Dealing with a Non-Ergodic World: Institutional Economics, Property Rights, and the Global Environment

I. INTRODUCTION This is the kind of conference I like to attend. I hope that out of it will come some real additions to our understanding of a set of very complex issues. I understand that my job is to set the scene. So, what I am going to try to do is to provide a framework for our thinking and to raise a lot of serious questions, which I will not answer. But you will. I am going to begin not by being negative but by raising some thorny issues that we have to confront in the subject matter that we are concerned with here--the creation of institutions for protecting the global environmental commons. II. A NON-ERGODIC WORLD I am going to begin by asking, "What are the limits to our understanding of the world around us? " I think without being very self-conscious about that question, we do what so many economists often do--put their feet in their mouths. Let me begin by asserting that the world we live in is not an ergodic world; it is a non-ergodic world. I like the term "ergodic. " Paul Samuelson has used the term frequently when trying to show that the field of economics is scientific. In fact, Samuelson's assertion was that if the world is not ergodic, economics is not a science. There are some aspects of economics that may be ergodic, but most of the issues that are important for us are non-ergodic. If I say the world is ergodic, I mean that it has a stable underlying structure, such that we can develop theory that can be applied time after time, consistently. (1) It is very important to understand that the world with which we are concerned is continually changing, is continually novel. That does not mean that there are not ergodic aspects of the world. But we cannot develop theory that can be used over and over again and over time. For an enormous number of issues that are important to us, the world is one of novelty and change; it does not repeat itself. There may be lessons in history,(2) but we have to be careful about them. We have to be careful about the lessons that history may teach, if we are going to try to unravel the problems that concern us here. If indeed these issues with which we are concerned, such as global warming and the global commons, belong in a world of continuous change, a non-ergodic world, then we face a set of problems that become very complex. So, let me move from a non-ergodic world to dealing with uncertainty. III. UNCERTAINTY, PLAYING GOD, AND THE GLOBAL ECONOMY Economists, from Kenneth Arrow to Robert Lucas, have asserted that one cannot theorize in the face of pure uncertainty. By "uncertainty," I mean the same thing that Frank Knight specified. For Knight, uncertainty means that no probability distribution of outcomes exists. This is in contrast to risky activities in which there is a probability distribution of outcomes. So, if one is confronted with risk, presumably one could insure against it and develop theory or models that would deal with such risk. However, if there is uncertainty, one can do no such thing. This means that, under uncertainty, one not only does not have a probability distribution of outcomes, but (using a Keynesian definition)(3) one may not even know what the possible outcomes are, much less have a probability distribution of them. I want to assert that almost all of the issues that we are concerned with in this room are uncertainty issues. Some result straightforwardly from simply not having enough knowledge. Faced with that kind of uncertainty, we can acquire more knowledge and therefore convert uncertainty into risk, which is what human beings have done for a long period of time. Other uncertainty issues, however, arise from the non-ergodic aspects of the systems with which we are concerned. That is, the systems in which we are interested reside in a world of continuous change, in many dimensions--not only in terms of physical change but also change in the social structure and behavior of human beings. …