Wednesday, May 12, 2010

(Monetary) tragedy of the commons

In our monetary system, property rights in money are not adequately defined or defended, giving rise to inflationary credit expansion. Our fiat fractional-reserve banking system produces a tragedy of the commons, leading to an overexploitation of resources. A typical example of a tragedy of the commons is overfishing in the ocean. As fish swarms are not the property of anyone, the costs of fishing are externalized on all other fishers. If I do not fish as many fishes as fast as I possibly can, my competitor will fish them. Similarly, the property rights in bank deposits are not clearly defined. Banks have the incentive to expand credit and externalize the costs onto society.
Exactly!