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The truth is, as much as we might chafe at the idea of being compelled to do something we wouldn’t otherwise choose to do, having an overarching authority that’s capable of requiring everybody to follow certain rules can make us all significantly better off in the long run. As counterintuitive as it might sound, we can benefit greatly from voluntarily accepting (on a meta level) the possibility of some involuntary coercion (at the object level).

So just to take an example that’s unrelated to government, consider this one described by James Surowiecki:

Back in the nineteen-seventies, an economist named Thomas Schelling, who later won the Nobel Prize, noticed something peculiar about the N.H.L. At the time, players were allowed, but not required, to wear helmets, and most players chose to go helmet-less, despite the risk of severe head trauma. But when they were asked in secret ballots most players also said that the league should require them to wear helmets. The reason for this conflict, Schelling explained, was that not wearing a helmet conferred a slight advantage on the ice; crucially, it gave the player better peripheral vision, and it also made him look fearless. The players wanted to have their heads protected, but as individuals they couldn’t afford to jeopardize their effectiveness on the ice. Making helmets compulsory eliminated the dilemma: the players could protect their heads without suffering a competitive disadvantage. Without the rule, the players’ individually rational decisions added up to a collectively irrational result. With the rule, the outcome was closer to what players really wanted.

Dilemmas like this are known as “collective action problems” – situations where (in the absence of any higher authority) each individual has an incentive to act in a particular way for their own self-interest, but then when they all act in accordance with that incentive, it ends up producing a group-wide outcome that’s not in anybody’s interest. And they can crop up in all kinds of different areas of life, not just in artificially constructed situations like hockey games. As Pinker puts it:

[These are] actions that make sense to the individual choosing them but are costly to society when everyone chooses them. Examples include overfishing a harbor, overgrazing a commons, commuting on a bumper-to-bumper freeway, or buying a sport utility vehicle to protect oneself in a collision because everyone else is driving a sport utility vehicle.

It’s worth explaining each of these examples in a little more depth – so here’s Peter Singer, for starters, elaborating on the traffic example:

Suppose I live in the suburbs and work in the city. I could drive my car to work, or take the bus. I prefer not to wait around for the bus, and so I take my car. Fifty thousand other people living in my suburb face the same choice and make the same decision. The road to town is choked with cars. It takes each of us an hour to travel ten miles.

In this situation, according to the [negative] conception of freedom, we have all chosen freely. No one deliberately interfered with our choices. Yet the outcome is something none of us want. If we all went by bus, the roads would be empty and we could cover the distance in twenty minutes. Even with the inconvenience of waiting at the bus stop, we would all prefer that. We are, of course, free to alter our choice of transportation, but what can we do? While so many cars slow the bus down, why should any individual choose differently? The [negative] conception of freedom has led to a paradox: we have each chosen in our own interests, but the result is in no one’s interest. Individual rationality, collective irrationality.

The solution, obviously, is for us all to get together and make a collective decision. As individuals we are unable to bring about the situation we desire. Together we can achieve what we want, subject only to the physical limits of our resources and technology. In this example, we can all agree to use the bus.

[But now let’s imagine a group of people trying to voluntarily coordinate their commutes in this way.] They hold a meeting. All agree that it would be better to leave their cars at home. They part, rejoicing at the prospect of no more traffic jams. But in the privacy of their own homes, some reason to themselves as follows: ‘If everyone else is going to take the bus tomorrow, the roads will be empty. So I’ll take my car. Then I’ll have the convenience of door-to-door transportation and the advantage of a traffic-free run which will get me to work in less time than if I took the bus.’ From a self-interested point of view this reasoning is correct. As long as most take the bus, a few others can obtain the benefits of the socially minded behaviour of the majority, without giving up anything themselves.

What should the majority do about this? Should they leave it up to the individual conscience to decide whether to abuse the system in this manner? If they do, there is a risk that the system will break down – once a few take their own cars, others will soon follow, for no one likes to be taken advantage of. Or should the majority attempt to coerce the minority into taking the bus? That is the easy way out. It can be done in the name of freedom for all; but it may lead to freedom for none.

