Saturday Potlatch

It's the weekend and the baby is napping, so let's talk about something different.

An old friend of mine told me an even older story recently. I'll let her tell her version of the story when she starts her blog. Here's the one I tell my children.

Once upon a time there was a tribe of people who lived near the ocean. Everybody in the tribe liked to give the things they had to other people. They weren't afraid to give away things because they knew that everyone else in the tribe liked to give gifts also, so no one would ever end up with nothing, no matter how much they gave. The people who gave the most away were the people that everyone else looked up to, so everyone worked hard to produce more to give away. Sometimes there would be gigantic parties where someone would give away absolutely everything he owned.

Then outsiders arrived and saw this custom that was so different from theirs. Their custom was to keep what you earned from your own labor and only give it up in exchange for something of equal value. They decided the tribe's custom was worthless. They called it demonic and then outlawed it. The tribe sank into poverty.

My friend's version, which sounds like the Nigerian version of this tale, via the Girl Scouts, has a happy ending. Mine doesn't. But mine has the virtue of being historical. Several tribes in the Pacific Northwest practiced some version of a gift economy before the custom was outlawed in 1885 after protests by missionaries.

Gift economies are interesting. Capitalists argue that without markets there is no motivation to produce. In a gift economy the motivation is status, not goods and status often has more utility than goods. The fatal objection to gift economies is that they do not allocate resources well. This is hard to argue with: it is difficult enough to maximize your own utility, directing your production to maximize the utility of a group is harder. As the group grows, it becomes unwieldy or impossible. The feedback on production in a gift economy ("how happy were they to receive my gift?") is less direct or timely than the feedback in a market economy (price.)

Because of this lack of timely feedback, gift economies can easily mismatch supply and demand in the short- to medium-term, wasting resources. If it is easy to catch fish, a tribe member may decide to catch far more fish than the tribe could eat in order to give the biggest gift.

Gift economies, because they do not depend on material exchange, avoid both one of the failings of the market economy and communism's fatal flaws. Because goods are given freely, no one is poor. But because there are rewards for production, no one underproduces.

But gift economies are unstable. They require the cooperation of the entire tribe. In a form of the Prisoner's Dilemma, all players are better off if they cooperate, but if players start to defect (in this case, not give gifts but keep taking them, becoming freeriders) then all players would do better to defect. It takes strong cultural and ethical constraints to keep people from defecting.

Unstable equilibra exist, of course. You can balance a coin on its edge and it will balance for quite a while, provided there is no outside disturbance. Gift economies exist all over the place: from the open source movement to academic research. The participants in these economies are so much better off from them that there is plenty of extra to leak out to the rest of us, who do not contribute.

Why do gift economies work with knowledge goods? Because knowledge, once created, can be widely distributed at almost no cost. The misallocated resource problem of gift economies is minimized when production cost goes to zero. Resource wastage is a minor effect when the ratio of output to input is so enormous.

But these modern gift economies are still unstable. I wonder if we should worry about the entrepreneurial model of academics (I will call it the "Stanford Model" although it's much more widespread than that.) In the last thirty years (and remember that the current model of academics freely sharing the results of their research with each other is at least 400 years old) research performed in universities has begun to be used to start companies, get patents and otherwise be owned rather than given away freely. At what point do these defections cause all academic research to be closed? And what would that cost society?