A Nobel winner's solution to the tragedy of the commons
Last week, the Nobel Prize in Economics was announced. Claudia Goldin of Harvard won for her work on gender and the labor market. I’m planning to dive into her work soon, but this week I want to share something from another Nobel Economic laureate.
Elinor Ostrom was the first woman to win the Nobel Prize in Economics in 2009. Her prize lecture was packed with insight and lessons learned from her long career. It is excellent in its entirety but relies on economic jargon, complex sentences, and in-depth case studies. Ostrom never sacrifices precision for simplicity. That precision of thought and speech is what made her work so outstanding, but it can be a barrier to understanding the rich concepts she developed.
I’ve rewritten a simplified version of the speech below. My goal is to make her ideas more concise and less jargony while trying to preserve the key insights and meaning. Because the original speech is 30 pages long, I’ve skipped the middle section where she discusses several case studies and reorganized the order of her ideas. I also bolded many of the most important points. Here is a link to the full text in case you want to read the original. The idea of rewriting a Nobel winner’s speech feels a bit arrogant, but Ostrom’s ideas are worth sharing widely and I hope this simplified version introduces new readers to her work. In my opinion, anyone who is aware of Garrett Hardin’s “The Tragedy of the Commons” should also know Ostrom’s polycentric approach to solving problems of the commons.
Beyond Markets and States: Polycentric Governance of Complex Systems
Case studies of water systems and forests around the world challenge the idea that governments always manage and protect important resources better than users do. The misconception that governments are always better at managing shared resources stems from two economic theories that my research has shown do not always hold true in the real world. I’ll explain the two theories, how my research moved beyond simple models to embrace the complexity of real-world systems, and the list of 8 principles I developed that can help communities manage shared resources.
Two Kinds of Goods
Paul Samuelson divided goods into two types. Pure private goods are things that you are excluded from using unless you pay for them, and that can only be consumed by one person— not many at once. If you buy the last apple, no one else can have it.
Public goods are things that you are able to use without paying for them, and even if you use them, others can use them too. If I swim in the lake, that doesn’t stop other people from swimming in it too. And if there is no fence around the lake, you don’t have to pay to use it. This basic separation of goods matched up well with the simple organizational model explained in the next section. Private goods were exchanged on the market and public goods were managed by the government. People were viewed as consumers or voters.
Two ideal ways to organize
In the 1950’s, economic theory held that the market was the optimal institution for producing and exchanging private goods. For public goods, the government was the best institution. A government was needed to force individuals to contribute to essential resources despite their own self-interest. This was accomplished by enforcing rules and gathering taxes. Without a government that had the authority to enforce rules, individuals would fail to create things like peace and security, which are valued by the whole community. Whether they were citizens or officials, individuals were self-interested and therefore unable to advance the public interest at whatever level it was needed. A central government was suggested in order to reduce the chaos of society, promote efficiency, limit conflict, and carry out an orderly agenda. This split view of the world explained how private companies interact with each other to create a market, but it failed to adequately explain behavior and incentives inside of private groups. This worldview is also incapable of explaining the many different systems humans have come up with to govern, provide, and manage public goods and resources.
Rational Individuals
It’s worth mentioning a third theory that contributed to the consensus in economic thought at the time. Economists and game theorists in the mid-1900’s assumed that individuals were fully rational. A rational person knows every choice they could make in their particular situation, what the outcome of each choice would be (including taking into account the choices of other people), and which outcomes would be most useful to them. In every situation, you expect the rational individual to make the choice that results in their preferred outcome. While a rational individual can choose a preferred outcome based on many different factors, scholars tend to rely on just one—expected profit. This theory has yielded many insights into how people make decisions in a market, but not in the wider world of social dilemmas.
Moving beyond simple systems
Polycentric Public Industries
Careful research into how stakeholders at various levels manage and create public goods has yielded results that do not fit neatly into the existing theory of two kinds of goods. Vincent Ostrom, Charles Tiebout, and Robert Warren wanted to understand whether the more or less uncoordinated efforts of private actors, public officials, and groups resulted in chaos when trying to manage public goods. Those scholars introduced the concept of polycentricity to explain how these emergent actions can be productive.
“‘Polycentric’ means many centers of decision-making that are supposedly independent of each other. Whether they actually function independently or instead are interdependent is an open question and depends on each particular case. The various political districts in a city may influence each other through competition, cooperation, or shared contracts. There may be a central authority to resolve disputes between them. Their spontaneous, apparently unorganized interactions may result in consistent and coherent patterns of behavior. To the extent that patterns emerge, you could say their interactions create a ‘system’.” (Adapted from V. Ostrom, Tiebout, and Warren, 1961)
Case studies of water management in California showed that multiple public and private agencies had found productive ways to manage shared water resources. This contradicted the common view that multiple government agencies with no clear hierarchy led to chaos. Three things were found to increase productivity in polycentric cities. First, small-to-medium cities were more effective at monitoring people’s actions and the cost of management than large cities. Second, if people are unsatisfied with the services provided by their city they can vote with their feet by moving to cities that better match their preferences. Third, small communities can contract with private groups and change contracts if they are unsatisfied. Neighborhoods within a large city have no voice.
Moving beyond water, we also studied how cities provide policing and public safety. We found that in large metropolitan areas with many police departments, it was rare to find duplication of services, and areas with multiple departments performed better than areas with fewer police departments. We demonstrated that complexity is not the same as chaos. This allowed us to reject the theory underlying metropolitan police reform proposals. We have continued to see similar results as we studied polycentric resource systems around the world.