Singer is right to point out in his last sentence there that in some cases, the collective benefits of using coercion, while appreciable, aren’t worth the costs in terms of individual freedom. This particular commuting example, for instance, despite being a good hypothetical for illustrative purposes, isn’t necessarily one in which government coercion would automatically be justifiable. Here in the real world, we’ve decided not to impose such constraints on people’s ability to drive their own individual cars – and for perfectly valid reasons. As a result, we unfortunately have to endure horrible traffic jams fairly often – but that’s a tradeoff we’ve chosen to accept.

Having said that, though, there are plenty of cases in which the tradeoff does more clearly favor using government coercion to resolve the problem – with the most obvious of these cases, of course, being all the laws against outright theft and violence and so on. People might find that they’re able to benefit on an individual basis from being able to abuse and steal from others – but if they all acted in accordance with this individual incentive, society as a whole would be plunged into chaos; so therefore we’ve opted to have government require everyone to coexist peacefully, even if it means using coercion where necessary. As Fukuyama explains in his discussion of the original formation of the state in China:

In Leviathan, Thomas Hobbes argues that the sovereign derives his legitimacy from an unwritten social contract by which each individual gives up his natural liberty to do as he pleases in order to secure his own natural right to life, which would otherwise be threatened by the “warre of every man against every man.” If we substitute “group” for “man,” it is clear that many premodern societies operated on the basis of such a social contract, China’s included. Human beings were willing to give up a huge amount of freedom and delegate a corresponding amount of discretion to an emperor who would rule them and guarantee social peace. They found this preferable to a state of war, which they had experienced repeatedly in their history, when powerful oligarchs fought each other and exploited their own people without restraint.

Preventing rampant violence and subjugation in this way is a pretty elementary use of government authority. But in addition to such basic cases, there are also plenty of other kinds of collective action problems which don’t involve any kind of overtly belligerent behavior on anyone’s part, but can still benefit from government intervention to bring everyone together under a common set of rules. One of the best-known of these is what’s called “the tragedy of the commons,” which includes the aforementioned examples of overgrazing and overfishing. In such situations, where there’s some kind of renewable common-pool good like a natural resource (e.g. grazing pastures), everyone has an individual incentive to use up as much of it for themselves as they can – but then, when they all do that, it ends up depleting the natural resource beyond the point of recovery, leaving them all worse off in the end. If they could all commit to limiting their usage of the natural resource, they could use it in a more sustainable way, and could continue reaping the benefits indefinitely – but none of them has any individual incentive to do so unless it means everyone else will do so as well. So the only two ways of ensuring that the resource isn’t depleted are to either take it out of the commons entirely (i.e. privatize it and put it in the hands of specifically designated owners) or to have an overarching authority impose enforceable limits on how much of it each individual may use at a time (i.e. use government coercion) – or both. Wheelan breaks it down by comparing it to a classic prisoner’s dilemma:

Some of the most interesting problems in economics involve situations in which rational individuals acting in their own best interest do things that make themselves worse off. Yet their behavior is entirely logical.

The classic example is the prisoner’s dilemma, a somewhat contrived but highly powerful model of human behavior. The basic idea is that two men have been arrested on suspicion of murder. They are immediately separated so that they can be interrogated without communicating with one another. The case against them is not terribly strong, and the police are looking for a confession. Indeed, the authorities are willing to offer a deal if one of the men rats out the other as the trigger man.

If neither man confesses, the police will charge them both with illegal possession of a weapon, which carries a five-year jail sentence. If both of them confess, then each will receive a twenty-five-year murder sentence. If one man rats out the other, then the snitch will receive a light three-year sentence as an accomplice and his partner will get life in prison. What happens?

The men are best off collectively if they keep their mouths shut. But that’s not what they do. Each of them starts thinking. Prisoner A figures that if his partner keeps his mouth shut, then he can get the light three-year sentence by ratting him out. Then it dawns on him: His partner is almost certainly thinking the same thing—in which case he had better confess to avoid having the whole crime pinned on himself. Indeed, his best strategy is to confess regardless of what his partner does: It either gets him the three-year sentence (if his partner stays quiet) or saves him from getting life in prison (if his partner talks).

