Example One Efficiency And Changes In Knowledge

For example, imagine a society in which all the above conditions for efficiency are met, considered from the community level. The community is entirely dependent on the stocks of salmon in a nearby lake for its food supply. Suppose, further, that the society believes - incorrectly - that the supply of salmon is infinite: that it will regrow faster than it could possibly be depleted. In such a community there would be no rule which limited the number of fish that could be caught each day. Indeed, the community's rules might encourage each member to catch as many fish as possible, to ensure a readily available food supply.

It would not be efficient, before the community encounters a fish shortage, for the community to pass a new rule limiting fishing, because nobody in the community knows that the number of fish is limited, and everybody in the community would regard the rule as foolish and unfair. This is true even though a rule limiting fishing will benefit the group - objectively -whether they know of the impending shortage or not. But the objective view assumes that the community has somehow acquired new knowledge, in violation of the requirement that conditions (including knowledge) do not change. In hindsight, the community will presumably realize that the existence value of a healthy stock of salmon to that community was so great that a rule protecting the stock would have been efficient, since the cost of losing the salmon could be the extinction of the entire community through starvation (assuming they could not find an alternative food source in time). That is, in hindsight the tribe will wish that it had reduced its catch.3 The reason for this counterintuitive result is that efficiency can only be measured from the standpoint of an observer who is conducting an economic analysis (Zerbe 1991).4

In other words, efficiency requires a perspective. Whittington and MacRae (1986) define economic standing, which determines whether or not one's values are to count in an economic analysis. Zerbe (1991) has argued, for example, that the thief's valuation of his stolen goods is not to count, on the basis that theft is illegal, unless the issue is the legality of thievery itself. Standing, according to Zerbe (1991) is something that is determined according to the regard for others and the law of the community; it represents a prior decision about how efficiency is to be measured.

The related issue in the salmon example is whether or not an outside, expert observer has been given standing to have his assessment of the valuation of the community's costs and benefits with regard to salmon counted. Questions have been raised about how to count values where the expert's opinion differs from the opinions of those directly affected (Portney 1992), and as to whether harm can occur when it is unknown (Dunford, Johnson and West 1997). These issues are considered in Chapter 5.5

In our static community hypothesis, there is no way that any observer who was part of the static community could become aware of the potential salmon shortage, since that would require the observer to acquire new knowledge.

Suppose, however, that a naturalist from a nearby, dynamic community observes that the salmon stock is on the brink of a shortage.6 If we introduce an observer who is aware of the salmon shortage, does the efficiency of a rule limiting fishing change? In order to answer this question, we have to decide whether the naturalist - or, more to the point, his or her knowledge - has standing. The static community might decide to grant the naturalist's information standing, and if it did so, it would decide that it would be efficient to change the fishing rule, even though a rule change would upset older rules and norms. However, if the static community granted the naturalist's knowledge standing, it would, in effect, be increasing its own knowledge, so that it would no longer be a static community.

Alternatively, we might ask whether it would be efficient for the world to impose fishing limits on the static community. For example, the dynamic community that the naturalist belongs to might have the power to force the static community to change its rule,7 or it might have sufficient wealth to 'bribe' the static community to change its rule voluntarily.8 If we conclude that the static community should listen to the naturalist, and grant him or her standing, then the formerly static community has changed into a dynamic one. If we conclude that the naturalist's community should impose a change (forcefully or peacefully), then the static community itself remains static (since its rule is changing but its norms, knowledge, and technology are not), but we are adopting the perspective of the naturalist's dynamic community in making this judgment. The important point is that there is no way for the naturalist's new knowledge to matter, economically speaking, unless one adopts the perspective of a dynamic world.

This hypothetical situation shows that whether or not an economist counts gains or losses that the community is not aware of can make a profound difference in the economist's recommendations. If the community welcomes new knowledge (provided that the knowledge is reliable), the economist's new knowledge has standing within that community, and the economist should count gains and losses that the community is not aware of (Zerbe 1991). If the economist considered only gains and losses that the community knows about, the economist might encourage a community to do something which he or she knows to be inefficient, or even self-destructive. This hypothetical situation also shows that although it is efficient for a static community to pass laws that are consistent with its norms, even when its laws and norms are based on incomplete knowledge, it is not necessarily efficient to be a static community in the first place. To put this another way, it is never efficient for a static community to adopt a rule which is inconsistent with its settled norms, even when its norms are grounded in ignorance, but it may be efficient for a static world to become dynamic.9 Indeed, in this hypothetical situation, the fact that the fishing community is static prevents it from acquiring knowledge that is necessary to ensure its survival.

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