The Woman Who Saved Economics from Disaster

Who is Elinor Ostrom?

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Editor’s Note: In an effort to center New Economic Thinking in the discussion of the COVID-19 crisis, we’ve curated a list of Evonomics articles relevant to this moment—including this one. Check out the full list here.

2016 February 1

By David Sloan Wilson

Part 1 of my journey »

J.R.R. Tolkien’s Lord of the Rings trilogy is a meditation on the corrupting influence of power. I felt like Frodo making his way towards Mordor in my effort to understand economic theory, but the person who came closest to playing a Frodo-like role in the recent history of economic thinking is Elinor Ostrom.

I asked Lin to tell me her life story when I first met her at a workshop in 2009, a few months before she was awarded the Nobel prize in economics. Let’s get to know her as a flesh and blood person before proceeding to the import of her work.

Lin’s ancestors were protestant refugees on her mother’s side who migrated from Europe to the US early in the history of our nation, and Jews on her father’s side who migrated from eastern Europe in the early 1900’s. She was born in California in the 1930’s, at a time when women were expected to be housewives, secretaries, and schoolteachers. Neither of her parents had a college education and did not nurture Lin’s academic ambitions. Fortunately, her school provided the support that she needed. Shy and burdened with a mild stutter, Lin gained confidence by participating in the school’s debate and speech teams. College was sufficiently affordable in California at the time that she could work her way through without her parent’s support. She attended UCLA and became a political science major after taking a course in American government that captivated her. She had no idea what she might do with a degree in political science but merely enjoyed the subject. She also took some courses in economics, business, and personnel with a livelihood in mind.

Lin married her high school sweetheart and put him through Harvard Law School after they graduated from college. Her first job in Boston was for an electronics company that started their employees out in the mailroom so that they could get to know the whole company. From there she went to the export department, where she worked in a large clerical room with many other women, overseen by a man sitting at an elevated desk. Lin laughs good-naturedly at the experience and says that it was useful for learning how firms work from the inside.

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After one year at the electronics company, Lin boldly talked her way into a job as assistant personnel manager at a large-scale manufacturing company. At first she didn’t get the job but they reconsidered when she offered to work without charge for a trial period. At that time there were no Catholics, Jews, or blacks in the entire company and no women in upper positions. When she first arrived, her boss spoke to another staff member over an intercom, who wanted to know if “Lin” was a male or a female. His response upon receiving the answer was “Damn!” Lin laughs at the memory and notes with pride that she managed to hire some people who weren’t protestant males during her two years there.

After her husband graduated from Harvard Law School, they returned to Los Angeles where he began working for a large corporation. Lin found a job in the personnel department at UCLA and started taking graduate courses part time. At first she intended to earn her Masters in Public Administration to increase her job qualifications, but then she switched to more academically oriented courses for the love of it. When she told her husband that she wanted to get her PhD, he found this unacceptable and they soon divorced. She recalls this without bitterness, adding that she also found the life of a corporate lawyer’s wife unappealing. She physically shuddered when she recalled the parties that she had to attend, with all the men in one room and all the wives in another.

Lin’s PhD research was on the seemingly mundane subject of water management. Water use in California was unregulated in those days. Anyone could sink a well on their property but the water that they were tapping was a shared resource. When the water table began to decline, the various users realized that water was a limited resource and that something must be done to regulate its use. Lin studied the process whereby the various stakeholders negotiated a workable set of rules without requiring government intervention. It was a success story that she called public entrepreneurship.

Unbeknownst to her, Lin had stumbled upon a radically different configuration of ideas than the mathematical empire dominating economic theory. The mathematical empire was founded on the assumption that self-interest automatically leads to collective wellbeing. Lin’s work was founded upon a stubborn fact of life: self-interest often leads to the overexploitation of resources and other problems that make life worse for everyone, not better. When everyone was allowed to suck as much water out of the ground as they pleased, there was no invisible hand to rescue the situation.

Yet, centralized government intervention was not required to solve the problem. Instead, the local stakeholders got together and negotiated their own agreement, including rules about water use enforced by punishment. Collective wellbeing was achieved, at least roughly, and there was something emergent and self-organizing about the way it happened—but the process of negotiation bore no resemblance whatsoever to the assumptions of the mathematical empire, which even has trouble accommodating the concept of norms, as we have seen.

Lin married Vincent Ostrom, one of her professors, while she was getting her PhD and followed him when he moved from UCLA to the University of Indiana. By now it was the early 1970’s and Lin was in her mid-30’s. No one thought of offering her a job until the department needed someone to teach an early morning course in American government. Only when she was asked to serve as graduate advisor for the department did she become a full-fledged faculty member. She acted like a mother hen to a very large brood of graduate students as she started to launch her own research career.

