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Putting Humans Back in Economics

The idea of community governance is getting a little more respect these days. Over the past few decades scholars have studied a host of communities that hold natural resources in common, such as forests or fisheries. We know now, it doesn’t always have to be an either-or of each against all in the market or total government control, but that sometimes an emergent community governance can work to steward resources. These studies are useful to find what we can learn about how communities work, or  don’t work, and apply it in situations not only where geography is the tying factor, but also in online communities or information goods.  The Nobel committee gave a nod to the field this week awarding Elinor Ostrom, a political scientist at Indiana University, 1/2 of the Nobel Prize in economics.

Prior to her work, there were three generally accepted solutions to overcome Hardin’s tragedy of the commons, where resources accessible by many are over-harvested until it’s too late: 1) put ownership under one roof (monopoly control); 2) in very limited situations have the parties negotiate themselves (Coasian bargaining); or 3) have government step in and set up a system.

Ostrom’s work highlights a middle of the road way, where the market isn’t fully relied on, nor complete government control, but rather an emergent community governance.

This post can’t do justice to a prolific researcher working since her dissertation in 1965, but here are four prominent themes:

1. Self-governance can work Systems are more likely to be successful when the rules and their enforcement come from the community itself.

2. Start small Scaling up to bigger successes is more likely after building momentum from smaller community successes.

3. Best ideas win Resiliency in part comes from good conflict resolution and flexibility to change rules and practices over time to things that work.

4. Facilitate personal interaction Communication and trust are of utmost importance. We gravitate toward trust and reciprocity first, but when burned, don’t quickly return to a state of trust.

Sure, the body of her work focuses on natural resources, where individuals in the community primarily want to extract some value. More recently, though, Ostrom and others have started to turn toward information goods.

We could look at open source or other forms of open as a sort of reverse common pool resource. Instead of taking things out, we’re concerned about sustaining the inputs, or keeping things going. Open source isn’t free form, but of course it’s by no means perfectly controlled and proprietary. Forking and poor governance can lead to loss of mindshare and dwindling source. On the output side, when you start to deal with  access restrictions through copyright, patents, or digital rights management, the differences with Ostrom’s studies aren’t so big.

To be sure, the message is not that these arrangements are easy to come by or always work, but that they do exist and when they work, they work pretty darn well.

Rather than pretend she could formulate, in her words, an institutional panacea that would work everywhere, or give up and cry that everything is a one-off, she sought to build a set of design principles that can inform our understanding of how things work, but still be applied elsewhere. Ostrom also worked on not just theory development, but extensive field work and case studies, supplemented by controlled laboratory experiments revealing often hidden, but present human behaviors.

This prize and her work are important not just for the content, but also for the shift to an appreciation for economic inquiry centered around humans that actually behave, well, like humans—a more realistic, albeit messier field, as Dan Ariely, a behavioral economist at Duke University, points out in “The End of Rational Economics.”

For further reading:

Social Science Research Network holds almost 20 free papers

Amazon lists 70 authored or edited titles

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