A Question of Balance - Quareness Series 109th "Lecture".

In 1960 the late British economist (and 1991 Nobel Prize recipient) Ronald Coase made a simple and (for its time) revolutionary point - given that costs from economic activity borne by people not directly involved in that activity ("externalities") are reciprocal...if there were no transaction costs, the externality would be corrected by the most efficient solution and the initial allocation of property rights would not matter. However, this world of ours is hardly much of a zero-transaction-costs one and in reality the initial allocation of rights may matter a great deal when transaction costs are not zero. In these circumstances, he saw some outside/neutral authority (e.g. a court of law) as being able to step in, assign rights and lower transaction costs to the point at which negotiation could happen.

Back when I was a young lad there was a program series on TV entitled "Have Gun - Will Travel" concerning the adventures and exploits of a West Point graduate turned righteous hired gun, who called himself Paladin. In addition to being a man of old and classical virtues, this Paladin character was also portrayed as quite a model of up-to-date scientific learning.

One episode (entitled “Bitter Wine”) began at a fair in San Francisco at which Paladin served as a judge in a competition among local vineyards. The winner Donatello intimated that despite this honour, his winery was in grave trouble and Paladin then offered to help. Despite his scepticism about the offer, Donatello went on to tell that a man who bought land next to his had built an oil well and refinery thereon. The smog from the refinery was making his grapes bitter and the wastewater was infecting the groundwater on his own land. 

Realising the reciprocal nature of the problem, Paladin headed over to the refinery to meet with the owner...a man called Gorman...who explained the heavy security presence there as necessary because Donatello had hired men to raid his well. Paladin was impressed by and congratulated Gorman on his successful production facility, but also pointed out that his well's wastewater and smoke were damaging Donatello's grapes...a situation in respect of which he Paladin was now seeking a peaceful solution. He went on to propose that Gorman build a sump and pump the water over a different hill onto unoccupied land, and also build a smoke stack to bring the smoke up...away from a downdraft and away from Donatello's vines. Despite initially sympathising with the notion that his neighbour had a right to clean vines, Gorman pleaded he simply didn't have the extra resources to implement this solution and in any event why should he care when Donatello had fought him every step of the way.

In appreciating somewhat this other point of view, Paladin decided to talk again with Donatello who really just wanted him to lead a raid on Gorman's rig. In refusing to do so, our "hero" pointed out that the oil rig meant as much to Gorman as the vineyard meant to Donatello and offered the same solution stating that it could occur if Donatello were to lend Gorman $3,000 for construction. His suggestion was angrily refused. 

Paladin was clear in his own mind that the only real problem was the coincidence of the vineyard and the oil rig. Gorman too appeared to understand this but Danatello was reluctant to think that way...perhaps mirroring the sentiments of most economists of the time i.e. that it would be better to make the owner of a factory liable for the damage caused by its smoke emissions. But what if such an approach were to lead to results which were not necessarily desirable? 

Donatello’s sentiments betrayed a kind of incumbent bias leading him to frame the problem in moralistic terms. Paladin tried to correct Donatello in pointing out that “very useful things” come from oil production. He noticed that viewing the conflict as a morality tale only resulted in wasted resources with both hiring "muscle" in order to "protect" their rights. Their mutual anger toward each other indicated that substantial transaction costs needed to be overcome before any bargain could take place.

Later in the episode we saw Paladin away seeing a lawyer to draw up the formal bargaining that both antagonists hadn't yet realised they needed. In his absence there was an attack on Gorman's facility initiated by the Donatello side but with the initative shifting after two men are killed. Paladin arrived back just in time to prevent further bloodshed and forced Gorman to recall his men. Ultimately a stalemate ensued but given that Gorman continued to pollute, it was a de facto loss for Danatello.

As a chastened (and by now kinda indifferent) Donatello resigned himself to his fate, Paladin requested a keg of his wine which he went and placed in a conspicuous location near Gorman’s oil well. The local "muscle" having overindulged soon fell asleep...which resulted in some reduction of the bargaining transaction costs. Taking advantage of this gap in security, Paladin brought Donatello to Gorman's patch and climbed up to the top of the oil well holding a lighted torch over it. In pointing out that the whole place would go up in flames if he was shot, he managed to call Gorman's bluff of threatening to shoot. He then threw to the ground the lawyer's contract he'd obtained i.e. an explicit assignment of property rights and subsequent negotiation on how to solve the issues. Not yet quite grasping the changed situation, Donatello still refused to sign and told Paladin to drop the torch. But when the latter pointed out to him that an oil fire would be uncontrollable if the torch dropped and his vineyard too would go up in flames, he suddenly got the picture. The game had changed and the cost of not negotiating had skyrocketed high enough for even these two to negotiate. Relatively speaking, the transaction costs had fallen firstly because of the clear assignment of rights and secondly because of the threat of losing everything. The enemies agreed to become partners in a workable balance of interests.

The episode clearly displayed those "Coase elements"

- externalities were reciprocal where Gorman's wastewater and soot were issues only because they flowed onto Donatelo's land (with no issue if/when pumped onto unoccupied land);

- the initial allocation of rights mattered when the transaction costs were high and since neither protagonist in their mutual hatred was willing to negotiate, an initial allocation of property rights to Donatello to grow pollution free vines had to occur before negotiation could begin;

- the legal system could overcome transaction costs to ensure an efficient allocation of resources. 

Once the rights were defined, Paladin was able to raise the cost of not negotiating to an unacceptable degree and ultimately to achieve a reduction in the mutual violent antipathy of the enemies...a balanced/practical/workable improvement on the prior status quo of attacking each other. 

We have material dominance in control of economic and political power

And we have rhetorical dominance in control of words and ideas,

With the former giving us luxuries and the latter making us feel good.

This modern conflation of material and rhetorical dominance

Sees many leftists and rightists, liberals and conservatives,

In denial that with great power comes great responsibility.

And with most of them dreaming of holding all the cards...

Dreams which really are the stuff of nightmares.

Being epistemically vicious and habitually drunk with emotion

Reveals a not even knowing what sober rationality looks like,

Leaving little likelihood of these secular religions fading soon.

And maybe the best we can hope for now is a workable world 

With an uneasy balance of power and dominance.

When stationary a pendulum is a plumb line to gauge verticals and when swinging its beats measure time with great accuracy. The only factors that have any significant effect on the beat are the length of the pendulum from fulcrum to the centreline of the weight and the mass of the Earth (gravity). The energy put into the swing by the user has no effect...if the swing is made more vigorous it just swings faster in a wider arc but the rate of beat remains exactly the same.

Sean.

Dean of Quareness.

September, 2019.

Perhaps little people should not take big ones too seriously (including when they think they are big themselves)...given that a society tends to be less brittle when everyone knows the dominant can laugh at themselves.