Article 10
Second-order effects and the Tragedy of the Commons
2-3 minute read
CAPSULE SUMMARY – The simple yet related economic parallel of the Tragedy of the Commons provides the perfect blueprint for addressing Second-order impacts. They can only be solved through top-down government intervention or proactive Collective Action.
10.1 Second-order effects, because of the partial causality dynamics, are insidiously hard to fix. Because no one can prove that a given business is causing the societal impact in question, it makes no sense for a given company to act. Or at least that is the de facto defense to justify non-action that we often see today from today’s leaders.
10.2 There is a well-known parallel in Economics and Psychology called the Tragedy of the Commons that provides an excellent metaphor for this behavior and conundrum—and the obvious solution.
10.3 The Tragedy of the Commons, for those not familiar, is: “a situation in which individual users, who have open access to a resource unhampered by shared social structures or formal rules that govern access and use, act independently according to their own self-interest and, contrary to the common good of all users, cause depletion of the resource through their uncoordinated action.” [1]
10.4 The original 1833 paper by William Forster Lloyd describes a simple example of multiple sheep farmers, all having their flocks grazing on common land. Each farmer, pursuing his own self-interest, would have his flock graze as much as possible. However, if every farmer were to act in that manner, the field would be depleted and the shared resource would be totally consumed. Lloyd argued that the individual short-term focus—to take as much of a resource as possible—was in opposition to the broader societal good. Garrett Hardin later revisited and popularized this concept in his 1968 essay, "The Tragedy of the Commons."
Multiple entities pursuing their own livelihood can create unanticipated harm for all.
10.5 Sound familiar? This exact same dynamic underpins the challenges of Second-order business impacts with a slight twist. The shift to get from “over-grazing” to “societal harm” is a simple replacement. As opposed to thinking of a finite resource being taken away and no longer available (grass), view the societal resource as some positive aspect of society that is continually and incrementally damaged.
10.6 With this slight morphing, you get the exact same behavioral dynamic: a business, in pursuit of its own profit and health, will effectively ‘consume’ the societal resource (by creating ongoing harm). Individually, no company moves society to the breaking point—but collectively, the cumulative damage pushes society into the danger zone in some area.
10.7 The Tragedy of the Commons has been one of the most referenced dynamics in economics and psychology, and the solution to avoid the ‘tragedy’ proves to be simple: either a top-down system of control must be employed (in the case of business, this would take the form of government regulation) or the entities involved need to collaborate to regulate their group behavior.
10.8 Today, our corporate leaders often take a position of ‘wait for the tragedy and deal with regulation when it comes.’ This has been partially to blame for the massive increase in government regulation over the last thirty years. For example, the current code of Federal regulations (not including state or local) that businesses must adhere to clocks in at nearly 200,000 pages, a nearly 10x increase since 1960).
10.9 We can and must do better. We need our business leaders to lead proactive Collective Action against our second-order business effects. Collective Action can be both pre-emptive and reactive; it can respond quickly vs. at the pace of government; it can be refocused and redeployed quickly vs. government regulations that sit for decades and are incredibly difficult to unwind. And of course, it’s simply the right thing to do for society.