Of course, Prisoner B has the same incentives. They both confess, and they both get twenty-five years in prison when they might have served only five. Yet neither prisoner has done anything irrational.

The amazing thing about this model is that it offers great insight into real-world situations in which unfettered self-interest leads to poor outcomes. It is particularly applicable to the way in which renewable natural resources, such as fisheries, are exploited when many individuals are drawing from a common resource. For example, if Atlantic swordfish are harvested wisely, such as by limiting the number of fish caught each season, then the swordfish population will remain stable or even grow, providing a living for fishermen indefinitely. But no one “owns” the world’s swordfish stocks, making it difficult to police who catches what. As a result, independent fishing boats start to act a lot like our prisoners under interrogation. They can either limit their catch in the name of conservation, or they can take as many fish as possible. What happens?

Exactly what the prisoner’s dilemma predicts: The fishermen do not trust each other well enough to coordinate an outcome that would make them all better off. Rhode Island fisherman John Sorlien told the New York Times in a story on dwindling fish stocks, “Right now, my only incentive is to go out and kill as many fish as I can. I have no incentive to conserve the fishery, because any fish I leave is just going to be picked up by the next guy.” So the world’s stocks of tuna, cod, swordfish, and lobster are fished away. Meanwhile, politicians often make the situation worse by bailing out struggling fishermen with assorted subsidies. This merely keeps boats in the water when some fishermen might otherwise quit.

Sometimes individuals need to be saved from themselves. One nice example of this is the lobstering community of Port Lincoln on Australia’s southern coast. In the 1960s, the community set a limit on the number of traps that could be set and then sold licenses for those traps. Since then, any newcomer could enter the business only by buying a license from another lobsterman. This limit on the overall catch has allowed the lobster population to thrive. Ironically, Port Lincoln lobstermen catch more than their American colleagues while working less. Meanwhile, a license purchased in 1984 for $2,000 now fetches about $35,000. As Aussie lobsterman Daryl Spencer told the Times, “Why hurt the fishery? It’s my retirement fund. No one’s going to pay me $35,000 a pot if there are no lobsters left. If I rape and pillage the fishery now, in ten years my licenses won’t be worth anything.” Mr. Spencer is not smarter or more altruistic than his fishing colleagues around the world; he just has different incentives. Oddly, some environmental groups oppose these kinds of licensed quotas because they “privatize” a public resource. They also fear that the licenses will be bought up by large corporations, driving small fishermen out of business.

So far, the evidence strongly suggests that creating private property rights—giving individual fishermen the right to a certain catch, including the option of selling that right—is the most effective tool in the face of collapsing commercial fisheries. A 2008 study of the world’s commercial fisheries published in Science found that individual transferable quotas can stop or even reverse the collapse of fishing stocks. Fisheries managed with transferable quotas were half as likely to collapse as fisheries that use traditional methods.

In this example, the tragedy of the commons is avoided thanks to the government allocating private property rights to individual fishermen, and then setting limits on how much each of them can catch at a time. In other such cases, like that of grazing land, the solution might be an even more straightforward form of privatization, with the government simply splitting up the land, allocating a piece of it to each person, and then letting them use it however they want, without any need for further regulation. In still other cases, though, this kind of privatization might have major drawbacks – and if those drawbacks are significant enough, the best solution might not be to privatize at all, but to just keep the resource as a common-pool good and have the government regulate its use. As Heath explains:

For a long time, social scientists were remarkably inattentive to the economic benefits of [common-pool goods]. For example, economists routinely engaged in blanket condemnation of “common property” arrangements, on the grounds that they generated collective action problems. The story of the “tragedy of the commons” is a good example. According to the received wisdom, the common-field system in England, in which all the peasants in a community were entitled to graze their animals in a shared pasture, led to systematic overgrazing. Since most of the cost of grazing one’s own animals on the pasture was borne by other users, the private benefit of grazing always exceeded the private cost, and so everyone kept grazing until the field was destroyed. (The same dynamic has led to the destruction of many common resources, such as the cod fishery on the Grand Banks off the coast of northeastern North America.) The solution typically proposed is, when feasible, to divide up the common property into individual holdings and then limit individuals to the use of their own plots. If the only place to graze your animals is in your own backyard, then the incentive to overgraze disappears, since the full cost is now “internalized,” or borne by the individual making the decision.

