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The Gridlock Economy: How Too Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives

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How to do property right -
The idealized free market can be framed in a number of ways, but the Coase Theorem is one of its more intuitive pillars. The idea is that, *under certain well-specified conditions*, property lands in the hands of those who value it most, regardless of who gets that property at the beginning. Now you need to specify those conditions. One is that it's costless for sellers to find buyers, and costless for them to carry out the sale. Under these conditions, I sell my property to person A, who sells it to person B, and so on until it finds the person who values it the most. (The mathematicians would say that this is an "if" rather than an "only if": there may be other conditions under which property finds the right home, but at least we know that it does so under the given conditions.)

The trouble is that in the real world, transaction costs are nontrivial. To sell a piece of property, you need to engage the services of a lawyer to draw up the contract and need to pay various fees to various government agencies to maintain the records of who owns what. This isn't just "bureaucratic friction"; it's essential to the system's functioning.

So the Coase Theorem doesn't apply in the real world. To his credit, Coase understood this; his work is where much of the economic study of institutions starts. Humans establish institutions, goes the story, when their own uncoordinated actions would lead to manifest market failures. In a world with positive transaction costs, institutions spring up to bring us somewhat closer to the world predicted by the Coase Theorem. "The Gridlock Economy" is, in part, an exploration of these institutions. And it's a fun read.

There are cases in which Coase breaks down rather viciously; these are the cases that Professor Heller tackles in "The Gridlock Economy". Not all private property is created equal. Sometimes land is unavoidably split and cannot be put back together without political changes -- as, for instance, with the Rumaila oil field shared by Iraq and Kuwait. In these cases a prisoner's dilemma can develop: without coordination, and enforceable penalties for violation, both Iraq and Kuwait will extract as much oil as they can, as quickly as possible, from the ground beneath them. If they don't, they know that the other guy will.

This story of competing for a resource when property rights are split, leads to the longest and most fascinating story in "The Gridlock Economy", about the fight between Virginia and Maryland over oyster-harvesting rights. The fight lasted 300 years, led to untold deaths, and was a real-world example of how property rights matter.

The general theme is that often property rights are divided in such a way that they prevent optimal use of a resource. Too many people with divergent interests need to be coordinated before the whole mass of them can move. Heller's clearest and most entertaining example in this direction (what Daniel Dennett would call an "intuition pump") is the Quaker Oats Klondike Big Inch, whereby those who bought Quaker products 40-some years ago each got a deed on a single square inch of Alaskan land. It was all very clever at the time, but what happens to that land when someone wants to develop on it years later? Any potential developer needs to track down every last "big inch" owner and buy up his land. Quaker didn't, of course, register all of those who owned big inches, so the costs even of finding those owners are prohibitive, not to mention contracting with them.

Imagine, instead, that those big inch owners were regularly in contact with one another (they've all established a Big Inch Alumni Club, say). Word starts getting around that a developer is buying up their inches. Pretty soon owners stop selling, or they jack up the prices at which they'll sell. The developers must, of course, realize that this will happen before they even start buying. So smart developers will either buy up the land slowly -- as big-inch owners die, say -- or they'll establish many front companies to convince owners that the buying effort is uncoordinated. This obviously imposes huge transaction costs. These transaction costs are as high as they are because each big-inch owner has something akin to monopoly power: one owner out of a million can block the entire transaction. It's private property like any other, but it's private property done wrong.

Cities normally use eminent domain to get around this monopoly problem: forcibly buy land at fair market value, then hand it over to a private developer. But eminent domain is pretty ugly, and isn't voter-friendly. (As it happens, eminent domain is exactly how Alaska got around the big-inch problem with this bit of land.)

The endorsement on the cover from Larry Lessig suggests to potential buyers that we'll be encountering gridlock in the copyright and patent domains, and indeed we do. As Lessig and many others have pointed out, the new "mashup economy" can't work if every mashup artist needs to contact the source of every song he's sampling. Songs go unproduced. Here's where Heller asks us to add a word to our vocabulary: rather than just thinking about "overuse," which the tragedy of the commons forces us to consider, Heller's tragedy of the anticommons makes us think about underuse -- for instance, underuse of music samples that could otherwise be put to profitable use, or big inches laying fallow in Alaska.

