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Ostrom and Williamson win Nobel

October 13th, 2009

The award of the Economics Nobel (yes, yes, I know) to Elinor Ostrom and Oliver Williamson came as a big surprise, but is certainly welcome. I’ve always been keen on Ostrom’s careful and empirically-based analysis of common property systems (I did my Master’s thesis on this topic, and wrote a bunch of papers about it back in the 1980s), in contrast to the factually false Tragedy of the Commons story pitched by Garret Hardin. And Williamson’s work on transactions costs transformed the way economists think about these things, though we have yet to offer a fully satisfactory account of them.

Update Over the fold, an extended version I wrote for Crikey

The award of the Economics Nobel prize (for pedants, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ) to Elinor Ostrom and Oliver E Williamson came as a surprise to most economists, but a welcome one for most of the commentators I’ve seen.

As regards the surprise, the global financial crisis had (for me, at least, but not for some betting markets) ruled out the early favorite, Eugene Fama, famous for developing the efficient financial markets hypothesis, not to mention the majority of macroeconomists whose models failed to warn of the impending crisis or provide useful responses. Still, there were plenty of contenders who seemed more likely.

Of the two winners, Williamson was on most lists of people (actually, men) who were bound to win sooner or later. His fundamental work on transactions costs and economic organization, largely done in the 1970s and 1980s changed the way economists think about these things. That said, it raised more questions than answers. Economists still tend to use ‘transactions costs’ as a kind of black box, in which to put anything that prevents markets working as they should. My view is that the ultimate answer will be found by dropping the assumption that market participants are perfectly rational agents, capable of considering all possible outcomes of the transactions into which they enter. But I would say that – most of my theoretical work these days is about bounded rationality in one form or another.

Elinor Ostrom is a far more interesting choice. She’s the first woman to win the prize and (much more controversial for some) a political scientist.

The best way to understand the impact of Ostrom’s work is to look at what it displaced. In 1968, Garret Hardin wrote a highly influential article in Science called The Tragedy of the Commons. Hardin started with the story of how the medieval commons in England had collapsed under the pressure of overgrazing, and used this as a metaphor for modern environmental problems. The solution he argued was “enclosure”, that is, the conversion of the commons into private property. Hardin’s work was influenced by, and encouraged the further development of, the ‘property rights’ school of economic thought, which saw the expansion of private property rights as the central engine of economic progress.

Hardin took his analysis to its logical conclusion in his Lifeboat Ethics: the Case Against Helping the Poor, which suggested that having seized enough property rights to support themselves, the rich should (metaphorically) throw the poor overboard.
Decades of careful empirical work on actual common property institutions, in which Ostrom has played the leading role has shown that Hardin’s description of the commons was totally inaccurate, and that the policy prescriptions he derived were likely to be counterproductive. That said, Ostrom is not romantic about common property institutions, and observes that they need not be egalitarian, and may be rendered ineffective by changing circumstances.

The message from both Williamson and Ostrom that a mixed economy can involve not just private and public ownership but a range of other possible institutional structures, interacting through markets, contracts, regulations and direct collective management. Ostrom shows how the historical example common property in resource management may be applied modern problems involving externalities, local public goods and pollution.

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  1. Dick Veldkamp
    October 13th, 2009 at 07:47 | #1

    Dear Mr Quiggin,

    Could you expand a little on your statement that the Tragedy of the Commons is ‘factually false’ ? As far as I can see the TotC is a pretty good description of what is currently happening with fish in the ocean, with CO2 dumping in the atmosphere, et cetera.

    Thank you.

  2. Crispin Bennett
    October 13th, 2009 at 08:45 | #2

    To add to DK’s question: can you recommend any reading on challenges to the prevailing ToC story for non-economists?

  3. October 13th, 2009 at 08:58 | #3

    yes please, would you please refer to some readings on the tragedy of commons being factually false?

  4. jquiggin
    October 13th, 2009 at 09:08 | #4

    I’ve added a link.

    In response to DK, I’m not claiming that the metaphor is nowhere applicable, but that the description of actual historical, and existing, commons is false. Demonstration of this is the starting point of Ostrom’s research program.

    For this reason, economists now use the term “open access” to refer to resources over which there are no property rights, and reserve “common property” for the case of collective management.

  5. James
    October 13th, 2009 at 09:22 | #5

    Not in front of my library (though those who want references could start here), but historically speaking most “commons” were well managed systems. The medieval village commons was used as grazing or sometimes crop land, frequently on a rotational system. Social sanctions were highly effective at preventing any person from over-using or appropriating the shared resource. This was probably contributed to by most communities with common resources being small, often kin-linked groups where people were bound to each other by a multitude of kin and customary obligations and free-riding was easily detected (hence the difference between the classic commons and the problems mentioned by Dick Veldkamp above).
    In England, the enclosure movement which privatised the commons was essentially piracy, driven by demand for land for the wool industry. Hence the rhyme:

    They hang the man and flog the woman,
    Who steals the goose from off the common,
    Yet let the greater villain loose,
    That steals the common from the goose.

    Then people like Hardin come along and apply Orwellian historical revision to claim that it was all correct and rational.

  6. Ikonoclast
    October 13th, 2009 at 10:07 | #6

    The tragedy of Garret Hardin’s article is possibly this. Its brilliant, pithy and memorable title is far superior to the actual article. His argument is confused and disturbing to say the least. The title may also give a false impression to readers nowadays. Our attention is mainly fixed on environmental commons suffering from pollution (atmosphere, seas etc.) or on almost unenclosable commons such as the fishable seas.

