OVERCOMING "TRAGEDIES OF THE COMMONS" WITH A SELF-REGULATING, PARTICIPATORY MARKET SOCIETY

by Dirk Helbing
Our society is fundamentally changing. These days, almost nothing works without a computer chip. Processing power doubles every 18 months and will exceed the capabilities of human brains in about ten years from now. Some time ago, IBM's Big Blue computer already beat the best chess player. Meanwhile, computers perform about 70 percent of all financial transactions, and IBM's Watson advises customers better than human telephone hotlines. Will computers and robots soon replace skilled labour? In many European countries, unemployment is reaching historical heights. The forthcoming economic and social impact of future information and communication technologies (ICT) will be huge - probably more significant than that caused by the steam engine, or by nano- or biotechnology.
The storage capacity for data is growing even faster than computational capacity. Within just a year we will soon generate more data than in the entire history of humankind. The "Internet of Things" will network trillions of sensors. Unimaginable amounts of data will be collected. Big Data is already being praised as the “oil of the 21st century”. What opportunities and risks does this create for our society, economy, and environment?

From "homo economicus" to "homo socialis", the networked decision-maker


Let's start by analysing the situation today. Probably, the most widespread economic paradigm is that of "homo economicus", who merely tries to maximize personal benefits. It is often believed that such behaviour balances and coordinates the interests of individuals, as if controlled by an "invisible hand" and automatically maximizes social welfare.
If one believes in this neoclassical credo, then, economic problems arise mainly from the fact that there are too many regulations, or that some people do not adhere to the principle of self-regarding optimization. But why are there so many regulations, and why do many people have fairness preferences?
It was long believed that the merciless forces of evolution and natural selection could not have created man other than as a selfish being. However, recent scientific insights teach us something else. It has been demonstrated that the very same evolutionary forces that create "homo economicus" may also produce a different kind of people under very realistic circumstances: "homo socialis". "Homo socialis" tries to reach favourable outcomes as well, but considers the impact on others when taking decisions. As a consequence, "homo socialis" does not decide in an independent, but rather in an interdependent, "networked" fashion. This has surprising consequences: while "homo economicus" often runs into "tragedies of the commons", for example, the exploitation and pollution of the environment, overfishing and/or global warming, "homo socialis" can overcome such problems and reach a higher success by conditional cooperativeness. 

Reputation systems to master social dilemmas 


The above tragedies of the commons result from social dilemmas. These are situations, in which it would be good for everyone, if everybody behaved cooperatively, but where there is also a temptation to take advantage of the cooperativeness of others. Under such conditions, cooperation is likely to erode. To avoid this, it is common to establish regulations and enforce compliance with them by means of monitoring and punishment strategies. However, over time, the costs of such strategies have created enormous public debts, and in some cases de facto state bankruptcy.

But there are also alternatives. The root problem is that we have created an institutional framework for "homo economicus", for which cooperation in social dilemma situations cannot thrive. But it would also be possible to create institutions for "homo socialis"; i.e. institutions which provide a suitable framework to support self-regulation. With such institutions for "homo socialis", the principle of Adam Smith's "invisible hand", i.e. the favourable self-organization of a complex (market) system to the benefit of everyone would work much better than with institutions for "homo economicus".

The difference between “homo economicus” and “homo socialis” is that the latter takes into account the interests of others when making decisions, which implies interdependent decisions or “networked minds.” The different nature of “homo socialis” leads to a complex dynamics and another macroscopic outcome than expected for “homo economicus.” In the case of public goods problems, for example, interactions of agents with strictly self-regarding preferences will lead to “tragedies of the commons,” while the self-regulation of “homo socialis” can overcome this undesirable state and foster cooperation, leading to higher individual and social benefits. Due to the different system dynamics and different systemic outcomes, both types of agents cannot be described by the same body of theory. They require separate sets of literature and different institutions. 

 How to envisage a self-regulating market system? The transfer of the principle of Swiss-style bottom-up democracy to the business world would probably be a good way to imagine this. 

