By Bruce Lachney
In the polarized political environment of today, it is generally unpopular to espouse and hail the benefits of regulations. But I’ll give it a try.
In behavioral economics, we clarify the emotional relationship in a transactional event. In fact, the most basic idea is that humans seek to maximize a transaction. In its simplest form, we seek to benefit as much as possible when spending or saving money – the two-for-one coupon, driving across the street to save two cents a gallon on gas, renewing our Costco membership. But there is a devilish side to “maximization.”
In the early 1800s, unregulated farm-animal foraging on common grounds in Britain led to overgrazing. Exploitation by a few created the phrase “tragedy of the commons.” The “commons” became, in the 1960s, an expanded reference to an unregulated resource – water, air, fish stocks, wildlife. Some commons are over-exploited to the point of collapse; think animals hunted to extinction, or water so polluted it is undrinkable. This tragedy of the commons walks us to a darker idea: Moral hazard.
“ … to the detriment of others …” is the foundational idea of moral hazard. It is a situation where one person makes a decision that takes on risk, but the cost is borne by someone else.
Anyone who sat through the Great Recession should recognize it. Remember all the worthless loans that banks bundled into securities, then peddled them to unsuspecting hedge funds, sovereign wealth managers and to your retirement plan? Moral hazard exists as the bank begins to accept even more risk as it knows the government will always be there to backstop it.
So, as humans we maximize. This creates a tragedy of the commons, which leads us to inflicting a moral hazard on others.
Wow. That’s a lot of darkness in the world. Fortunately, there are a couple of ways we handle this Shakespearian disaster: Individual property rights and regulations.
The other side to maximizing is that humans take care of the stuff they own. They understand they can make the best use of a resource if they make long-term sustainable decisions for that resource. (If it’s my car, I will change the oil often. It will last longer.) Simply stated, if we want people to maximize a resource, they should own it. Some might say “have skin in the game.”
The other way to safeguard a resource is through regulation. Not every resource can, nor should, be privatized. Air, water, wildlife, etc. The only way to disrupt the misappropriation of a common resource is through common regulation that institutionalizes a symmetry of use. Here governments are sometimes the uninvited guest in mediating disputes – Indian fishing rights, cattle grazing, water rights for development versus farming, etc. The salient idea here is that government becomes the instrument in intervention between various groups, more often than not making no one happy but providing an essential common good.
Humans expropriate resources. It is regulations that keep us from creating asymmetries that make one person wealthy because they exploited more than another.
Bruce Lachney is an Eatonville-area resident, a cranberry grower, and a member of the Clover Park Technical College Board of Trustees.
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