    The following quote illustrates what Hardin is really driving at. “The most important aspect of necessity that we must now recognize, is the necessity of abandoning the commons in breeding.” His argument veers very close to and probably actually advocates a form of eugenics. Perhaps even more than the historical inaccuracy of his descriptions of commons, it is the dubious eugenics-flavoured morality of his central argument which repels liberal, humanitarian and democratic thinkers.

    The further tragedy of his article is that some aspects of his initial argument are correct. It is true that some problems do not have technical solutions and (may) have only moral solutions. (The irony is that Hardin goes on to propose the highly immoral solution of controlled breeding which would require intense technical-administrative oversight and would slide inevitably into oppression.) It is true that the earth is finite and cannot support an endlessly growing population. It is true that the failure to cost or regulate negative externality impacts is destroying certain commons (for example an “anthropo-benign” climate).

    Overall, those parts of Hardin’s thesis which make sense are rapidly drowned out by a quasi-eugenicist argument. It’s totalitarian thinking wearing (a very tattered) academic cloak.

  7. Paul Norton
    October 13th, 2009 at 10:35 | #7

    I outline Hardin’s TotC thesis in my lectures, but always make sure my students know that it is, at best, a parable and that history is rich with examples, from many cultures, of successfully governed commons.

  8. October 13th, 2009 at 11:26 | #8

    @James

    “The medieval village commons was used as grazing or sometimes crop land, frequently on a rotational system”.

    I have stated over and over, in many times and places, that there was no such thing as “commons” as a singular noun, and that this isn’t a mere sloppy wording like the Americanism “woods” as a singular but that it makes a very real difference. Of all the commons, each common had its own commoners (note the contrast between each and all, very relevant to the mechanism at issue). No one common was up for grabs by outsiders, right from the get go. Using “commons” as a singular noun obscures this separation into several distinct commons and makes it appear that the problem relates to handling one vast resource, which would have been far less manageable than the real cases. It is not quibbling to tell people that “commons” is not singular.

  9. Ikonoclast
    October 13th, 2009 at 12:28 | #9

    True PML, in the examples you give. However, the atmosphere appears to be a single commons. It is one vast resource. Portions of it are not separable as separate commons (plural) and are not enclosable in any meaningful economic sense. The broad environmental common is the one in trouble now; atmosphere, seas, climate.

  10. James
    October 13th, 2009 at 13:33 | #10

    @P.M.Lawrence
    Point taken.

  11. Ikonoclast
    October 13th, 2009 at 13:51 | #11

    Another point has been bothering me. Hardin’s reasoning is truly confused. He makes a basic category error when he implies that breeding is a commons.

    “The most important aspect of necessity that we must now recognize, is the necessity of abandoning the commons in breeding.” – Hardin.

    “The Commons” in any socioeconomic context refers to resources which are collectively owned or collectively managed or which exist outside individual and collective ownership.

    Human “Breeding” is not a commons. Breeding is not a primary resource in the sense that land or air are primary resources.

    It’s always instructive to see that flawed reasoning in any field can be shown to be flawed not merely with respect to the specific tenets of that field by also with respect to the general tenets of logic and philosophy. (I’m happy to admit that this might be a kind of truism.)

  12. Ikonoclast
    October 13th, 2009 at 15:18 | #12

    @Paul Norton

    Paul, you say you outline Hardin’s thesis to your students. It would be interesting to see your outline. In my opinion, it’s not all that clear what Hardin’s primary thesis is. Is he concerned about “the tragedy of the Commons” as such or is he concerned to misappropriate commons arguments (via a category mistake) to promote his particular brand of eugenics and/or population control?

  13. Glenn Tamblyn
    October 13th, 2009 at 15:47 | #13

    @Ikonoclast

    ‘“The Commons” in any socioeconomic context refers to resources which are collectively owned or collectively managed or which exist outside individual and collective ownership’

    Another distinction which may be important is not only the lack of collective ownership/management of any ‘Commons’ but even a lack of meaningful awareness of the existance of such a ‘Commons’. If I cut down a tree in a park I am at least aware of my actions. I know I took something from the ‘Commons’. If someone cuts down a tree in the Amazon to raise a cow so I can eat a hamburger, it takes a fairly herculean effort on my part to really even be aware of that fact. And most of us most of the time aren’t really into herculean efforts. So ‘Out of Sight, Out of Mind’ multiplies the potential impact of any TOTC. Hence much of the rather parlous state of our globalised world.

  14. gaddeswarup
    October 14th, 2009 at 10:22 | #14

    Elinor Ostrom’s work sounds very nice and natural but I wonder about this statement in the citation “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.” in the Indian context. Some of the laws of common resource governance have caste elements in it(like fishing, temple properties etc) and these implicit understandings of the past may not be desirable or viable now and it seems a big challenge to change these privileges.

  15. jquiggin
    October 14th, 2009 at 10:39 | #15

    @gaddeswarup
    You’re quite right. As I mentioned in my post, Ostrom is not romantic about common property institutions, and observes that they need not be egalitarian, and may be rendered ineffective by changing circumstances.

  16. October 14th, 2009 at 15:59 | #16

    @Ikonoclast

    No, Ikonoclast, the atmosphere is not “a single commons”, as there is no such thing/I> as “a commons” at all. That is the point I was making. The atmosphere is “a common” or (more precisely) “a common resource”.

  17. October 14th, 2009 at 15:59 | #17

    Drat. A left angle bracket went missing.

  18. Michael of Summer Hill
    October 14th, 2009 at 16:28 | #18

    PMLawrence, as far as I know there were three different common wrights the ‘appendant’, the ‘appurtenant’ and the ‘in gross’ before the Statute of Merton (1235) was introduced changing the rules as to the wright of pasture over waste.

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