Susan and I went to Burning Man this year for our first time. We had a wonderful experience together with our friends Cindy and Robin (who is an experienced Burner and acted as our guide). There are many justified criticism of Burning Man and the festival will likely to have to change substantially over the coming years (a subject for a future post).

Today I want to write about the absence of prices at Burning Man. Once you get to Black Rock City, everything is free (well, not everything, as ice was $20/bag – more on that shortly). People have written about hopes and aspirations for a gift economy before but my key takeaway was about the importance of allocation mechanisms.

Without prices at Burning Man everything is rationed. You can go have a free drink at any of the bars (remember to bring your own cup and your ID – yes, that’s strictly enforced). But the bartenders will pour you a limited amount and then send you on your way. Same goes for all other goods and services. There are defined quantities available and that’s what you get.

Now “rationing” has a negative connotation but it isn’t inherently bad. It is a different allocation mechanism that has pros and cons when compared to the price mechanism. One advantage is that rationing treats people equally independent of their financial means, which can be desirable from a social cohesion perspective (well, rationing does that at least in theory – back to that shortly). A disadvantage is that the signal of demand relative to supply are inventory and queue based. If you run out of stuff and have long queues, demand clearly exceeds supply. That is a lot harder to track than price and unlike price doesn’t provide any inherent incentives for changing the supply (high prices usually provide high profits, which in well-functioning markets results in expansion of supply – important note: we don’t have a lot of well functioning markets these days due to concentration).

Now ice, one of the most important items given the extreme heat, did have a price of $20/bag. But because that price was fixed at $20 rationing was still needed. One day for example the ice trucks were only giving out three bags per person, which turns out to be a challenge if you are trying to pick up ice for your entire camp.

Keeping money out of the system entirely is actually quite hard. Why? Because rationing and queuing make a fertile ground for favoritism and bribes. If you know someone who can let you in the back door or you come “bearing gifts” you may be able to skip a line and obtain far more goods than you would be entitled to under the official rationing scheme. Susan and I were at Burning Man for five days and witnessed quite a few instances of this.

Experiencing all of this firsthand is exciting because it turns allocation mechanisms from a dry subject into a lived reality. Many discussions of the trade-offs involved in social and economic systems would be more honest if people had access to more diverse experiences (e.g. through travel).

Consider for example the discussion around higher education. To be clear upfront, I believe the US system of higher education is fundamentally broken and badly needs deep reforms. Still, too many people who advocate for free higher education seem to have given zero thought to the allocation questions that arise. In places where higher education is free, there are rationing schemes in effect. Some of these schemes are based on prior grades and admission testing, such as in Germany. Others, such as Switzerland, put up gating classes where early on a large percentage of students are failed.

Again, I am not saying these systems are bad and the US system of outrageous tuition and fees is good (especially because it still includes rationing). I am arguing that you cannot get around having some kind of allocation mechanism for limited resources (such as lecture halls and professors’ time). That is of course why I am a huge proponent of making as much human knowledge digitally accessible as possible in my book The World After Capital, because with zero marginal cost we can in fact let everyone have access. I am also not advocating for attempting to use the price system everywhere because some of the most important things cannot have prices.

Instead my point here is as follows: (1) for limited resources when you don’t have prices, you need rationing. And (2) rationing is hard to get right, which means you need to put a lot of thought and effort into it, including considering capacity signals and avoiding corruption. This is worth keeping in mind whenever you propose that something should be free.