For a sub-200-page book, "The Gridlock Economy" is highly enlightening. I know of few other books which capture patent, copyright, real-estate law and transaction costs under a single simple, readable framework. In a just world, Heller's book will change the way we think about markets and property. By the time it's finished, Heller sees gridlock everywhere, and so do we.

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How overly granular ownership creates mirror problems to when there is no ownership -
This is a fascinating book. Michael Heller says he got the key insight to the problem he describes in this book in the faulty way the old Soviet Union tried to create private property upon its dissolution. For example, let's say you have been operating a store and with the return of private property, you might expect that you would either get the store or be able to buy it from the state or some such process that would let you continue operating the store. However, you forget that all those Soviet bureaucrats have to get property too! So, some people formerly with the government would also be assigned rights of ownership to the property and your store. This means all of you need to share in its profits and must agree on how it is to be operated. Unfortunately, this also empowers the owners who have no real interest in working the store. They will demand to be bought out in order to let the store function. So, the store cannot function and will be closed with the building sitting vacant. Was society improved by this process?

We all know about the problem of commons. Say there was a well producing apple orchard that we turn into a park that no one owns and everyone can use as they see fit. Will the apple trees be tended to? Will the apples be disturbed to those who need it? Or will the trees be untended, the apples taken by those who want to hoard or sell them, or might the trees be cut down for their wood? All we know is that the orchard will be destroyed. Private property, rightly assigned, can protect resources by those who have an interest in their continuing. When ownership becomes too granular, what Heller calls anticommons, it freezes assets and keeps them unused just as surely as the commons problem does. If that apple orchard were owned equally by 1,000 people who each had a portion of each tree, gridlock would set in because nothing could be decided and nothing would be done to care for, harvest, or use the tree productively.

The author uses many real life business stories to illustrate his points. I found his arguments interesting and very much worth thinking about. His central examples focus on the way our current patent laws for medicines and pharmaceutical manufacturing prevent the creation of new and beneficial medicines. He also shows why our radio spectrum is mostly empty because of the crazy way we license it. The United States is far behind in the products and services available in our telephones, TVs, radios, and other uses of this precious resource. Leaving it unused is just as silly as overuse. We also get a tour of how less than optimal private solutions are created when government creates either a commons or an anticommons problem. Heller then takes us to Moscow and shows us the mess there and offers some steps we can take to fix problems in our own economy.

Good reading.

Reviewed by Craig Matteson, Ann Arbor, MI

Illuminates what Econ 101 leaves invisible... -
An excellent book. The chapter on Russia's efforts to adopt property rights in the retail and apartment markets alone is worth the price.

Heller's main thesis is that too much ownership can work to 'gridlock' economic progress, investment and innovation. This is explored in how granting too large a bundle of rights for patents has hobbled many high-technology, biotechnology and pharmaceutical development efforts, threatening U.S. prosperity and consumer well-being.

Also, a fine chapter on how U.S. radio spectrum, subject for decades to FCC over-specification of permissible uses and politically-constrained allocation practices, is presently a mostly-wasted public resource.

Great read -
I enjoyed reading this book. A lot. I've worked in the high-tech business and can vouch for many of the things presented throughout the pages. I did find that the book repeated many points, seemingly unnecessarily, and I do wish that more time would have been spent on ideas for how to solve the problems that exist.

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Changes the way we see the world -
Every once in a while a gifted academic writes a book about a technical subject that changes the way the lay public sees the world. Michael Heller has written such a book. The Gridlock Economy illuminates by giving language to a phenomena that is all around us but we've had no word for. The stories he tells are chilling and heart wrenching. But he gives us hope as well. By describing gridlock and why it happens - the word he coins is "anticommons" - Professor Heller lead the way to creative problem solving. This book is a must read for policy makers in all fields.