There is a lot to be said for this analysis. However, it is often suggested that the transition to a private-property regime is an unqualified Pareto improvement. In many cases, particularly agricultural ones, this is not the case, because enclosure also has the effect of “unpooling” various types of risk. If some portion of the land is afflicted by a blight or ruined by hail or eaten by insects, a common-field system automatically divides the loss up among all members of the community. With individual plots of land, on the other hand, some individuals may find themselves with nothing, while others are completely unaffected. Thus private property may increase productivity and improve the incentives for land management, but it will also increase the variability of returns. Whether or not this makes it worthwhile depends upon a large number of factors, particularly environmental ones.

This is not to say that sharing and mutual aid are never based upon purely altruistic sentiment. It is, however, easy to underestimate the extent to which they are based upon rational self-interest, narrowly conceived. Many of the social movements and institutional arrangements that we traditionally think of as “socialist” have a lot more to do with risk-pooling than with equality or distributive justice. And in cases where these movements succeed in generating permanent institutional reform, it is usually because the arrangements they promote involve win-win efficiency gains, not win-lose redistributions of income.

It is interesting to reconsider the history of nineteenth- and twentieth-century “class struggle” in this light. Canadians sometime express puzzlement over the fact that Saskatchewan, which is traditionally the most socialist province in the country, sits right next to Alberta, which is traditionally the most conservative. Yet this is hardly so mysterious when one thinks of socialism in terms of social insurance. The left-right political divide coincides near-perfectly with the shift from an economy based almost entirely upon farming, in Saskatchewan, to one based increasingly on ranching (and later oil), in Alberta. Since the growing season on the prairies is barely long enough to support one crop, and rainfall is both low and highly variable, there is a long-standing tradition of mutual aid among farmers. The socialist movement prospered in Saskatchewan primarily because of the risk-pooling arrangements that it helped to create, first in response to price volatility and crop failure, and eventually in response to other shared risks (most important, in health care, through the introduction of “socialized” government insurance). Ranchers, on the other hand, are not affected by very many “exogenous” risks, such as bad weather. Theft is usually their biggest issue, leading to a political emphasis upon property rights, rather than upon solidarity and mutual aid. That’s why a rancher is more likely to shoot you if he finds you on his land, whereas a farmer might invite you to stay for dinner.

The advantages of pooling risk in this way are often considerable, and can provide a strong reason to want to maintain a common-property arrangement rather than opting for complete privatization. In addition to that, though, another relevant factor favoring the former over the latter is that sometimes privatization just isn’t possible at all, even in theory. As Alexander writes in his broad overview of coordination problems, such a situation might arise in a context like, for instance, aquaculture, in which fish are farmed in a lake (as opposed to Wheelan’s example of catching them in the wild):

[Q]: What are coordination problems?

Coordination problems are cases in which everyone agrees that a certain action would be best, but the free market cannot coordinate them into taking that action.

As a thought experiment, let’s consider aquaculture (fish farming) in a lake. Imagine a lake with a thousand identical fish farms owned by a thousand competing companies. Each fish farm earns a profit of $1000/month. For a while, all is well.

But each fish farm produces waste, which fouls the water in the lake. Let’s say each fish farm produces enough pollution to lower productivity in the lake by $1/month.

A thousand fish farms produce enough waste to lower productivity by $1000/month, meaning none of the fish farms are making any money. Capitalism to the rescue: someone invents a complex filtering system that removes waste products. It costs $300/month to operate. All fish farms voluntarily install it, the pollution ends, and the fish farms are now making a profit of $700/month – still a respectable sum.

But one farmer (let’s call him Steve) gets tired of spending the money to operate his filter. Now one fish farm worth of waste is polluting the lake, lowering productivity by $1. Steve earns $999 profit, and everyone else earns $699 profit.

Everyone else sees Steve is much more profitable than they are, because he’s not spending the maintenance costs on his filter. They disconnect their filters too.

