The post “Macrowikinomics
of Pandemics” discusses around the O-Ring effect and its prospective impact
on the production and business cycles. Implied is absence of a small element
missing in the larger puzzle causing a halt in production. The production is
hostage to a few components unimportant in standalone context yet very critical
in production of goods and services. The
causes of these missing components can be varied.
In the current
state of things, the supply lines being located in China are disrupted due to
the prevailing pandemic thus having cascading effect on the production lines
across the world. Economic theorists term the same as supply shock.
Redundancies are normally not factored in given these shocks are likely to be rare
and short lived. Yet in optimizing for the costs, the ruin events can
potentially hinder the manufacture of output thus a downward spiral in the
global marketplace. A mechanism to
overcome these supply shocks would be to build in the necessary redundancies. Diversification
of supply sources can alleviate the problems caused by the disruption. Going forward,
there might be increasing emphasis on supply security to factor in any prospective
disruptions.
Yet, while there
are man-made or natural shocks, there can be wilful hold-out of inputs towards
a production of critical output. Michael Heller makes an important observation
about the properties of fragmentation of ownership. An instance would buttress
the point. In 1914 as Europe and the world by extension got dragged into the
War, air force for the first time seemed to play a role in the war. In 1903,
Wright Brothers had flown the first flight and within a decade, flying was
quite common. While Europe started to build aircraft, US production was at a
standstill. No one was in a position to build an aircraft. It was not for lack
of technology. Technology was available, there was skilled labour and expertize
yet the production was at zero. It had to do with the thousands of components
that go into manufacture of an aircraft and the ownership of those components
that lay with hundreds of individuals and firms. Any production of aircraft
needed to combine all these thousands of components and thus the permission of
the owners of the patents to these components. The patent holders had all the
right to refuse the use without the payment of royalty they demanded.
Negotiating with hundreds of patent right holders and satisfying each was near
impossible. Any violation of patent rights was in all likelihood land the
aircraft manufacturer into jail at worst and long endless litigation at best. This
fragmented ownership causing disruption in production, research, development
and construction of goods, services, infrastructure etc. was described by Heller
as Tragedy of Anti-Commons. In the case
of aircrafts, the tragedy of anti-commons was overcome by legislative
intervention of the US Congress. The Congress created a patent pool into which
all patents relating to aircraft manufacture were placed in. Any manufacturer
could use this pool to draw components from by paying a fixed royalty and thus
go ahead with his plans. This method of compulsory licensing led to development
of aircraft industry in the US.
Another instance of hold-out causing disruption
in product development and commercialization was James Watt’s hold-out on rail
engine patents. Till his death and expiry of patent rights, British railways remained
a nonstarter. For centuries, trade along
the river Rhine remained hostage to the numerous robber barons as they were
termed. These robber barons controlled various points on the river and any
passage either cargo or passengers had to pay them the toll resulting in
numerous toll points. It was only after the Congress of Vienna in 1815, that
these robber barons were finally defeated. However, the waterways were soon
replaced by the railroads that emerged rapidly across continental Europe. The
anecdotal evidence from the biotech industry pointing to abandonment of commercializing
drugs is another instance. There were research laboratories that developed the
drugs for Alzheimer’s disease. Any drug is essentially a compound that is
manufactured using different materials. These raw materials or active pharmaceutical
ingredients (APIs) are subject matter of patent. The patents were held by
different individuals and firms. These firms refuse to part with the patents
unless a very high royalty was paid to them. Implied was high producer
reservation price with no ground for compromise. These hold outs ensure the
drugs remained on the shelves and not commercialized in the market. It is a different
matter, the drugs would have benefited numerous patients and their families by
extension but for the hold out.
Tragedy of Anti-Commons or Gridlock is not confined
merely to technological products but applies to land too. Numerous instances
exist wherein the refusal of land owner to part with the land leads to
abandonment or disruption in construction of infrastructure projects. Construction
of industrial corridors, highways, railway lines, airports, dams all need
contagious land. Invariably, land ownership is fragmented with numerous owners.
Any refusal by a single owner would invariably halt the projects. Payment of
compensation of high amount would lead to cost overrun as also reduce the
prospects of the project being viable. In fact, an official sanction to such a
hold out the Land Compensation and Acquisition Act brought about the UPA
government. In fact the one single piece of legislation given its sanction for
very high compensation killed the entire infrastructure industry and through
its spill overs, the large sections of the economy.
There is a Tragedy of Commons when comes to no
clarity in ownership or no ownership of resources resulting in over utilization
of resources. The Tragedy of Anti-Commons is the opposite of the same. Too fragmented
and too extreme an ownership results in the underproduction of the resource
thus the net effect being similar. Therefore, even though the problem existed
for centuries or millennia by the way, it is being recognized of late and needs
a Olstrom equivalent of Governing the Anti-Commons thesis. An induced O-Ring
disrupting the global production and economic process.
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