Self-Organisation, Self-Governance or Private Interest Government?

On March the fourth this year a report is published called “Materplan Toekomst IJsselmeervisserij” (Master Plan for the Future of fisheries in the IJsselmeer). This report tries to find a solution for the rapidly declining amount of fish who lives in the Ijsselmeer, the biggest lake of the Netherlands. Together with the some Dutch provinces,  an association which represent the professional fishermen who work in the IJsselmeer and nature organisations researches of the report came up with a drastic solution to increase the amount of fish to a sustainable level. The recommendation was to ban fisheries on scale fish in the IJsselmeer for the coming three years.

 

Many fishermen whose incomes are heavily dependent on what they catch in the IJsselmeer are opposed this recommendation. They do not believe that the decreasing amount of fish is caused by overfishing. They think it is unfair they are held responsible for that. In their opinion bad water quality, other predators are also responsible. Because the report do not mention these influences, the fishermen do not trust the outcomes of the report and its recommendation.  

 

This example of a depleting fish stock not only happens in the Netherlands, but everywhere around the world. When there are no institutions formal rules and regulations are made to control the amount of fish, the fish stock, following Hardin’s Tragedy of the Commons, will in the end result in an empty sea where fishery is not possible anymore.

 

What we have seen in the classroom of the 23^rd of October, will also happens in real life. The game we have played consist of a few simple rules:

-          Each round is one year. Each team decides how many fish they want to catch. Write down this number and put it in your boat

-          Facilitator takes boats and gives fish randomly to teams until they are gone. Rest of teams receive nothing

-          You get back your boat + harvest. Write down your profit

-          The sea starts with the maximum number of fish: 50. Each year, the remaining fish are able to produce one new fish, with a maximum of 50.

 

Communication between teams was not possible. Because we were with six different teams, a sustainable yield per team was 4 fish. Sustainable in this sense is that every year to amount of fish in the sea remain 50 (50/2=25, 25/6=4,167 à 4). If all boats will catch more than 4 fishes, the fish stock will decrease. Eventually there will be no fish in the water anymore, and the fishermen lose their jobs.  After just four rounds of this game this actually happens in during the lecture. This conclude that self-organisation, in this case, would not be the right solution for a sustainable fish stock.

 

To prevent what have happened in the IJsselmeer, a solution is needed to maintain the fish stock to 50. Creating awareness among the fishermen is the most straight forward solution. When the fishermen are aware that catching more than 4 fishes, will let to the depletion of the fish stock, than the fishermen will only catch four. But if all fishermen will catch 4 fishes, there is still 1 fish remaining to catch and still be sustainable. But when all the fishermen thinks this way, than the amount of fish will still decrease. Therefore, fishermen have to trust each other that no one will catch the 5^th fish. Or they fishermen have to come to a mutual decision which of the fishermen is allowed to catch to 5^th fish. This could happen under a self-governing system. But the problem is that then all the fishermen have to trust each other. For this reason self-governance would not in the long run work. Perhaps an external controlling system could tackle this problem.

 

When an external controlling body takes care of sustaining the fish stock, this system will could private interest government. Now, fishermen do not have to trust each other because an external body which has no interest in benefiting one fisherman above the other. When a fisherman is not following the rules, this body has the authority to put sanctions on the him. These sanctions has to be high enough that cheating would not be worth it for the fishermen. Also the chance for getting caught for cheating has to be high enough. Now the problem is how to control the fishermen for not catching the 5^th fish without approval from the external body. One solution is to send an observer to each boat to control the fishermen. But what are to costs to do that? And what will happen when to observer and the fisherman will become friends because they spend 24/7 on the same boat. This could cause an entanglement of interest and the observer would not be neutral anymore.

 

For this reason private interest government could only work  if the external body itself is robust enough to control the fishermen. If that is not the case, it will be very difficult to sustain the fish stock. When it is almost to late drastic measures like the in the IJsselmeer, has to be taken to get the fish stock back on a sustainable level. But it always will be a struggle between short term gains against long term gains and individual interest again collective interests.

A Decent Factory in a Decent Society

In 2004 filmmaker Thomas Balmès followed the Finnish cellphone producer Nokia for his documentary “A Decent Factory”[1]. At that time Nokia was the world leader in producing mobile phones. Because of the magnitude of this company, many other companies were reliant on Nokia for supplying parts and materials that Nokia needs for producing its mobile phones. At the time of making this documentary, Nokia tries to implement its high ethical standards through its whole supply chain. Therefore, not only Nokia itself has to meet these standards but also its suppliers. A team of ethical specialists on behave of Nokia visits suppliers who have their activities mainly based in China. In this documentary these specialists visits a German owned factory which produces adaptors and other electronic parts for Nokia’s mobile phones in China.