What would be suitable institutions for "homo socialis"? It is known that social dilemmas can be overcome by various social mechanisms, such as genetic favouritism, direct reciprocity ("you help me, I help you"), or punishment of uncooperative behaviour. Genetic favouritism tends to create ethnic conflicts between tribes, while direct reciprocity may promote corruption. The punishment of non-cooperative behaviour corresponds to our current approach, but this seems to have reached the limits of feasibility and affordability. Note, however, that there is a further approach, which transfers the success principle of social communities to the context of the "global village", namely reputation.

"Prosumers" and "qualified money"

Reputation systems in the internet spread very quickly. Nowadays, customers evaluate products and sellers, news, comments, politicians, institutions and companies. Reputation creates the opportunity to sell good quality for a higher price. Scientific studies of eBay and other electronic platforms show that customers prefer sellers who have good reputations, and that these sellers can charge more. When quality competition complements price competition, this can also create incentives to improve social and environmental production conditions, i.e. sustainability. Based on reputation principles, it would even be possible to establish a new kind of money, "qualified money" or "social money", which could overcome some of the problems of the current financial system.
The Information Age will transform markets fundamentally. In the following, I will outline just some aspects of the now emerging "democratic, participatory market societies." Flexible self-organization will play a much bigger role than today. The emergence of "Prosumers" illustrates this. These are consumers who participate in the production of the products they buy. Instead of just selecting existing products from a catalogue or choosing the special features of a personalized car, consumers will be able to create new components of products, new designs, or even entirely new products. For example, they could use a 3D printer to produce their own cell phone cover and distribute it to others. Or they could come up with their own fashion and upload it to a company webpage to produce it for them, their family, friends, and colleagues, or indeed customers all over the world. People could also distribute their own books, their own music and their own movies. Or they could put a team together to construct more sophisticated products. 

An "innovation ecosystem" of flexible "projects"

While the 20th century was an era of democratization of consumption, the 21st century can become an era of democratization of production. Next to today’s companies, flexible, participatory forms of production will emerge, which I term "projects". Creative minds will come together to realize joint project ideas. After completing a project, everyone will be looking for another project or two, and so on. Social media platforms such as Amazon Mechanical Turk will make it possible to bring ideas and skilled workers together. As a consequence, this will lead to a more direct participation of people in production processes. There will also be a much greater diversity of products, tailored to individual needs. Thus, while computers will increasingly replace our current types of routine and executive work, we will have an opportunity to replace these jobs by more creative activities. Production by large corporations will then be complemented by an innovation ecosystem made up of thousands of projects. The huge range of smartphone apps, which platforms such as app stores have enabled, gives just a first idea of the unlimited possibilities for new projects. Open Data and the Web2.0, Web3.0, etc. will further accelerate this development.
However, Europe has not found its place in this new innovation universe, yet. Suitable institutions must first be established: the aforementioned reputation system is just one of them. Furthermore, open platforms are needed to enable participation and cooperation. In order to encourage an open exchange of information and the emergence of an innovation ecosystem, new incentive systems are required, which reward creative contributions. For this, the relevance of innovations must be made measureable, and inventors must be compensated for the use their ideas, e.g. with micropayments. Last but not least, we need a new science, which helps us to understand and create the participatory market society. While current economics ("economics 1.0") is tailored to "homo economicus", the emerging "economics 2.0" must be tailored to "homo socialis", the networked decision-maker. These and further institutions should be part of a far-reaching strategy to create an "innovation accelerator".
An age of creativity and participation is ahead of us. We just have to use the opportunities that modern information and communication technologies offer. Reputation systems and social media can promote awareness of the risks and benefits of our available decision alternatives. In particular, they can help us to address challenges such as global warming and other problems in a more cooperative and sustainable way. 

References

Dirk Helbing, Economics 2.0: The natural step towards a self-regulating, participatory market society., Evolutionary and Institutional Economics Review 10(1), 3-41 (2013), see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2267697; A new kind of economy is born – Social decision-makers beat the “homo economicus”, see http://arxiv.org/abs/1309.7453; for related videos search youtube.com for “economics 2.0” and the TEDx talk at http://www.youtube.com/watch?v=nsrRo9x0j80; also see "Countering climate change with climate olympics" at http://www.youtube.com/watch?v=TaRghSuzBYM.    

FuturICT remembers Elinor Ostrom

Elinor Ostrom
1933-2012

Elinor Ostrom, the first and only woman to win the Nobel prize in economics and a professor of political science at Indiana University in Bloomington, Indiana, has died at the age of 78. She received the 2009 Nobel prize in Economic Sciences for her outstanding research on better understanding the management of common property. Elinor Ostrom was named among Time magazine's 100 most influential people of 2012.

