Revisiting the Commons

The commons here is used to denote a public, open space. The title refers to going back to the example of the “tragedy of the commons“.

The basic idea is simple: an open access good ends up getting depleted because everyone uses it without any thought of sustainability. The point being stressed here is that all the economic actors (those accessing the resource) act in their own self-interest with no worry about the future and the resource gets exhausted. This simple scenario is rather similar to a prisoner’s dilemma, where two prisoners, looking for personal benefit end up with a more severe punishment.

We can consider the economy as the open access resource that everyone can get involved in to get an income from. There’s a slight modification to this resource though, on one side you have a flow of income/expenditure and on the other side you have a flow of cost/revenue. Here’s a diagrammatic representation of my words to make it clear (courtesy Wikipedia):

A two sector economy showing the circular flow of money

Those who are taking part in the economy take on the roles of:

  • a consumer of goods (who pays the price) and a supplier of a factor of production (from which income is received)

and/or

  • a consumer of the factors of production (who pays the returns of the factor of production) and a supplier of the goods demanded (which gives revenue).

There’s a reason I am bringing two different concepts together. The economy is like an open access field where the economic actors can undertake certain actions that give certain payoffs (results). Like the prisoner’s dilemma problem, the individual payoff (result) may result in a loss for the group as a whole without the individual realizing it.

In the circular flow, without providing a factor of production, one does not make an income. Of all the factors of production, it is labor that is perhaps the trickiest to understand. However, one can look at it simply as labor is provided in return for a wage that is used to buy what is needed for life (food, shelter, and such). Here’s where the major difference lies. At each end of the arrow, one economic agent will be present with a set of actions they can carry out (strategies) at the beginning and rewards that are also dependent on what options others choose (payoffs) at the end.

Obviously, everyone will go for the strategy that they think will net them the greatest benefit. The firm owners will want to reduce costs and boost revenue, the workers will want to increase their labor income. However, in the quest to reduce production costs by offering the lowest possible wage/salary, the workers are sometimes left with too little to spend on the local economy (that is another firm’s income) and thus the economy does not function smoothly. Labor is forced to accept because the alternative is a more dismal lifestyle (with respect to housing, food, clothing, etc.).

Previously, labor could achieve bargaining power through labor unions but that is no more an option for most labor because of legal changes. The bulk of the wage setting power now lies with the firms and they will obviously choose to set it low in the hopes of boosting profits. Therein lies the tragedy of the commons (economy) modified with the economic agents now allowed to have access to certain strategies that will have certain results. The power asymmetry in determining wages/salaries translates into a negative effect on the economy as a whole.

A World Bank study has been done already. An in-depth study that will take some time to look into.

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