Once four hundred people disconnect their filters, Steve is earning $600/month – less than he would be if he and everyone else had kept their filters on! And the poor virtuous filter users are only making $300. Steve goes around to everyone, saying “Wait! We all need to make a voluntary pact to use filters! Otherwise, everyone’s productivity goes down.”

Everyone agrees with him, and they all sign the Filter Pact, except one person who is sort of a jerk. Let’s call him Mike. Now everyone is back using filters again, except Mike. Mike earns $999/month, and everyone else earns $699/month. Slowly, people start thinking they too should be getting big bucks like Mike, and disconnect their filter for $300 extra profit…

A self-interested person never has any incentive to use a filter. A self-interested person has some incentive to sign a pact to make everyone use a filter, but in many cases has a stronger incentive to wait for everyone else to sign such a pact but opt out himself. This can lead to an undesirable equilibrium in which no one will sign such a pact.

The most profitable solution to this problem is for Steve to declare himself King of the Lake and threaten to initiate force against anyone who doesn’t use a filter. This regulatory solution leads to greater total productivity for the thousand fish farms than a free market could.

The classic libertarian solution to this problem is to try to find a way to privatize the shared resource (in this case, the lake). I intentionally chose aquaculture for this example because privatization doesn’t work. Even after the entire lake has been divided into parcels and sold to private landowners (waterowners?) the problem remains, since waste will spread from one parcel to another regardless of property boundaries.

[Q]: Even without anyone declaring himself King of the Lake, the fish farmers would voluntarily agree to abide by the pact that benefits everyone.

Empirically, no. This situation happens with wild fisheries all the time. There’s some population of cod or salmon or something which will be self-sustaining as long as it’s not overfished. Fishermen come in and catch as many fish as they can, overfishing it. Environmentalists warn that the fishery is going to collapse. Fishermen find this worrying, but none of them want to fish less because then their competitors will just take up the slack. Then the fishery collapses and everyone goes out of business. The most famous example is the Collapse of the Northern Cod Fishery, but there are many others in various oceans, lakes, and rivers.

If not for resistance to government regulation, the Canadian governments could have set strict fishing quotas, and companies could still be profitably fishing the area today. Other fisheries that do have government-imposed quotas are much more successful.

[Q]: I bet [extremely complex privatization scheme that takes into account the ability of cod to move across property boundaries and the migration patterns of cod and so on] could have saved the Atlantic cod too.

Maybe, but left to their own devices, cod fishermen never implemented or recommended that scheme. If we ban all government regulation in the environment, that won’t make fishermen suddenly start implementing complex privatization schemes that they’ve never implemented before. It will just make fishermen keep doing what they’re doing while tying the hands of the one organization that has a track record of actually solving this sort of problem in the real world.

Alexander continues his discussion by showing how similar considerations can apply to even bigger coordination problems as well, like global warming, business regulation, and charitable spending:

[Q]: How do coordination problems justify environmental regulations?

Consider the process of trying to stop global warming. If everyone believes in global warming and wants to stop it, it’s still not in any one person’s self-interest to be more environmentally conscious. After all, that would make a major impact on her quality of life, but a negligible difference to overall worldwide temperatures. If everyone acts only in their self-interest, then no one will act against global warming, even though stopping global warming is in everyone’s self-interest. However, everyone would support the institution of a government that uses force to make everyone more environmentally conscious.

Notice how well this explains reality. The government of every major country has publicly declared that they think solving global warming is a high priority, but every time they meet in Kyoto or Copenhagen or Bangkok for one of their big conferences, the developed countries would rather the developing countries shoulder the burden, the developing countries would rather the developed countries do the hard work, and so nothing ever gets done.

The same applies mutans mutandis to other environmental issues like the ozone layer, recycling, and anything else where one person cannot make a major difference but many people acting together can.

[Q]: How do coordination problems justify regulation of ethical business practices?

The normal libertarian belief is that it is unnecessary for government to regulate ethical business practices. After all, if people object to something a business is doing, they will boycott that business, either incentivizing the business to change its ways, or driving them into well-deserved bankruptcy. And if people don’t object, then there’s no problem and the government shouldn’t intervene.

