“Beyond Markets and States: Polycentric Governance of Complex Economic Systems,” E. Ostrom (2010)

It’s summer, which economists mark not with sun and beaches but rather with the appearance of expanded Nobel lectures in the June AER. Often these articles can be classified as “nothing new” – hopefully we know the greatest hits of Nobel prize winners! Last year, however, Indiana’s Elinor Ostrom won. Though she is very well known in her field (common property), she was generally unknown to the profession as a whole. This article, perhaps, does something to rectify that.

Ostrom is at heart an applied game theorist. She studies what happens when people face tragedy of the commons problems, whether they be fisheries, forests, municipal policing, or whatever. The basic insight is that, though these situations look like prisoner’s dilemmas, there are countless empirical examples of common property management without direct government involvement. In particular, she notes that the rules, meaning the available actions and payoffs, are not fixed as they might be assumed to be in a simplistic analysis. Rather, when games are repeated, the players themselves can agree on penalties, on restricted future actions, etc., such that prisoner’s dilemmas are avoided. This “altering of the rules” does not require a social planner, but rather can be done within the properly-written larger game.

This insight would be not be enough for a Nobel, though. Ostrom, along with her workshop partners, essentially gathered every empirical study on common property management done by sociologists, historians, economists and political scientists, and, in a consistent, game-theoretic manner, coded the methods used to overcome (or not overcome!) the tragedy of the commons. Such paradigmatic theory is close to economists’ heart – it is the reason we use math as our language, and, I would argue, the reason economics has been so successful in exporting the results of our field to policymakers and other social scientists.

The original goal of such standardization appears to have been extracting which rules were successful, in general, and which failed, in general. This was unsuccessful; there is simply too much heterogeneity between fishery rules used in a Sakhalin port and rules for lumber extraction in a forest in the Congo. Nonetheless, “lessons”, in Ostrom’s words, could be extracted, which provide guides to successful common property management. I am reminded of the urban planner Christopher Alexander and his beautiful A Pattern Language: social science is not about rules, but rather about sets of principles which can guide decisionmaking. That is, social science is about finding general patterns which help us think about specific situations. This, as I like to discuss on this site, is very different from the scientific method of the hard sciences.

Ostrom’s empirical method strikes me as the right one. Empirics do not tell us which theory to develop. Theory does not tell us which empirics to examine. Rather, theory and data develop together, feeding back on each other, in order to help us find the patterns above. Though Ostrom is known as a researcher who spent a great amount of time in the field, her influence lies in the standardized theoretical lens through which she examines her field results. No one, except the Congolese government, really cares about the specific results of a study of forest management in the Congo, but to the extent that the data from that experiment can be compared to similar studies across time and space, we can begin to learn something about humanity more generally, a much more valuable result.

http://webcache.googleusercontent.com/search?q=cache:8iQNqKO5VuoJ:pubs.aeaweb.org/doi/pdfplus/10.1257/aer.100.3.641 (Html version of AER article; I cannot find a non-gated pdf. Why does the American Economic Association, a non-profit dedicated to advancing economics knowledge, gate their articles? It’s nonsensical. Hopefully we have a reader with enough sway to end such ridiculousness!)