Prisoners in perpetuity?
In Beyond States and Markets, economist Elinor Ostrom raises an important question: “are rational individuals helplessly trapped in social dilemmas?” As Garrett Hardin brought to popular attention in the tragedy of the commons, people in pursuit of their own self-interest might inadvertently destroy the collective good:
“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.”
Garrett Hardin. (1968). The Tragedy of the Commons.
This march to oblivion seemed inevitable to many economists and environmentalists. Thomas Malthus, for example, argued in 1798 that overpopulation would someday threaten our food surpluses and bring about calamity. While our forebears overcame the challenge with industrialized food production, the tragedy has many new guises today (climate change, nuclear war, etc.).
Change from within
Many analytical frameworks in economics assume that solutions to social dilemmas must come from outside the system. Somebody, after all, has to enforce the rules, motivations and structures to stop self-destructive behaviors. But in the game of empires and super nations, there are no outsiders to call upon. Beyond the balance of powers and international unions, we are left only to our own devices.
Ostrom reminds us, however, that the economic problem is not necessarily economic reality. Despite all our apparent dysfunction, cooperation remains widespread on many scales of society. Social systems are constantly reorganizing itself. And people are forever squirreling away, rewriting the boundaries, choices, payoffs and rules of the game. The task then is to find the design principles and micro-situations that enable people to organize and reorganize in more productive ways.
Excludability and subtractability
To understand social dilemmas, it helps first to understand the nature of goods and services. Here, economists like to focus on two properties. The first is excludability, which refers to how easy it is to stop people from using a good or service. Nightclubs, for example, are relatively exclusive. Bouncers can exclude the under aged and troublemakers.
The second property is subtractability (or rivalry). It refers to how much a good or service diminishes as more people use it. Chocolates and sandwiches are highly subtractable. Each bite I take precludes my partner from enjoying it. While excludability and subtractability are matters of degree, we can summarize their nature in a 2×2 matrix:
Types of goods and services
| High subtractability | Low subtractability | |
| Low excludability | Common-pool resources “Lakes, irrigation systems, fisheries, forests” | Public goods “National defense, knowledge, fire protection, weather forecasts” |
| High excludability | Private goods “Food, clothing, automobiles” | Toll (or club) goods “Theatres, private clubs, day-care centers” |
Private, public, and club goods
Private goods are both excludable and subtractable. Retailers will sell only to those that can pay (high excludability). And once the buyer owns it, nobody else can have it (high subtractability). Public goods, by contrast, are neither excludable nor subtractable. National security is a good example. Then there are “club goods”. Like satellite television, some goods and services are excludable but not completely subtractable.
Common pool resources
Finally, there are common pool resources – a frequent source of social dilemmas. These are goods with low excludability and high subtractability. Fisheries and forests are classic examples. In an unregulated free-for-all, business-entry and overharvesting can destroy the very resources and environments that make us rich.
Polycentric systems
Traditionally, economists saw the market system as the optimal solution for the allocation of private goods – that it would produce efficient outcomes among rational, profit maximizing agents. Non-private goods, they believed, were the purview of government. After all, centralized coordination, regulation and taxation appears necessary to overcome the free-rider problem associated with the provision of public goods like national defense.
But Ostrom notes that human systems are rarely so categorical in practice. Societies tend to use a mixture of institutional arrangements, whether private, communal and/or state-based, to resolve their social dilemmas. In other words, people employ a polycentric system for decision-making and problem-solving.
Micro-situations and design principles
There are, however, some micro-situations that seem to promote cooperation without the need for central planning or authority. Ostrom’s research on harvesters in Nepalese forests found, for example, that “simply allowing communication, … [helped] participants to reduce overharvesting and increase joint payoffs”. While markets are great at coordinating strangers. Cooperation seems less likely when reputations are unknown and communication impossible.
Of course, when the benefit to cooperation is higher, the incentive for participation improves. Enduring relationships can help with this. Are you more likely to antagonize or upset your neighbor if you know with complete certainty that you have to work with them for the rest of your life?
People are also more likely to cooperate when the cost of piloting is low. That is, cooperation can proceed in small steps, building up to something larger. In construction, for example, builders finds it too risky to wait for payment upon completion. Buyers, however, do not want to pay upfront until they see results. Deposits and installments provide a middle ground.
It also goes without saying that “monitoring”, “graduated sanctions”, and “conflict-resolution” are essential. How else might you promote accountability and compliance?