Lin used her first opportunity to work intensively with a group of graduate students to focus on the subject of public goods. A public good is anything that can be shared, such as a radio station or a national defense force. The cost of providing a public good might not be shared, however, such as people who listen to public radio without contributing or who enjoy the security of a national defense force without paying taxes. The temptation to free-ride makes public goods difficult to maintain, as the ecologist Garrett Hardin observed in a famous paper titled “The Tragedy of the Commons” published in the journal Science in 1968. It was still a backwater subject in political science when Lin started working on it, as strange as that might seem today. Many different public goods were studied by people from many disciplines. There was no unified theory or methodology. Lynn and her students spent their first semester reading the scattered literature and she expected them to choose a public good for them to collectively start studying themselves during the next semester. Her only stipulation was that it couldn’t involve water, because she had grown tired of that subject from her PhD thesis. Her students chose police departments, a mundane subject compared to neoclassical economic theory’s lofty goal of creating a physics of social behavior.

Centralization was in vogue among policymakers at the time, with recommendations to consolidate the number of departments from 40,000 to 400 nationwide. Nobody had actually studied police service organizations, however, and reform recommendations were just relying on surface logic. Lin and her students studied the social organization of police departments, using rigorous methods to show that smaller units were often better integrated with the communities that they served and more responsive to their needs. They also showed that the optimum scale of police services depended upon the particular service; the answer for forensic laboratory services might be different than neighborhood patrol services, for example. The best social organization surrounding each service had to be determined on a case-by-case basis and the people most closely involved were the ones likely to make the best decisions.

Lin’s police work continued to explore the new intellectual territory that she had discovered previously with her work on water regulation, which emphasized the importance of decentralization and emergence but in a way that required richly structured interactions at the local level. The emergence emphatically did not result from individuals following only their self-regarding preferences. Sometimes it didn’t happen at all. Lin had not yet encountered evolution as an academic subject but she was still studying the process of cultural evolution in the real world. Many groups of people were negotiating solutions to their problems, some more successfully than others, and the successes were more likely to persist and be emulated than the failures. The variation-and-selection process resulted in outcomes that could be pretty good, if not perfect, and could be improved by studying and assisting the process scientifically. Lin was pioneering the art and science of managing the process of cultural evolution without ever using the E-word.

By the 1980s, Lin was gaining a reputation for her work on public goods and was asked by the National Research Council, a branch of the U.S. National Academy of Sciences, to join a committee on common property resources such as irrigation, forestry, and fisheries. Once again, she found the information on the subject in frightful disarray. Many different resources were being studied by people from many disciplines in many parts of the world using many different methods, and nobody was communicating across the boundaries. Lin began the herculean task of imposing order on this information by developing a general framework for analyzing social organizations that could be applied across case studies. At first she was overwhelmed by the diversity that she encountered. Her database included 100 case studies of farmer’s associations in the tiny nation of Nepal alone, each managing their irrigation systems in their own way. Nevertheless, she was able to show that the diverse solutions reflected a smaller number of design principles, which she articulated in her most influential work, titled Governing the Commons: The Evolution of Institutions for Collective Action, published in 1990. By this time Lin had read a little bit about evolution on her own but her use of the E-word in the title primarily reflected her own extensive experience studying how groups of people adapt to the challenges of their respective environments in the real world.

Here are the eight ingredients that enable groups to effectively manage their affairs (in my own words), which I like to call Lin Ostrom’s recipe for success. She frames the ingredients in terms of managing common resources but they apply equally well to any situation that requires coordination and cooperation.

Lin Ostrom’s Recipe For Success: Follow This Recipe And Your Group Will Be Able To Successfully Manage Its Own Affairs

1) Clearly Defined Boundaries. Members of the group should know who they are, have a strong sense of group identity, and know the rights and obligations of membership.

2) Proportional equivalence between benefits and costs. Having some members do all the work while others get the benefits is unsustainable over the long term. Everyone must do their fair share and those who go beyond the call of duty must be appropriately recognized. When leaders are accorded special privileges, it should be because they have special responsibilities for which they are held accountable. Unfair inequality poisons collective efforts.

3) Collective-choice arrangements. Group members must be able to create their own rules and make their own decisions by consensus. People hate being bossed around but will work hard to do what we want, not what they want. In addition, the best decisions often require knowledge of local circumstances that we have and they lack, making consensus decision-making doubly important.

4) Monitoring. Cooperation must always be guarded. Even when most members of a group are well meaning, the temptation to do less than one’s share is always present and a few individuals might try to actively game the system. If lapses and transgressions can’t be detected, the group enterprise is unlikely to succeed.

5) Graduated sanctions. Friendly gentle reminders are usually sufficient to keep people in solid citizen mode, but tougher measures such as punishment and exclusion must be held in reserve.