The question arises why Nokia was/ is focusing so explicitly on ethical standards in its supply chain? Especially when the subtitle of this documentary is Friedman’s quote; “The one and only social responsibility of business is to make profits”. Initially it seems like a contradictory between Nokia’s business philosophy and Friedman’s philosophy how companies should look like. But actually, in my opinion, these two philosophies can go hand in hand. I still share the opinion of American economist and Nobel prizewinner Milton Friedman that the business of business is to increase its profits. And I also think that Nokia is doing this as well. The first argument is a simple one. Why are the factories of Nokia’s supplier, the German company, mainly based in China and not in Germany any more? The answer is that the production costs are much higher in Germany than in China. By keeping the production costs down, the German company can sell their goods to Nokia  for a much lower price and still make profits. This means that to production costs of Nokia’s phone are also lower. Eventually, the prices of mobile phone in the stores are lower.

When the production is outsourced to developing countries, where the production costs are much lower than in the West, most of the time the working conditions are quite different. Lower wages, longer workdays, bad facilities, no safety standards, corruption etc. etc. Normally, these virtues do not match with Western ethical standards. Form a Western perspective these production activities can be seen illegitimate since it does not meet the standards of actions which are desirable, proper, or appropriate within the Western socially constructed system of norms, values, beliefs, and definitions[2]. For this reason, Nokia as an Western company, tries to adapt the production standards to meet with Western standards to make the way it is doing business legitimate.

The pressure on Nokia to make their business legitimate could come from many different actors; the shareholders, the consumers, employees or governmental regulations etc. . When consumers find the way Nokia’s cellphones are produced illegitimate, they will probably more hesitant to buy a Nokia product. For this reason it is in Nokia’s own interest to set high ethical standards into its supply chain. So, it is for Nokia a combination of normative and rational motives to comply with the high ethical standards. Because Nokia is a costumer of its supplier, Nokia can request its suppliers to meet the high ethical standards also. If not, Nokia could find another supplier of adaptors. This is a more coercive method. But since Nokia was in that moment of time the biggest producer in the world of mobile phones, it probably would succeed to diffuse their ideas of high ethical standards in the rest of the mobile phone market you might think.

Evidence this actually happened after Nokia’s campaign to set high ethical standards is difficult to find. More likely is that nothing fundamental really happens. In 2012 there was a worldwide consternation about a Chinese/Taiwanese company called Foxconn. The company was a big supplier of Apple for producing IPhones. Apple had become the biggest company in the world and Nokia was now rapidly declining. Rumors about riots, suicides and other bed working conditions in Foxconn factories occurred[3]. Even suicide nets were installed to prevent employees from jumping off the factory buildings[4]. This shows it is very difficult to make changes in working conditions to set high ethical standards as a company in a competitive industry where making profits is the main business. Only creating public awareness and governmental regulations and coercion mechanisms can make these types of structural changes. If the public is more aware about under what kind of circumstances their goods are produced, they will probably would not buy these kinds of goods any more or put more pressure to produces under higher ethical standards.

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[1]ThomasBalmès.com. http://www.thomasbalmes.com/filmography/a-decent-factory/ (15 October 2014).

[2] Suchman. M.C. 1995. Managing Legitimacy: Strategic and Institutional Approaches. In Academy of Management Review. Vol. 20 no. 3, 571-610.

[3] The Guardian. 2013. The woman who nearly died making your iPad. http://www.theguardian.com/commentisfree/2013/aug/05/woman-nearly-died-making-ipad (15 October 2014).

[4] Bloomberg. 2012. Inside Apple’s Foxconn Factories. http://www.bloomberg.com/slideshow/2012-03-30/inside-apple-s-foxconn-factory.html#slide9 (15 October 2014).

Social Ecological Systems: Make it Sustainable with Friedman's Principles

“The business of business is to increase its profits”. That is what American economist Milton Friedman claimed after the Second World War with setting up a capitalistic Western society. The role what companies have in society is to make profit, nothing more than that. Governments should give the industry restrictions what the boundaries are of that capitalistic playing-field. In democratic societies, like almost every Western society is the people vote for the government representatives. In the end the society as a whole set out the rules for the companies since societies consists out of people. There also lies the social responsibility.

      But how can Friedman's idea of open-market economy still contribute to sustainable management of social ecological systems (SESs)? It sounds contradictory but I think it is possible if you think about it a little longer than usual. Even when you think that management of social ecological system is not a social responsibility of businesses. If we look at Ostroms idea of sustaining common pool resources it is possible that governmental interference is not necessary in all circumstances. When all key players have the same values, thoughts about sustainable usage and the same interest, it is possible to come to a mutual agreement between the them. In the long term it will be beneficiary for all the key players to set up certain rules to avoid a tragedy of the commons like phenomena. In this case no external pressure is necessary to have sustainable management system on SESs.

       This mechanism could also be applied in a capitalistic where the business of business is to increase it profits. When all the companies of a certain industry, in the case of the previous blog the oil industry, uses to same system to extract a common pool resources, each company has its interest to make certain agreements with each other to control the usage of that resources. Because companies wants to survive in the future, they also pursuing long term profits. If each company will extract as much oil or gas form the same well as they can, the source will deplete rapidly. Also economic mechanism of demand and supply will be disadvantageous for the industry as a whole. Because much oil and gas is extracted, the supply will increase. If the demand will stay the same (ceteris paribus) the price of oil and gas will drop. The companies will get a lower price for their good and have therefor a lower revenue on their investments.

