Elinor Ostrom awarded the Nobel prize in economics? Who? no doubt some of you are wondering.
Well, sharp-eyed readers will have noted that I have referred to her any number of times (which I will reprise later, as this post has gotten too lengthy).
I excerpt below some of the praise Elinor Ostrom has been receiving from Austrian economists familiar with her (emphasis added).
1. First, though, from the press release:
Elinor Ostrom has demonstrated how common property can be successfully managed by user associations. Oliver Williamson has
developed a theory where business firms serve as structures for conflict resolution. Over the last three decades these seminal
contributions have advanced economic governance research from the fringe to the forefront of scientific attention.
Economic transactions take place not only in markets, but also within firms, associations, households, and agencies. Whereas economic theory has comprehensively illuminated the virtues and limitations of markets, it has traditionally paid less attention to other institutional arrangements. The research of Elinor Ostrom and Oliver Williamson demonstrates that economic analysis can shed light on most forms of social organization.
Elinor Ostrom has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories. She observes that resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest, and she characterizes the rules that promote successful outcomes.
The background explanation is useful and contains a pointed criticism of many centrally-directed approaches to common pool resources (emphasis added):
If we want to halt the degradation of our natural environment and prevent a repetition of the many collapses of natural-resource stocks experienced in the past, we should learn from the successes and failures of common-property regimes. Ostrom’s work teaches us novel lessons about the deep mechanisms that sustain cooperation in human societies.
It has frequently been suggested that common ownership entails excessive resource utilization, and that it is advisable to reduce utilization either by imposing government regulations, such as taxes or quotas, or by privatizing the resource. The theoretical argument is simple: each user weighs private benefits against private costs, thereby neglecting the negative impact on others.
However, based on numerous empirical studies of natural-resource management, Elinor Ostrom has concluded that common property is often surprisingly well managed. Thus, the standard theoretical argument against common property is overly simplistic. It neglects the fact that users themselves can both create and enforce rules that mitigate overexploitation.
The standard argument also neglects the practical difficulties associated with privatization and government regulation. …
There are many …. examples which indicate that user-management of local resources has been more successful than management by outsiders. …
[T]he main lesson is that common property is often managed on the basis of rules and procedures that have evolved over long periods of time. As a result they are more adequate and subtle than outsiders – both politicians and social scientists – have tended to realize. Beyond showing that self-governance can be feasible and successful, Ostrom also elucidates the key features of successful governance. One instance is that active participation of users in creating and enforcing rules appears to be essential. Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated. Likewise, monitoring and enforcement work better when conducted by insiders than by outsiders. These principles are in stark contrast to the common view that monitoring and sanctioning are the responsibility of the state and should be conducted by public employees.
2. Words of praise from libertarians:
Vernon L. Smith (2002 Nobel laureate for economics), Forbes, October 12:
For many of us she has long occupied our radar screen. Let me tell you why.
Relentlessly, Ostrom has pursued answers to two questions:
(1)
Since “everybody’s property is nobody’s property,” how is it that there
are so many cases where collectives of ordinary people with no
education and with none of the economists’ knowledge of “the tragedy of
the commons,” in fact discover ingenious rules (institutions) for
taking the “tragedy” out of a productive resource they hold in common? …
Numerous other examples include Japanese lands held by thousands in
common under governance structures that avoided “tragedy;” also ancient
solutions to communal water and irrigation systems that create
effective enough private rights conferring benefits and costs that
constrain use. This should not be too surprising, because “property
(originally propriety) rights” are about human rights and the challenge of defining them incentive-compatibly for mutual benefit.
(2)
As a distinguished political-economic scientist she will be the first
to tell you that there are also plenty of commons problems that
represent institutional failures and fragilities; she has asked why,
and what makes the difference between success and failure? The
fragilities include inshore fisheries and groundwater basins with
continuing commons problems; failures include salt water fisheries and
irrigation systems hamstrung by the complexity of the rules.
Success is associated with clarity in the definition of and
bounds on individual rights (and opportunities) to take action, and the
geography of the commons; details for monitoring, operations, sanctions
and mechanisms for conflict resolution emerge from within the
collective and out of motivated people’s direct experience with
environmental context and each other. When too many of these
problem-solving elements fail, the governance systems fail or require
continuing attention to their fragility characteristics. A fatal source
of disintegration is the inappropriate application of uninformed
external authority, including intervention to prevent application of
efficacious rules to political favorites. Also detrimental to good solutions is the OPM (other people’s money) problem.
