20th century / Contemporary / Humanities

Elinor Ostrom and Economic Governance

By Eleanor Connolly.

This year Elinor Ostrom became the first ever female recipient of the Nobel Prize in Economic Sciences. Ostrom’s win was revolutionary for her gender, but more importantly because the research she was awarded for has overturned commonly held assumptions about basic human economic interaction. The prize was shared Oliver E. Williamson for their work in the field of economic governance, particularly the governance of the commons. Economic governance research involves the study of institutions that have arisen to facilitate human interactions – such as political government and business organisations – and analyses how different types of institutions are better suited to fulfil particular economic needs. For example, the transactions of private goods (such as food, clothes, cars etc) are well facilitated by markets, whereas public goods (such as military defence or public parks) are often better managed by governments. Ostrom’s work focuses specifically on ‘common-pool resources’. These are resources to which more than one person has access to (like a public good), and where each person’s consumption of the good limits the availability of that good to others. In her analysis she arrived at a startling conclusion that contradicts the traditional models dominating the study of such resources.

The conventional wisdom is based on the well-known dilemma of the Tragedy of the Commons, famously emphasized by Hardin in 1968. Imagine a rural medieval village in which there is a pasture where all the herders are permitted to graze their cows. Each herder, if acting rationally and therefore profit-maximising, will wish to put each new cow that he acquires out to the pasture to graze, even if doing so will over-use the pasture and exhaust the resource permanently. The benefits of each new cow will be received by the individual herder, while the cost of the overgrazing will be shared by all. This inevitable destruction is the tragedy. This example is used to highlight the conventional wisdom in economics that when it comes to common-pool resources, if each user is acting rationally and maximising profits, the common resource will eventually be damaged and/or destroyed. Evidence of this seems to be ubiquitous; world-wide over-fishing, air pollution, water crises in arid regions due to over-irrigation or water pollution and global warming are but a few possible examples.

Elinor Ostrom

This dilemma has been seen as having two possible solutions – privatisation, or governmental regulation. The first solution entails allocating full property rights over the commons to the individuals who use them and thereby ensuring that the same individuals both benefit from the use of the commons and suffer from their destruction. However, this approach has been heavily criticised. The social justice of such an arrangement has been questioned; practicality often results in property rights being consigned to one or a few individuals. Privatisation is, however, still a common solution to the common-pool resources dilemma. The alternative solution is to have a central government own and regulate use of the commons, usually through use of taxes and quotas. This solution has a similarly long list of criticisms.

Ostrom, however, has suggested a possible third solution: leaving the resource as a common-pool resource and letting the users of the resource create their own system of governance. Through a series of in-depth case studies from around the world, she has found many examples of groups that create their own institutions for controlling the use of the resource to mutual benefit. These local institutions sidestep the problems that can be caused by central government, such as a lack of local knowledge, or a corrupt bureaucracy. She rejects, from her findings, the assertion that common-pool resources necessarily entail the tragedy of the commons, and points out numerous examples of where local unofficial governments achieve effective results. These local governments, or ‘common property regimes’, arise where the users of a common-pool resource are better off keeping the resource as common property and creating their own rules to maintain it than they would be by dividing it up into smaller private properties. Some examples are as seemingly y different as Swiss grazing pastures, and irrigation systems in Spain and in the Philippines.

One of her best examples is the comparison between Mongolian, Chinese and Russian methods for cultivating the grasslands in central Asia. Traditionally, nomads allowed herds to graze on the grasslands, moving them seasonally. This practice was being maintained in Mongolia in the 1990s, while satellite images showed the comparative degradation of similar terrain in China and Russia. Both China and Russia had attempted to regulate use of the grassland through central government control, encouraging settlement and resulting in damage to the land. China then attempted the privatisation solution, parcelling the land to individual households. This encouraged even more settlement, and thus simply sped up the degradation of the land. It’s clear that quality of the land and the benefits accrued from it can be better maintained by a common property regime (in this case the traditional nomadic arrangement) rather than a government-regulation or a privatisation approach.

The extensive nature of her research and thoroughness of her analysis, based soundly in game theory, makes her findings as compelling as they are pioneering. The tragedy of the commons, she argues, is based on the assumption that the decision resulting from acting individually and rationally will be inimical to the best interest of the users collectively. Although she allows that this may not be wrong, it appears that this will only hold under certain conditions, such as when there is little trust between users, no ability to enter binding agreements with each other et al. Her findings not only suggest a less pessimistic view of human interaction, they provide an important impetus for governments to think outside the narrow confines of the usual approach to common-pool resources, and encourages policies that take into account traditional methods of economic governance. Indeed, she has maintained that “if this study does nothing more than shatter the convictions of many policy analysts that the only way to solve common pool resource problems is for external authorities to impose full private property rights or centralized regulation, it will have accomplished one major purpose.”1

References

Ostrom, Elinor (2003) “How Types of Goods and Property Rights Jointly Affect Collective Action”, Journal of Theoretical Politics, Vol. 15, No. 3, 239-270 (2003).
Ostrom, Elinor (1990) “Governing the Commons. The Evolution of Institutions for Collective Action”.Cambridge University Press.
Ostrom, Elinor, Roy Gardner, and James Walker (1994) Rules, Games, and Common-Pool Resources.University of Michigan Press. 1994.http://nobelprize.org/nobel_prizes/economics/laureates/2009/info.pdf http://nobelprize.org/nobel_prizes/economics/laureates/2009/ecoadv09.pdf
http://www.scottlondon.com/reviews/ostrom.html