A close consideration of coordination problems demolishes this argument. Let’s say Wanda’s Widgets has one million customers. Each customer pays it $100 per year, for a total income of $100 million. Each customer prefers Wanda to her competitor Wayland, who charges $150 for widgets of equal quality. Now let’s say Wanda’s Widgets does some unspeakably horrible act which makes it $10 million per year, but offends every one of its million customers.

There is no incentive for a single customer to boycott Wanda’s Widgets. After all, that customer’s boycott will cost the customer $50 (she will have to switch to Wayland) and make an insignificant difference to Wanda (who is still earning $99,999,900 of her original hundred million). The customer takes significant inconvenience, and Wanda neither cares nor stops doing her unspeakably horrible act (after all, it’s giving her $10 million per year, and only losing her $100).

The only reason it would be in a customer’s interests to boycott is if she believed over a hundred thousand other customers would join her. In that case, the boycott would be costing Wanda more than the $10 million she gains from her unspeakably horrible act, and it’s now in her self-interest to stop committing the act. However, unless each boycotter believes 99,999 others will join her, she is inconveniencing herself for no benefit.

Furthermore, if a customer offended by Wanda’s actions believes 100,000 others will boycott Wanda, then it’s in the customer’s self-interest to “defect” from the boycott and buy Wanda’s products. After all, the customer will lose money if she buys Wayland’s more expensive widgets, and this is unnecessary – the 100,000 other boycotters will change Wanda’s mind with or without her participation.

This suggests a “market failure” of boycotts, which seems confirmed by experience. We know that, despite many companies doing very controversial things, there have been very few successful boycotts. Indeed, few boycotts, successful or otherwise, ever make the news, and the number of successful boycotts seems much less than the amount of outrage expressed at companies’ actions.

The existence of government regulation solves this problem nicely. If >51% of people disagree with Wanda’s unspeakably horrible act, they don’t need to waste time and money guessing how many of them will join in a boycott, and they don’t need to worry about being unable to conscript enough defectors to reach critical mass. They simply vote to pass a law banning the action.

[Q]: How do coordination problems justify government spending on charitable causes?

Because failure to donate to a charitable cause might also be because of a coordination problem.

How many people want to end world hunger? I’ve never yet met someone who would answer with a “not me!”, but maybe some of those people are just trying to look good in front of other people, so let’s make a conservative estimate of 50%.

There’s a lot of dispute over what it would mean to “end world hunger”, all the way from “buy and ship food every day to everyone who is hungry that day” all the way to “create sustainable infrastructure and economic development such that everyone naturally produces enough food or money”. There are various estimates about how much these different definitions would cost, all the way from “about $15 billion a year” to “about $200 billion a year” – permanently in the case of shipping food, and for a decade or two in the case of promoting development.

Even if we take the highest possible estimate, it’s still well below what you would make if 50% of the population of the world donated $1/week to the cause. Now, certainly there are some very poor people in the world who couldn’t donate $1/week, but there are also some very rich people who could no doubt donate much, much more.

So we have two possibilities. Either the majority of people don’t care enough about world hunger to give a dollar a week to end it, or something else is going on.

That something else is a coordination problem. No one expects anyone else to donate a dollar a week, so they don’t either. And although somebody could shout very loudly “Hey, let’s all donate $1 a week to fight world hunger!” no one would expect anyone else to listen to that person, so they wouldn’t either.

When the government levies tax money on everyone in the country and then donates it to a charitable cause, it is often because everyone in the country supports that charitable cause but a private attempt to show that support would fall victim to coordination problems.

His list of coordination problems goes on, including the whole discussion of labor coordination quoted earlier. What all these examples demonstrate is that there are some things we just can’t do very efficiently if we’re all acting as isolated individuals, compared to if we’re all acting as a collective unit through the coordination mechanism of government. And in fact, there are some things that we can only really do as a collective unit – including a lot of the things that are most crucial to our well-being. It’s just one more way in which the coercive power of government, despite being restrictive in one sense, can nevertheless make us freer in a broader sense by helping us fulfill our interests in a way that just wouldn’t be possible without it.

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