Peter Boettke, The Austrian Economists, October 12:
I told David [Henderson] that she is amazing and well deserving of the Nobel award for her pioneering work on rational choice theory (as if the choosers were human) and institutional analysis. I then bent his ear about her work on governing the commons, institutional diversity, and learning. …
What Lin’s work demonstrates … is how individuals can in a variety of settings work to find (or stumble upon) institutional solutions that promote social cooperation and human betterment. It is about voluntary civic association, a subset of which is commercial life, that her works highlights; not the absence of individual choice. … My blurb on the back of her book, Understanding Institutional Diversity reads as follows: “What emerges from Elinor Ostrom’s book is precisely what the title suggests — an understanding of the diverse nature of institutions that exist in human societies to promote human cooperation or to hinder it.”
She is both a methodological individualist (rightly understood) and a spontaneous order theorists. In this regard, Lin Ostrom (and Vincent) have represented one manifestation of the research program in the sciences of man (praxeology) by Mises and Hayek in the 1940s. Actors of limited cognitive capabilities are studied for how the[y] shape and our [sic] shaped by the social structures that emerge in a variety of situations to provide voluntary solutions to complex and difficult problems, and they do so in a way that promotes social cooperation under the division of labor. Read Human Action, chapter VIII, and Individualism: True and False, pp. 11-14 (in Individualism and Economic Order), and then look at Lin’s work in Governing the Commons; Understanding Institutional Diversity; and the 3 volume McGinnis, edited volumes, Readings from the Workshop in Political Theory and Policy Analysis and I think you will see what I am talking about. She has done fundamental research on the central idea of Ricardo’s Law of Association as Mises termed it. Humanly rational choice and institutional analysis combine to address the most pressing question in the social world — why do some institutional patterns produce societies of peace and prosperity, while others produce societies that suffer under violence and poverty? …
Lin Ostrom is firmly seated in the mainline tradition of economic scholarship from Adam Smith and David Hume to F. A. Hayek and James Buchanan ….. [H]er methods were chosen to be appropriate to the task she was pursuing. Humanly rational choice, institutional analysis, field work, and experimental design were her tools for social understanding. She did not limit her work to that of Max U notions of “choice” nor instituitonally antiseptic models of ‘markets’ nor one size fits all models of economic development. Instead, she has been a major contributor to public choice economics, new institutional economics, and to our understanding of polycentricity and political economy.
[in comment] At the
home page for her institute — The Workshop in Political Theory and
Policy Analysis — they describe their work as a New Science of
Governance for a New Age. And they describe their task as follows: “The
betterment of humankind depends on the ability of fallible human beings
to make decisions, manage resources, and govern themselves. This is the
basis of democracy, and of civilization itself. It is also the basis
for more than 30 years of research and inquiry at the Workshop in
Political Theory and Policy Analysis at Indiana University in
Bloomington.
The Workshop’s teaching and research probes the inner workings of
human institutions—structures of rules used to govern people and
resources, in this usage—in order to better understand what works and
what does not. Institutions affect every facet of life, from public
services to family and community structures to natural resources and
beyond, and the Workshop’s research helps people design and adapt their
institutions so that they generate better outcomes.”
This is why the work is so intriguing. First, at the core is a model
of man as fallible — cognitively limited. Second, is a focus on the
emergence of institutions — not necessarily state-led institutional
impositions. Third, is a focus on governance, not government.
Peter Boettke, comment at Marginal Revolution, October 13:
She is a former President of the Public Choice Society, as was
Vincent. She uses game theory, she engages in institutional analysis,
she has conducted experiements in the lab, she has conducted field work
both in the US and abroad, she considers herself a political economist,
etc. Her presidential address to the APSA summed up her theoretical agenda as “A Behavioral Approach to the Rational Choice Theory of Collective Action.”
She
is most deserving of this Nobel, and she has made a unique contribution
theoretically and empirically to the study of self-governance. But
there is no need to pick a fight where one isn’t there. Her prize fits
nicely in a stream of recognitions ANALYTICALLY
by the committee to scholars such as Hayek (1974), Buchanan (1986),
Coase (1991), North (1993), and V. Smith (2002). These are all scholars
within the discipline of economics/political economy that recognize the
cognitive limitations of man, and focus analytical effort on
institutional analysis.
Lin Ostrom’s contributions come from
an analytical framework that grounded in rational choice theory (as if
the choosers are human) and builds to an institutional analysis (as if
history mattered). The distinction between “rules in form” and “rules
in use” means she studies in close detail the social norms that
underlie self-governance in the management of resources and the
management of social relationships.
It is amazing body of work.