Multivariate dysfunction
What we’ve discussed so far are the seeds of cooperation. But, as Ostrom outlines in Collective Action and the Evolution of Social Norms, there are many more variables to think about:
“An immense number of contextual variables are also identified by field researchers as conducive or detrimental to endogenous collective action. Among those proposed are: the type of production and allocation functions; the predictability of resource flows; the relative scarcity of the good; the size of the group involved; the heterogeneity of the group; the dependence of the group on the good; common understanding of the group; the size of the total collective benefit; the marginal contribution by one person to the collective good; the size of the temptation to free ride; the loss to co-operators when others do not cooperate; having a choice of participating or not; the presence of leadership; past experience and level of social capital; the autonomy to make binding rules; and a wide diversity of rules that are used to change the structure of the situation”
Elinor Ostrom. (2000). Collective Action and the Evolution of Social Norms.
Sometimes it’s a surprise that society even functions at all! Coordination and cooperation problems, whether in family, business, politics, or the environment, are multidimensional. We are complex creatures in a complex system with complex needs and wants. We are inherently dysfunctional because of this.
Towards a theory of human behavior
All of this, I suspect, must seem obvious to general readers. Economics, unfortunately, has been slow to incorporate these nuances into general theory. Ostrom says we need “a better theoretical understanding of human behavior” if we’re to make progress on these social dilemmas. While we’re unlikely to find a unifying theory soon, she highlights several themes that show promise as components of a new theory: (1) bounded rationality; (2) heuristics and norms; (3) self and collective interests; (4) contingent development; and (5) trust.
Bounded rationality
The first relates to Herbert Simon’s concept of bounded rationality. Unlike Homo economicus, Homo sapiens cannot possess complete knowledge. In many strategic situations, we make ‘satisficing’ decisions with the aid of learning and accumulated knowledge. For analysis, it seems wise then to transition from the traditional single-stage game of complete information to a series of repeated interactions, consisting of bounded rationality, incomplete information, learning and adaptation.
Heuristics and norms
Secondly and relatedly, people use heuristics and rules of thumb to make decisions. We do not have unlimited resources or time to optimize our strategies, consider every permutation, and solve for Nash equilibrium. Culture, norms, and tradition, in this sense, simplify our set of beliefs, motivations and choice set.
Individual and collective interests
We are also multivariate ‘saticficers’ that think in absolute and relative terms. Many people, for example, are envious and unhappy when their neighbor earns more than they do (even if their wages are rising). Our norms for justice and fairness, likewise, guide some of our internal payoff functions. Yes, some people care only about themselves. But many others show care for their wider community and society too.
Contingent development
What’s more, the environment and decision maker are highly interdependent. Circumstance affects our decision rules. Daniel Kahneman’s Thinking, Fast and Slow shows, for example, how easy it is for people to arrive at different conclusions when we frame the same problem in a different light. Bounded rationality is not necessarily stable or consistent.
Trust
Finally, Ostrom says we have to pay more attention to “the central role of trust in coping with social dilemmas”. Trust is an ingredient in the feedback loop that sustains human cooperatives. Trust begets cooperation, which begets more trust, and so on. Distrust and suspicion, by contrast, can generate vicious cycles. Our scientific, legal, financial, and medical institutions, for example, rely on a vast network of trust – systems that people have nurtured and improved upon for many generations.
As Ostrom writes:
“The most important lesson for public policy analysis … is that humans have a more complex motivational structure and more capability to solve social dilemmas than posited in earlier rational-choice theory. … We need to ask how diverse polycentric institutions help or hinder the innovativeness, learning, adapting, trustworthiness, levels of cooperation of participants, and the achievement of more effective, equitable, and sustainable outcomes at multiple scales. To explain the world of interactions and outcomes occurring at multiple levels, we also have to be willing to deal with complexity instead of rejecting it.”
Elinor Ostrom. (2009). Beyond Markets and States.
Sources and further reading
- Ostrom, Elinor. (2005). Understanding Institutional Diversity. Princeton, NJ: Princeton University Press.
- Ostrom, Elinor. (2007). A Diagnostic Approach for Going beyond Panaceas. Proceedings of the National Academy of Sciences, 104(39), 15181–15187.
- Ostrom, Elinor (2009). A General Framework for Analyzing the Sustainability of Social-Ecological Systems. Science, 325(5939), 419–422.
- Poteete, Amy,. Janssen, Marco., and Ostrom, Elinor. (2010), Working Together: Collective Action, the Commons, and Multiple Methods in Practice, Princeton, NJ: Princeton University Press.
- Ostrom, Elinor. (2009). Beyond Markets and States: Polycentric Governance of Complex Economic systems. Prize Lecture, December 8, 2009.
- Ostrom, Elinor. (2000). Collective Action and the Evolution of Social Norms. Journal of Economic Perspectives. Volume 14. No. 3 – Summer 2000. Pages 137 – 158.