      For this reason is necessary to for the survival of the company the have formal or informal rules about the volumes what they allowed to extract. This is why Friedman's argument about businesses might be constructive for the sustainable management procedures of SESs.

Extracting Natural Gas and Oil from The North Pole: Who Governs?

As a shareholder of oil company Royal Dutch Shell, commonly known as Shell, I have a special interest in its activities¹. One of its activities takes place in the Arctic². Shell sees this region as a potential source to secure the World from energy supply in the future; “It is estimated that the Arctic holds around 30% of the world’s undiscovered natural gas and 13% of its yet-to-find oil”. Due to global warming, the icecaps are decreasing. In the next few decades it becomes possible to extract natural gas and oil from the North Pole in the coming decades. Although it can be very profitable for the company to have activities in this region, Shell admits that there are still many economic, environmental and social challenges ahead. Ostroms framework of analysing social-ecological systems (SESs) might help to overcome these challenges.

Fig. 1. Decreasing amount of ice during summer at the North Pool (source: NASA Earth Observatory)

      Because of the multi-disciplinary complexity of these systems, Nobel prize-winner Elinor Ostrom describes a general framework for analysing the sustainability of social-ecological systems where each of these aspects will be taken into account ³. She stated that like natural gas “all humanly used resources are embedded in complex SESs”. Natural gas and oil can be described as common pool resources. These kind of resources are freely available but have a limited quantity. Her framework consists of several subsystems of an SES. Figure 2 gives an overview how the four subsystems at the first level are related. Resources systems describes in which ecological system the activity takes place. In this the case of Shell these are Arctic’s oil and gas fields. Resources units describes what kind of resources are extracted from the resource system. In this case it will be natural gas and oil reserves.

Fig. 2. The core subsystems in a framework for analysing social-ecological systems

The governance system describes if the government or other organizations plays a part in managing and setting rules for the use of the resources. It dependents if the industry itself or governmental interference is needed when it is for the industry cheaper to set out own rules than implementing law given topdown. The North Pole is a unique situation since it is officially no-man’s land. In the last part of this blog, I will elaborate more on that. The user are the actors who are involved in the extraction of oil and natural gas in the Arctic region. Oil companies like Shell and neighbouring states who claim parts as their national territory of the North Pole. But also actors who use the region for other purposes like the native people who might live there. All of these subsystems are interlinked with each other. If Users extract resources from the environment it will have an impact on the resource stock of the resource system.

The most interesting part of the North Pole is that it is officially no-man’s land   although several states are try to prove that the North Pole belongs to their territory. Russia planted a flag of the Russian Federation on the arctic seafloor to claim the North Pole during an expedition in 2007⁴. Today the debate is still going on whether which country has the right to claim the North Pole⁵. So that it can exploit the resources or the right to license oil and gas companies like Shell. Not only Russia but also Denmark, Canada, the United States and Norway are taking part in this debate. Because state are sovereign, no higher authority exists who can decide which of these state is the legitimate owner of the North Pole. The state have to come to a mutual agreement. But that is very unlikely that will happen. Therefore the United Nation can play a role to mitigate between these states. Especially the commission of the Convention of the law of the Sea⁶.This commission has the task to designate the legitimate owner. But the problem is that the United States do not recognise this commission as a legally binding body due to its sovereign-state principle.

Fig. 3. A Russian submarine plants a flag on the Artic seabed (Source: Reuters)

      Therefore, It is unlikely this debate will be solved in the near future. Hopefully the need for extra fossil fuels will compensated by renewable energy so that the Artcic region be saved form extraction of its resources. Because of the poor institutionalisation due Arctic issues, the framework of Ostrom is more or less a utopian ideal the practice in the real world. On the other hand, it still gives a good overview what role governance should take in common pool resources in SESs.

1 Low revenues on deposit accounts encouraged me to buy stocks with low-risk but with a high-dividend. Royal Dutch Shell was in my opinion the best option for me.

2 Royal Dutch Shell. 2014. http://www.shell.com/global/future-energy/arctic.html (8 October 2014)

3 Ostrom, E. 2009. A General Framework for analyzing sustainability of social-ecological system. In Science. 24 July. Vol 325: 419-422.

4 National Geographic. 2007. http://news.nationalgeographic.com/news/2007/08/070802-russia-pole.html (8 October 2014)

5 Johnson. J. 2014.Who Own the North Pole? Debate Heats Up as Climate Change Transforms Artic. 4 April. http://www.bloomberg.com/news/2014-04-04/who-owns-the-north-pole-debate-heats-up-as-climate-change-transforms-arctic.html (8 October 2014)

6 UN Convention on the Law of the Sea. http://www.un.org/depts/los/convention_agreements/texts/unclos/closindx.htm (8 October 2014)