Alex Tabarrok, Marginal Revolution, October 12:
Elinor Ostrom may arguable [sic] be considered the mother of field work in development economics. She has worked closely investigating water associations in Los Angeles, police departments in Indiana, and irrigation systems in Nepal. In each of these cases her work has explored how between the atomized individual and the heavy-hand of government there is a range of voluntary, collective associations that over time can evolve efficient and equitable rules for the use of common resources.
With her husband, political scientist Vincent Ostrom, she established the Workshop in Political Theory and Policy Analysis in 1973 at Indiana University, an extraordinarily productive and evolving association of students and professors which has produced a wealth of theory, empirical studies and experiments in political science and especially collective action. The Ostrom’s work bridges political science and economics. Both are well known at GMU since both have been past presidents of the Public Choice society and both have been influenced by the Buchanan-Tullock program. You can also see elements of Hayekian thought about the importance of local knowledge in the work of both Ostroms (here is a good interview). My colleague, Peter Boettke has just published a book on the Ostrom’s and the Bloomington School.
Elinor Ostrom’s work culminated in Governing the Commons: The Evolution of Institutions for Collective Action which uses case studies to argue that around the world private associations have often, but not always, managed to avoid the tragedy of the commons and develop efficient uses of resources. (Ostrom summarizes some of her findings from this research here). Using game theory she provided theoretical underpinnings for these findings and using experimental methods she put these theories to the test in the lab.
For Ostrom it’s not the tragedy of the commons but the opportunity of the commons. Not only can a commons be well-governed but the rules which help to provide efficiency in resource use are also those that foster community and engagement. A formally government protected forest, for example, will fail to protect if the local users do not regard the rules as legitimate. In Hayekian terms legislation is not the same as law. Ostrom’s work is about understanding how the laws of common resource governance evolve and how we may better conserve resources by making legislation that does not conflict with law.
Bob Subrick, Stationary Bandit, October 12:
Ostrom’s “Governing the Commons” develops Hayek’s theme of spontaneous order through numerous real world examples. Non-market institutions solve collective action problems that the price mechanism cannot. That is the point of Hayek’s later writings– non-market institutions coordinate behavior. Also, her emphasis on the lack of a “one-size-fits-all” approach resonates with those who are sympathetic to Hayek.
Paul Romer, Charter Cities, October 12:
Elinor’s fieldwork, followed up by her experimental work, pointed us in exactly the right direction. To understand BOTH why we don’t need police officers in some cases AND
why police officers don’t follow the rules in other cases, we have to
expand models of human preferences to include a contingent taste for
punishing others. In reaching this conclusion, she arrived at a point
similar to that reached by Avner Greif (whom the Nobel committee
correctly cites.) They, more than anyone else in the profession,
spelled out the program that economists should follow. To make the
rules that people follow emerge as an equilibrium outcome instead of a
skyhook, economists must extend our models of preferences and gather
field and experimental evidence on the nature of these preferences.
Economists
who have become addicted to skyhooks, who think that they are doing
deep theory but are really just assuming their conclusions, find it
hard to even understand what it would mean to make the rules that
humans follow the object of scientific inquiry. If we fail to explore
rules in greater depth, economists will have little to say about the
most pressing issues facing humans today – how to improve the quality
of bad rules that cause needless waste, harm, and suffering.
Cheers
to the Nobel committee for recognizing work on one of the deepest
issues in economics. Bravo to the political scientist who showed that
she was a better economist than the economic imperialists who can’t
tell the difference between assuming and understanding.
Lynne Kiesling, Knowledge Problem, October 12:
Both Ostrom’s work on governance institutions and common-pool resources
and Williamson’s work on governance institutions and the transactional
boundary of the firm contribute meaningfully to our understanding of
how individuals coordinate their plans and actions in decentralized,
complex systems. …
Ostrom’s work highlights the ability of communities of
individuals, using their local knowledge and taking into account their
individual preferences and constraints, to develop governance
institutions that enable beneficial outcomes to emerge. As I put it in my book on institutional design in electricity,
Given the pervasiveness of incomplete property rights,
even in commercial transactions, how are we able to engage in so much
mutually beneficial exchange? We achieve it through the design of
institutions to govern the commons (Ostrom 1990, 2005). These
institutions can specify use rights, means for enforcing those use
rights, and penalties for violating those rights. Again, defining and
enforcing use rights is costly, but institutional design to do so
happens when its benefits are high enough, and the institutional form
varies depending on the environment and context.
The Ostrom works cited therein, Governing the Commons and Understanding Institutional Diversity,
are full of rich insights that can be applied to environmental policy,
regulation, economic development, and many other areas of economics and
political science.
