed to fail part. Of course by the time it had gotten to this point these banks were so tangled with everything, that I can understand the argument for not allowing it to happen. IMO, any solution going forward should prohibit to big to fail. Break some of these banks up, like they did with AT&T etc. There should be no single institution that if it collapses so does our economy.

  47. People and markets will act irrationally, and often sacrifice long term gain for short term profit.

    Wall street was not acting irrationally. It was acting entirely rationally given the distorted ‘market’ government had created.

    Did AIG bet wrong? No.

    Did they know it was a game of musical chairs? Yes. Did they think they gamble they could be one of the last people with a chair? Yes.

    And many of them did indeed land well.

    And small banks (ie not politically connected) are failing.

  48. My only point is that if you take the Bible straight, as I’m sure many of Reasons readers do, you will see a lot of the Old Testament stuff as absolutely insane.

  49. The dividends are plowed back into the company. To a first order approximation, they are the rising price.

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