Economics: Common sense Nobel

by Jamie Bartlett

This month's most surprising Nobel Prize winner was not Barack Obama but Elinor Ostrom, a political scientist from the University of Indiana who picked up the coveted Nobel Memorial Prize for Economic Science.

Not only is Ostrom the first female recipient, she is also not an economist. For the past 20 years, the Prize has been dominated by financial economists for their work on weird and wonderful sounding things like "option pricing formula" (Robert Merton, 1997 winner). When the financial markets were inflating the bubble, that was fine. But the Nobel panel clearly gets the zeitgeist. Awarding this year's prize to someone like Robert Engle (the 2003 winner who came up with a new formula for predicting volatility in financial markets) would seem rather odd after the biggest financial meltdown in the modern era. Ostrom, on the other hand, is the perfect choice. Her life has been dedicated to understanding humans can live sustainably with our environment. And coming just a month before the Copenhagen Summit on climate change, it couldn't be more topical.

Ostrom has been entirely devoted to understanding one thing: managing what are known as common pool resources. Common pool resources are resources that are ‘non-excludable' (it is impossible to prevent individuals from using them) and "rival" (use by one individual means that there is less available for next). In other words, no one really owns them, and we can all use them to destruction. Farming on a public field or fishing in common waters are the classic examples. The problem is this that is in everyone's interests to limit usage to ensure there are enough cod in the North Sea for the stock to replenish. But, left to our own devices, we will all over fish and exhaust these finite resources, and all be worse off for it.

Why does this happen? Suppose I am concerned about my carbon emissions and decide to walk to work rather than drive. I alone bear the costs of this altruism - getting wet, arriving to work late and so on. But everyone, including people who still drive, benefit just as much as me from the reduction in emissions and congestion that my act of civic duty afforded. I am left with what the economist calls the "sucker's pay-off" - all the costs and just a fraction of the benefit. And because no one can be excluded from enjoying the "positive externalities" of my sacrifice, (known as free-riding), I conclude, quite rationally, that driving to work is the best strategy, and wait for some other sucker to act first. So does everyone else.

Our environment is the biggest and most important common pool resource we have. But apply the logic to installing solar panels, taking a coach to southern France rather than a cheap flight, or taking my rubbish to the recycling point. Then multiply it by 60 million people. Then by six billion. The result is that we are unable to act together to achieve our mutual goals and all rush, quite sensibly and entirely rationally, towards ruin. In 1968 Garrett Hardin rather beautifully dubbed it the "tragedy of the commons".

Traditionally, there have been two major approaches to getting ourselves out of this rather unfortunate spot and they dominate political debate to this day. The first is the oldest of all: a government with coercive powers forcing us to act enforcing restrictions. A Leviathan that can manage the resource for us, setting limits on fishing for example, thereby forcing us to cooperate for the common good. The second is to harness the power of the market: privatise common-pool resources so the selfish farmer bears the cost of his actions, rather than passing it on to society. The economist calls this "internalizing the cost of the externality" - and so he then has an incentive to manage his consumption more wisely. In environmental terms, carbon trading is the obvious example, the "polluter pays" principle.

More than anyone else, Ostrom sought out and theorised a third way, based on the assumption that we do have the psychological and socio-moral capacity to find our way out of this unhappy malaise without coercion. In her classic work Governing the Commons (1990), she showed how across the world communities of people have been able to come together to manage collective resources sustainably, "who" as she puts it "are in an interdependent situation and can organize and govern themselves to obtain continuing joint benefits when all face temptations to free-ride, shirk, or otherwise act opportunistically." In one famous example, Swiss Alpine cheese-makers with a grazing commons for their cattle managed to govern it sustainably with a simple rule - if you got three cows, you can pasture them in the commons, provided you carried them over from last winter - but you can't bring new cows in just for the summer. The community simply polices itself. Everyone knows whose cow is whose and no one transgresses the rule. This is what Ostrom calls polycentric governance.

Her work suits the times. It also has huge practical resonance for any number of local small-scale collective action problems. Her hopes that she would "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" has more than been realized. Her design principles of how to collectively manage resources have been applied all over the world, with the emergence of civic-led groups coming together off and on-line to get things sorted without government intervention. Not only that, Ostrom deserves great praise for the way she conducts the research itself, developing theories in the field by studying people's behavior, rather than generating a-historical models about human nature from a library. All in all, few would begrudge her the Nobel Prize.

And yet as the Copenhagen Summit approaches, some caution is needed. The relevance of Ostrom's award to the Summit - which hopes after all to deal with the greatest collective-action problem the world has ever seen - is widely noted. The timing itself is conspicuous. However, as Ostrom quite openly admits, the conditions for mutual collective management in the way she describes are quite restrictive - it tends to take place in small communities, with high visibility, high social capital, and clear enforceable sanctions. These conditions are certainly not met in a world of six billion people.

Therefore, I hope that Ostrom's work will be taken for what it is - proof that not every common pool problem can be best solved by government or market. But Ostrom herself has always been vocal that many collective action problems do need government enforcement. And when it comes to climate change, we don't have time to experiment with a multitude of potentially interesting civic led options; because we can't really afford to fail. The real task for Copenhagen will be to figure out where Ostrom's insights can be used - often together with government and the market incentivising collectively responsible behavior - and where only the clunking fist of national government legislation will do.

Jamie Bartlett is head of the independence program at the think tank Demos.

See, also: The Commons: From Tragedy to Celebrity (United for a Fair Economy 2009-10)

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