Lin, as many knew her, was born and raised in Los Angeles, and devoted her career to studying the interaction of people and natural resources. Through her research, she contended that individuals and communities could effectively manage their own collective resources — such as fisheries, forests and water supplies — without the intrusion of government regulation or private industry. “What we have ignored,” she said after her Nobel Prize was announced, “is what citizens can do . . . as opposed to just having someone in Washington or at a far, far distance make a rule.”

For much of Dr. Ostrom’s career, many economists were deeply influenced by misuse of shared resources, "the tragedy of the commons." Named for the overgrazing of pastures during the 1800s, the parable suggests that individuals acting in self-interest will ultimately deplete a resource — such as a pasture — that is open to everyone. Scholars used the parable to demonstrate the need for government regulation or control by private industry.

Dr. Ostrom challenged Garrett Hardin’s concept of the “Tragedy of the Commons”, showing through detailed case studies that local people could manage the environment without destroying it. She pointed to empirical evidence she had gathered around the world to prove that local knowledge, cooperation and enlightened self-interest could be more effective than regulatory leviathans. In essence, Dr. Ostrom contended that individuals and communities could effectively manage their own collective resources — such as fisheries, forests and water supplies — without the intrusion of government regulation or private industry.

Be it environmental protection, the international financial system or the dimensions of inequality, Ostrom's work sheds light on the direction society must follow to avoid misuse of shared resources. She was centrally involved in the emergence of game theory in economic and political thought, which itself became integrated with evolutionary theory. In her most influential book,  "Governing the Commons", she rejected the thesis that "the tragedy of the commons" is inevitable.

Dr Ostrom was a staunch supporter of the aims, objectives and ideals of FuturICT with its focus on sustainability and resilience, knowledge for and in service of the public good, with which resonate with the agenda of the Workshop in Political Theory and Policy Analysis of which she was Senior Research Director.
http://www.futurict.eu/sites/default/files/ElinorOstrom.pdf

Dirk Helbing, Scientific Coordinator of FuturICT called Dr.Ostrom the “goddess” of self-organized solutions to public goods problems and “tragedies of the commons”. She identified the principles that would make bottom-up, community-based cooperation work well, as compared to the classical paradigm of the need of a state to establish social order top down. From this point of view, she was paving the way towards mechanisms of self-organized bottom-up social control.

FuturICT supporter and Economist Alan Kirman’s vision of her contribution is that many "public goods" are, in fact, local public goods, that is they actually concern only a limited community. Most of the literature has focused on the problem of what Samuelson called pure global public goods.

However, what Elinor Ostrom was at pains to point out was that for most cases the communities involved do a better job at organising the exploitation of rare resources than some authority from on high which is not directly concerned. With many cases to back up her arguments she showed how systems of self organisation emerge and regulate the use of their resources. Yet, the actual solutions may differ. She did however evoke a certain number of principles which she regarded as necessary conditions for such arrangements to be viable.

How does this concern us? Well, this idea of emergent self-government fits well with the idea of participatory arrangements, and now that information is more easily available there is no need for centralised collection and dispersion of that information. Although our technologies are highly sophisticated, we can learn lessons about governance from the way in which "less advanced" societies organise themselves. It is also probably much easier now for communities to organise themselves when they have a common interest. In earlier societies the groups were largely geographical but now they may be much more thematic.

"We have to think through how to choose a meaningful life where we’re helping one another in ways that really help the Earth".  

With these words Elinor Ostrom taught that good science has to do with real life and real choices. Challenging the mainstream fields, she constantly explored the confines among disciplines, and showed that time has come to take seriously the burden of innovation. Rosaria Conte with FuturICT says “She gave us a hope, perhaps to women more: that heterodox science can really make the difference”.

“Little by little, bit by bit, family by family,” Dr. Ostrom once told the Indianapolis Star, “so much good can be done on so many levels.” Elinor Ostrom paved the way for future generations to do interdisciplinary research, and it is up to us to make the best use of the opportunities she generated. At a time when the world desperately needs to share resources, her wisdom will be greatly missed.