David R. Henderson, WSJ, October 12:
… I think it’s a great choice. The reason is that mainstream economics
has become highly mathematical and increasingly independent from
reality. Many economists sit in their offices and derive proofs. Few go
out and do the time-consuming work of examining the institutional
structures that humans build to solve their own real-world problems.
Among those few are Ms. Ostrom and Mr. Williamson.
Both draw on rich data from outside the field of economics. Ms.
Ostrom draws much of hers from case studies of common-property
resources and Mr. Williamson from business historians such as the late
Alfred Chandler. Some have summarized their work by saying that
institutions other than free markets often work well. But that
statement can mislead you to conclude that government solutions are the
answer. Free markets are only a subset of free institutions. A better
way to sum up their work is that what Ms. Ostrom and Mr. Willamson
really show is that voluntary associations work. …
Most economists are familiar with the late Garrett Hardin‘s classic
article, “The Tragedy of the Commons.” His idea was that when no one
owns a resource, it is overused because no one can control its usage
and each person has an incentive to use it before others do. This
insight has helped us understand much human behavior and has led people
to advocate either having the resource privately owned or having it
controlled by government.
Not so fast, said Ms. Ostrom.
Examining dozens of case studies, she found cases of communal ownership
that worked—that is, that didn’t lead to the tragic outcomes envisioned
by Hardin—as well as ones that didn’t. Were there systematic
differences? Yes, and interestingly the ones that worked did have a
kind of property rights system, just not private ownership.
Based on her work, Ms. Ostrom proposed
several rules for managing common-pool resources, which the Nobel
committee highlights. Among them are that rules should clearly define
who gets what, good conflict resolution methods should be in place,
people’s duty to maintain the resource should be proportional to their
benefits, monitoring and punishing is done by the users or someone
accountable to the users, and users are allowed to participate in
setting and modifying the rules. Notice the absence of top-down
government solutions. In her work on development economics, Ms. Ostrom
concludes that top-down solutions don’t help poor countries. Are you
listening, World Bank?
In a 2006 article with Harini Nagendra, Ms. Ostrom wrote: “We
conclude that simple formulas focusing on formal ownership,
particularly one based solely on public [government] ownership of
forest lands, will not solve the problem of resource use.” …
Economists talking about real humans and not mathematical
abstractions and winning the Nobel prize for it? Good on ya, Nobel
committee.
John V.C. Nye, Forbes, October 12:
Oliver Williamson and Elinor Ostrom are both leaders in the growing
field of the New Institutional Economics. Both can be seen as pioneers
in understanding how markets work in the real world where transactions
costs are high, establishing smoothly functioning markets is costly,
information is incomplete, and hiring and production options are
limited. They show how firms, communities and organizations come to
solve these problems absent government regulation and how the choices
they make can be disrupted or worsened by bad state policy or sustained
by good rules that promote stable property rights and reliable contracts. …
Elinor operationalized the core insight of Ronald Coase that
creating and accessing markets is often quite costly and hence
organization, hierarchy and collective agreement can, under the right
conditions, serve as viable or even superior alternatives to market
competition. While the lack of private property often leads to the
tragedy of the commons, it is surprising how often tragedy has been
avoided throughout the world. The answer is that small groups with
tight social structures can substitute community monitoring and peer
controls for a market that is non-existent and private property that is
neither well-defined nor reliably enforced. Of course, such local
enforcement tied to community norms, moral suasion, and restricted
geographical domains does not scale well to the modern world of
extensive impersonal exchange. But she has studied areas as diverse as
police departments in Indiana to irrigation in Nepal.
But as
Elinor has demonstrated, ham-fisted reforms that attempt to bring the
illusion of modernity to the developing world by a naive adoption of
Western best-practice laws without the structures that support and
enforce those rules often leads to a destruction of indigenous practice
that works reasonably well without substituting a functioning and
reliable market of impersonal exchange. Much of the disaster that is
foreign aid can be tied to the blunt importation of best-practice rules
without understanding how their implementation interacts with existing
practice.
Her work centers on a variety of case studies of
private associations throughout the world but is tied to the mainstream
methodologies in the social sciences through her use of game theory
and related analysis. She also tests her hypotheses in various
laboratory experiments designed to isolate the core behavioral
assumptions and in so doing continues in the tradition begun by
Nobelist Vernon Smith. Moreover, her work on real-world institutions
and the rules that sustain efficient outcomes is a natural complement
to the work of laureate Douglass North who also draws upon the ideas of
Coase and Williamson in understanding how political and social
institutions promote or retard growth.