Doubling the Types of Goods
Our case studies of public problems around the world led us to reject Paul Samuelson’s classification of goods as either public or private. Buchanan (1965) had already introduced the idea of club goods, increasing the types of goods to three. A club good is something that can be shared by multiple people, but those people can exclude others from using the good. Watching a movie in a cinema is an example. Everyone who pays to get into the theater can enjoy the movie together, but people on the street are not allowed in unless they pay.
Based on our research, we proposed additional changes to the classification of goods.
Replacing the term “rivalry of consumption” with “subtractability of use.”
Clarifying that subtractability of use and excludability exist on a spectrum, instead of being purely binary.
Changing the name of a club good to a toll good, since the word club implies a private group manages access. In reality, many of these goods can be provided by either public or private organizations.
Most importantly, adding a fourth type of good—common-pool resources. These goods are subtractible just like private goods, but difficult to exclude people from using—like public goods. Forests, water systems, fisheries, and the global atmosphere are all common-pool resources that are immensely important for the survival of humans on this earth.
The updated classification of goods looks like this—public goods, private goods, toll goods, and common-pool resources.
Within these four types of goods, there are many differences based on context. A river and a forest are both common-pool resources, but they vary by how portable they are, how easy they are to measure and how long they take to regenerate. Specific resources may also differ based on the number of users, how much area they cover, and other factors.
Through my fieldwork, I saw an immense variety of situations and interactions. You see very different interactions when riding as an observer in a police car Saturday at midnight in a large city than you see in a suburb on a weekday afternoon. But in both cases, you are watching how the police provide a public good—safety. Other people who influence public safety have different goals, motivations, ages, and sobriety levels. Those factors influence the strategies of the police.
We can also see how private water companies, city utilities, private oil companies, and local citizens interact while trying to figure out who is responsible for overconsuming a shared water resource. Context matters here too. They all face the same problem—the shared water has been overdrafted—but the way they behave changes depending on the setting. They interact differently in a private monthly meeting, when they face each other in a courtroom, and when they petition the legislature or propose solutions to citizens. These situations and many others around the world do not neatly fit into the standard model of a market or a hierarchy.
Are rational individuals helplessly trapped in social dilemmas?
The standard theories mentioned above hide the possibility that people will cooperate productively. Under the old assumptions, individuals in the Prisoner’s Dilemma, for example, are trapped in the situation without the capability to change the structure themselves. Under these theories, resource users are trapped but actors outside the resource area have the power to influence it. Those other actors are able to observe behaviors, analyze outcomes, and suggest changes to the rules that they expect will lead to better outcomes. Those outside the system are expected to impose an optimal set of rules on users within the system. It is assumed that the momentum for change must come from outside the situation rather than from the self-reflection and creativity of those within a situation.
However, whether individuals have the ability to change the circumstances of their situation varies dramatically from one situation to the next. Police detectives keep detainees separated so they cannot communicate. The users of a common-pool resource are not so limited.
Garrett Hardin’s portrayal of the users of a common-pool resource – a pasture open to all – being trapped in an inexorable tragedy of overuse and destruction has been widely accepted because it was consistent with the predictions of game theory that individuals would not cooperate. It captured the attention of scholars and policymakers across the world. Many presumed that all common-pool resources were owned by no one. Thus, it was thought that government officials had to impose new policies to prevent destruction by users who could not do anything other than destroy the resources on which their own future (as well as the rest of our futures) depended.
My research team analyzed over 500 case studies of common-pool resources around the world. We found that the capacity to overcome dilemmas and create effective governance occurred far more frequently than expected. Cooperation depended on the nature of the resource itself and whether the rules-in-use were linked effectively to that particular type of resource (Blomquist et al. 1994). In all self-organized systems, we found that users had created boundary rules for determining who could use the resource, choice rules for determining how much each user could consume, and active forms of monitoring and consequences for rule breakers.
We also found situations where resource users failed to cooperate, like the original theories predicted. In resource dilemmas where individuals do not know one another, cannot communicate effectively, and thus cannot develop agreements, norms, and sanctions, failure to cooperate was more common.
How to successfully manage a shared resource
After several years compiling and studying different ways that communities manage common-pool resources, the next step was to determine what distinguished successful management systems from those that failed. From the research, we compiled a list of institutional features that were present in resource systems that had proven sustainable for long periods of time.
They are:
There are clear boundaries between legitimate resource users and nonusers.
Rules for how and when the resource is divided up match the local social and environmental conditions.
Most of the people who are affected by the use of the resource have some say in how that resource is managed.
Users of the resource monitor both the allocation of the resource to other users and the condition of the resource itself.
Consequences for rule violations start very low but become stronger if a user repeatedly violates a rule.
Fast, easy to use conflict resolution mechanisms exist between the users or designated officials.
The rights of local users to make their own rules are recognized by the government.
When a common-pool resource is closely connected to a larger social-ecological system, governance activities are organized in multiple nested layers.
Conclusion
Building trust in one another and developing institutional rules that are well-matched to the ecological systems being used are of central importance for solving social dilemmas. One surprising finding is that in well-functioning resource systems, users come up with various ways to monitor each other—demonstrating the importance of trust in managing shared resources.
To explain the many different ways humans manage shared resources, and whether or not those efforts are successful, we also have to be willing to deal with complexity instead of rejecting it. If the models we have come up with so far fail to explain real-world outcomes, we need to update our models to better accommodate reality, not simply reject the world’s complexity. Understanding how the rules we set up to govern ourselves can help people become more innovative, cooperative, and trustworthy makes it possible to manage our shared resources more equitably and sustainably.
The most important lesson from my research is that humans have more capability to solve social dilemmas than previously thought. Their motivations are also more diverse than rational-choice theory predicts. Rather than assuming that individuals only care about their own interests, and trying to design systems that force them to act in the public interest instead, the core goal of public policy should be to design institutions that bring out the best in humans.