Thursday, September 04, 2008

Sachs' Social Value Mishap

We're going through Sachs' Common Wealth in our reading group, it certainly makes for a lively discussion since there isn't a lot to agree with. Nonetheless, the man is a Harvard trained economist, which made the following gaffe all the more surprising. I'm paraphrasing, but it goes as follows:

Let's consider we have a lake that is privately owned. There are fish in the lake that exist only within those waters. Further, if the fish reproduce at a sufficiently low rate compared to the interest rate, it becomes profit maximizing not to manage the population, but to "cash out," if you will, and use the proceeds in capital markets to earn a better return. He notes that the social value of having this fish species can not be calculated into the price of the fish-- people would want it only for meat-- and, viola, market failure.

(Side note: Are there any animals-- fish or otherwise-- that even begin to approach this scenario? And no, his point was not that any animal exhibiting characteristics like this would end up extinct.)

He overlooks the market adjustment here-- the price of the fish will rise as extinction nears, but that could be swept under the rug as well considering his interest rate assumption. Depending on the demand for the fish, this may or may not be accurate, but that's not what bothered me. What bothered me was that he assumed the social value of fish needs to be factored into the sale of individual fish. It's in the sale of the lake that this calculation comes into play. When the lake is purchased, the owner has an idea of how he'll use the lake-- conservation, for food, perhaps some combination of the two. But to assume the lake is privately owned and to be used strictly for profit-maximizing fish harvesting is to forego completely the possibility for social value to play a role in the acquisition of the lake.

There will be collective action problems in mobilizing the social value into a lump of money to buy the lake with-- free rider problems mainly, there's reason to believe that you'll be below what the theoretical aggregated social value of the fish existing. (That's not to say that market solutions don't exist to the free-rider problem that would help get closer to the aggregated social value-- a hazy concept in and of itself.) But to miss completely the transaction of the lake itself and to attribute market failure to the sale of the fish since it doesn't account for the social value...that was surprising.


Justin M Ross said...

What other social value do the fish we eat carry?

Matt E. Ryan said...

His argument was that there's a social benefit to knowing the fish are alive and not extinct-- evidently the social welfare function in number of species is strictly increasing.