Greg Ranson, Taking Hayek Seriously, October 13:
Peter Boettke, Lynne Kiesling, Peter Klein, Vernon Smith, David Henderson, Don Boudreaux,
and other Hayekian economists are all applauding the award of the Nobel
Prize in Economics to Lin Ostrom and Oliver Williamson. …
In many ways Ostrom & Williamson are very much contributing to an
intellectual tradition championed by Hayek and other leading
“Hayekians” like James Buchanan and Douglass North.
Henry Farrell, Crooked Timber, October 12:
[T]his is also a very interesting statement of what the Nobel committee see as important in economics.
Lin’s work focuses on the empirical analysis of collective goods problems –
how it is that people can come up with their own solutions to problems
of the commons if they are given enough room to do so. Her landmark
book, Governing the Commons, provides an empirical rejoinder
to the pessimism of Garret Hardin and others about the tragedy of the
commons – it documents how people can and do solve these problems in
e.g the management of water resources, forestry, pasturage and fishing
rights. She and her colleagues gather large sets of data on the
conditions under which people are or are not able to solve these
problems, and the kinds of rules that they come up with in order to
solve them.
This is … a vote in favor of detailed, working-from-the-ground-up, empirical work, which doesn’t rely on
sharply contoured theoretical simplifications and flashy statistical
techniques so much as the accumulation of good data, which reflects the
messiness of the real social institutions from which it is gathered.
Quoting from Governing the Commons:
“An important challenge facing policy scientists is to develop theories of
human organization based on realistic assessment of human capabilities
and limitations in dealing with a variety of situations that initially
share some or all aspects of a tragedy of the commons. … Theoretical
inquiry involves a search for regularities … As a theorist, and at
times a modeler, I see these efforts [as being] at the core of a policy
science. One can, however, get trapped in one’s own intellectual web.
When years have been spent in the development of a theory with
considerable power and elegance, analysts obviously will want to apply
this tool to as many situations as possible. The power of a theory is
exactly proportionate to the diversity of situations it can explain.
All theories, however, have limits. Models of a theory are limited
still further because many parameters must be fixed in a model, rather
than allowed to vary. Confusing a model – such as that of a perfectly
competitive market – with the theory of which it is one representation
can limit applicability still further. (pp.24-25)”
One plausible characterization of her life’s work is that it is about
demonstrating the empirical weaknesses of a ‘cute’ economic model (the
Tragedy of the Commons) that assumed a role in policy discussions far
out of proportion to its actual explanatory power, and replacing it
with a set of explanations that are nowhere near as neat, but are far
more true to the real world. …
It is also a vote in favor of supplementing quantitative work with
qualitative understanding – Lin spends a lot of time (albeit less than
she used to) in the field, soaking up practical knowledge which informs
her work in striking ways. She is hands-on in a way that very few
economists, political scientists or sociologists are. It is also
interesting to note that the Nobel committee pays specific attention to the political implications of her work.
“Elinor Ostrom has challenged the conventional wisdom that common property is
poorly managed and should be either regulated by central authorities or
privatized. Based on numerous studies of user-managed fish stocks,
pastures, woods, lakes, and groundwater basins, Ostrom concludes that
the outcomes are, more often than not, better than predicted by
standard theories.”
This reflects what she and her husband Vincent refer to as “polycentricity,” a normative approach to
governance which stresses the degree to which higher levels of
government should not crowd out self-organization at lower levels. Her
work implies that both pure marketization and top-down government
control can have badly adverse consequences for resource management,
because they rob individuals of the capacity to govern themselves, and
because they both lead to the depletion of important forms of local
collective knowledge. … Ostrom stresses repeatedly that even the best
functioning markets are undergirded by an array of collective
institutions which order people’s market interactions, and that in the
absence of such rules, self interested behaviour will have highly
adverse consequences.
Greg Ransom, Taking Hayek Seriously, October 14:
Elinor Ostrom Endorses Hayek’s Model of Economic Science
See Elinor Ostrom & Charlotte Hess, “Ideas, Artifacts, and Facilities: Information as a Common-Pool Resource”.
Ostrom also frequently cites Hayek’s work on social rules and local knowledge in many of her books & book articles and in her journal publications.
Most frequently Ostrom cites Hayek’s Law, Legislation and Liberty and Hayek’s “The Use of Knowledge in Society”.
As economist Art Carden says, “Ostrom’s win can be considered a win for the Hayekian worldview as opposed to the Samuelsonian worldview.”
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