With all the debate that has surrounded the decision to award President Barack Obama with the Nobel Peace Prize, surprisingly little discussion has occurred around today’s announcement that Elinor Ostrom and Oliver Williamson would share the Nobel Prize in Economics. With the exception of Paul Krugman (who framed the Nobel Prize committee’s decision as a vindication of New Institutional Economics), the blogosphere has been surprisingly quiet about the award.
The award was given to Williamson for his work on transaction costs. According to the committee, “Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative governance structures which differ in their approaches to resolving conflicts of interest.”
The decision to award Ostrom the prize is particularly interesting. Ostrom’s work challenges traditional assumptions around common pool resources. Indeed, her work is based fundamentally on a rejection of Garret Hardin’s famous parable of the tragedy of the commons, which argues that,
The tragedy of the commons develops in this way. Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. Such an arrangement may work reasonably satisfactorily for centuries because tribal wars, poaching, and disease keep the numbers of both man and beast well below the carrying capacity of the land. Finally, however, comes the day of reckoning, that is, the day when the long-desired goal of social stability becomes a reality. At this point, the inherent logic of the commons remorselessly generates tragedy. As a rational being, each herdsman seeks to maximize his gain. Explicitly or implicitly, more or less consciously, he asks, “What is the utility to me of adding one more animal to my herd?” …The rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another…. But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit — in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons. Freedom in a commons brings ruin to all.
The solution to the tragedy, according to Hardin, rests in one of two possibilities. Either we must enclose (privatize) the commons or we must allow government to regulate them. In the context of his argument, Hardin comes out in favor of the former rather than the latter. His argument around necessity of enclosing the commons to prevent over-exploitation of them has become accepted as a truism in resource management.
In her most well-known work, Governing the Commons: The Evolution of Institutions for Collective Action (Cambridge University Press, 1990), Ostrom demonstrates that communities can successfully manage commons even in the absence of private property rights and a strong regulatory authority. In analyzing common pool resources (CPRs) [glossary] from around the world, Ostrom concludes that informal institutions with certain characteristics (e.g., Clearly defined boundaries; Congruence between appropriation and provision rules and local conditions; Collective-choice arrangements allowing for the participation of most of the appropriators in the decision making process; Effective monitoring by monitors who are part of or accountable to the appropriators; Graduated sanctions for appropriators who do not respect community rules; Conflict-resolution mechanisms which are cheap and easy of access; Minimal recognition of rights to organize; and in case of larger CPRs: Organization in the form of multiple layers of nested enterprises, with small, local CPRs at their bases) can successfully manage common pool resources even in the absence of a formal system of private property rights. In doing so, Ostrom offers important insight into a wide range of contemporary issues, from deforestation to carbon emissions, and suggests that neither government regulation nor market-based solutions, necessarily represent the direction forward.