6) Fast and fair conflict resolution. Conflicts are sure to arise and must be resolved quickly in a manner that is regarded as fair by all parties. This typically involves a hearing in which respected members of the group, who can be expected to be impartial, make an equitable decision.

7) Local autonomy. When a group is nested within a larger society, such as a farmer’s association dealing with the state government or a neighborhood group dealing with a city, the group must be given enough authority to create its own social organization and make its own decisions, as outlined in 1-6.

8) Polycentric governance. In large societies that consist of many groups, relationships among groups must embody the same principles as relationships among individuals within groups.

When I first read about these ingredients I was struck by their immense practicality. I couldn’t connect the dots between evolutionary theory and the mathematical empire of orthodox economics, but I could easily connect the dots with Lin Ostrom’s recipe for success.

The reaction to Elinor Ostrom as the recipient of the 2009 Nobel Prize in economics (along with Oliver Williamson, who also studies how decisions are made outside markets) spoke volumes about the field of economics. Here is what Steve Levitt, the highly regarded University of Chicago economist best known to the public for his bestselling book Freakonomics, wrote on his blogsite in the New York Times on the day after the announcement (October 12, 2009).

If you had done a poll of academic economists yesterday and asked who Elinor Ostrom was, or what she worked on, I doubt that more than one in five economists could have given you an answer. I personally would have failed the test. I had to look her up on Wikipedia, and even after reading the entry, I have no recollection of ever seeing or hearing her name mentioned by an economist. She is a political scientist, both by training and her career — one of the most decorated political scientists around. So the fact I have never heard of her reflects badly on me, and it also highlights just how substantial the boundaries between social science disciplines remain.

So the short answer is that the economics profession is going to hate the prize going to Ostrom even more than Republicans hated the Peace prize going to Obama. Economists want this to be an economists’ prize (after all, economists are self-interested). This award demonstrates, in a way that no previous prize has, that the prize is moving toward a Nobel in Social Science, not a Nobel in economics.

I don’t mean to imply this is necessarily a bad thing — economists certainly do not have a monopoly on talent within the social sciences — just that it will be unpopular among my peers.

Levitt is refreshing in his honesty. Let’s pause to reflect upon what he is saying. Economists are proud to be different and don’t want to share their status with other branches of the social sciences. They also don’t bother to read much outside their own field. They live in a self-contained world and want to keep it that way. Finally, they have adopted the assumptions of their theory as their personal credo. If their theory says that all people are driven entirely by self-interest, then so it must be.

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It would be wrong to say that all economists are like this. As we have seen, some of the best and brightest have resisted the mathematical empire and still defend a common-sense view of human nature, from Veblen to Akerlof. Levitt’s estimate of one in five is about right, as we can affirm by eavesdropping on the chatter that took place within the field of economics following Lin’s award. What better place to listen than the “Economics Job Market Rumors” blog, which is frequented by economics PhD students, postdoctoral students, and young faculty looking for jobs. In the spirit of The Lord of the Rings, I will divide the commentators into the Orcs and the Fellowship of the Ring.

The Orcs:

  • Nobel BULLSHIT!!!! Who the fuck are these idiots? Never heard of them … ever.
  • What kind of bullshit is this? This year is the worst.
  • Well, they had to give it to a woman at some point. Why not just throw a dart at a board.
  • I never saw their work on any reading list during PhD.
  • A stupid Nobel pick to accompany a stupid job market this year. Our field is falling apart.
  • Never heard of Ostrom in my life. Lame.
  • This girl seems to be a political scientist. I don’t think she has published original research in any major economics journal.
  • Multidisciplinary?? Other disciplines are all rubblish [sic]. Why let them conteminate [sic] our purity?
  • Economics is superior. Don’t let political science conteminate [sic] us!
  • This is the problem with Affirmative Action: last time a woman tried to go to the moon, the Challenger exploded 73 seconds after the launch. • Now, this is the end of Economics.

The Fellowship of the Ring:

  • All you guys need to READ MORE. The market rewards multidisciplinary work more and more.
  • These postings really do show the narrow training of many economists. In fact, economics departments in most universities are highly isolated places in the larger world of social science. To trash a scholar as serious and insightful as Ostrom is a shame.
  • What if the commons is actually an important field of study and the fact that most of us never read anything about it during graduate school is something that economic theory lecturers should take into account when formulating their syllabi?

Remember: The Orcs outnumber the Fellowship of the Ring five to one and will be heavily represented in the next generation of economists. Be afraid.

Steve Levitt was right about the import of the Nobel Prize going to Lin Ostrom. It signaled that something was rotten about the mathematical empire and that a new paradigm needs to begin from a different starting point. But what would the new paradigm look like and what would be its theoretical foundation?

To be continued…

Adapted from The Neighborhood Project: Using Evolution to Improve My City, One Block at a Time, published by Little, Brown.

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