An evening with Elinor Ostrom

Last night I attended the Annual IEA Hayek Memorial Lecture delivered by the brilliant Nobel prize winning economist Elinor Ostrom. The subject was one of my favourites; Market Failure and Government Regulation. To be more precise, the title was "Future of the Commons: Beyond Market Failure and Government Regulation". Steve Davies of the IEA has the summary here.

Elinor was amazing. Despite her age and a lovely-old-grandmother appearance she seems so vivid and sharp. This should hardly come as a surprise since most groundbreaking economists live up to be over 90 years old (Mises - 92, Hayek - 92, Friedman - 94, Samuelson - 94, North - 91, Tullock - 90 Buchanan - 92, Coase - 101; bear in mind that the last 4 of the list are still alive and active) without losing a bit of their brilliance or sharpness. In fact, I remember Paul Samuelson had an article on the current crisis published in a newspaper about two weeks before he died.

Anyway, her Nobel prize winning research concerns the governing of common resources where local social interactions solve the collective action problem of the commons. 

For those unfamiliar to the subject, the collective action problem of common resources is often referred to as the 'tragedy of the commons'. This term (devised by Garrett Hardin) describes a situation of resource overexploitation in which self-interested individuals will "ultimately deplete a shared limited resource, even when it is in no ones interest to do so". For example, with common goods like fish stock in a pond (or the ocean) it is believed that fishermen will extract more and more of the fish until they eventually run out of stock, while it is in neither ones interest for this to happen. Other common good examples include clean air, oil in the ocean or any good that is non-excludable and rivalrous (in the fish stock example, no one can be excluded from fishing while additional consumption by one individual reduces the amount of the resource left for others).

While usual solutions included either centralized regulatory and government control or privatization of the resource, Ostrom challenged this by introducing a third approach based on real world examples, in which local communities can overcome the knowledge problem by "designing cooperative institutions that are governed by the resource users themselves". She uses the term 'common pool resources' to describe these examples of cooperative behaviour; fisheries, groundwater basins and irrigation systems.

"The central question in this study is how a group of principals who are in an interdependent situation can organize and govern themselves to obtain continuing joint benefits when all face temptations to free-ride, shirk, or otherwise act opportunistically." Ostrom (1990)

Her case is basically an empirical verification of Mancur Olson's theory of collective action, where small groups are able to overcome the free rider problem as their gains of cooperation outmatch the gains of self-interested behaviour. However, as the size of the group increases, the incentive to cooperate decreases and more and more members decide to free ride.

The lecture was a detailed inquiry into the challenges of her extensive research. She wishes to move her study beyond the small common pool resources into the global environmental system. This would be a framework putting people and ecologies together into Social-Ecological Systems (SES). It is essential to develop the understanding of dynamic processes that lead to ecological problems and use this understanding to move towards a more sustainable social and ecological system. The diversity of the commons and the different cases of social interaction poses the main issue, as it is sometimes too hard to overcome the knowledge and the free rider problem. But the main point is to move further from centralized government solutions and find out what drives human behaviour to universal cooperation. Solving this problem is indeed a challenge and its solution would truly be a vital contribution to social sciences. Even though she already won the Nobel prize, based on last evening's lecture, I certainly expect even more essential contributions coming from Mrs Ostrom and her research team.