Beyond Markets and States: Polycentric Governance of Complex Economic Systems

1. Beyond Markets and States: Polycentric Governance of Complex Economic Systems ElinorOstrom Review and Commentary by Gary Lynne

2. Using Meteconomics framing (MEF), dual interest theory (DIT), and dual motive modelIng (DMM) in interpreting, commenting on this paper Framework, Theory, and Model

3. Alternative Economic Framing, Theory and Model • Metaeconomic Framing (MEF): “We needs a Me to be, but without a Me there is no We” • Dual Interest Theory (DIT): Joint and nonseparableSelf&Other-Interest giving rise to an Own-interest • Dual Motive Model (DMM): Egoistic-Hedonistic and Empathy-Sympathy based motives

4. Neural Functioning in MEF Rational Choice (two interests) Ego ‘n’ Empathy: Value Self-Control (Engagement) System 2 Self-interest Other(shared)-interest System 2 Cognition (Intelligence) Egocentric Empathetic Conscious Affective hedonism, “it feels good,” e.g. take more water, maximize profits and wealth Affective “in sympathy with” e.g. share the water, act on the basis of how you would wish to be treated System 1 Automatic (System 1: Subconscious, feelings; two emotional tendencies)

5. Metaecon 101 Dual Interest Theory (DIT) Egoistic-hedonistic path 0G of self-interest Integration, balance and synergy on a rational (including self-control) path 0Z of own(internalized)-dual interests (notice the bit of self-sacrifice in both domains...) Empathetic-sympathetic” path 0M of other (shared)-interest Metaecon has Empathy, and Self-control, at the Core of Economic Framing

6. Dual Interest Theory (DIT) R R/py A' G Primary feature: A bit of sacrifice in both domains, when choosing the eco-path 0Z, seeking the joint own-interest Z A Good x (flow from materials and energy to produce good x, e.g. snorkeling equipment) 3 U G 2 pon/pxo U G B' M B C' U 1 1 U G 3 M U 2 U M C M pn'/px' U o Ro G 0 / R/pn' R/pon Good n (services from a coral reef) “Peace of Mind” Means Pursuing Joint Interests with a Bit of Sacrifice

7. Using MEF, DIT and DMM Review of the Paper

8. Introduction • Draws on standard economic theory while building new theory to explain phenomena that does not fit the dichotomous world of “the market” and “the state” (p. 408) • Scholars shifting from the simple models to more complex, real models

9. Institutional Analysis and Development (IAD) Framework • Calls for addressing the “complex motivational structures” (N: within the “I”) and developing “new theory” of human behavior • Once understood, then “establish diverse… institutional arrangements” that operate at “multiple scales” (N: multiple “We”) (p. 408) • Found that “isolated, anonymous” individuals (N: I-only) overharvest; even “cheap talk” helps (N: some We-influence) (p. 409)

10. Challenging presumptions that governments (N: We/Other-only) or markets (N: I/Self-only) always do a better job • Wants to focus attention on “trust” (p. 409) in a “more general theory of individual choice” (N: Likely not deep-enough; need to go to fundamental motives, the egoistic-hedonistic v. empathetic-sympathetic tendencies)

11. Historically, market was seen as an “optimal” institution (p. 409) for private goods (rivalrous) and “the” government (single governmental entity) for public (nonrivalrous) goods • For the latter, government had to impose rules and use taxes to force self-interest only individuals to temper their behaviors

12. Single governmental unit was to reduce the “chaotic” nature of governance… increase efficiency, limit conflict among governmental units, best serve a “homogenous” view of the public (p. 409) • Cites the Samuelson (1954) classification of goods • Private goods as rival and excludable • Public goods as nonrival and nonexcludable

13. So, simple solutions: • Market to deal with rival and excludable goods (as microeconomics suggests) • Government to deal with nonrival and nonexcludable goods (as public good economics suggests) • And, perhaps most simplistic of all: Presumption of a fully rational consumer and/or voter bringing this about

14. One Model of an Individual • Everyone fully rational … presumed in mainstream economics and game theory • Such an individual: • Knows all possible strategies • Outcomes from each strategy • Rank order for each of these outcomes… know the utility (N: self-interest only utility) • So, rational individual maximizes utility (N: on path 0G; there is no path 0M, no We)

15. Early Efforts…Fuller Understanding of Complex Human Systems • Studying Public Industries • Two models framework found inadequate • Proposed polycentricity… found a diverse array of public and private entities providing public services could be productive, not chaotic • Polycentric means “many centers of decision making”… “formally independent* of each other” (p. 411) • No essential need for a hierarchy

16. Found: • Small to medium sized cities more effective than large cities • Dissatisfied citizens move to their preferred communities • Local incorporated communities can contract with larger producers of services, change contracts if not satisfied (while local areas within larger cities have no choice)

17. Doubling the Types of Goods • Buchanan (1965) had already added “club goods” … private associations to provide nonrival and nonexcludable (within the association) goods • Ostrom and colleagues proposed: • Using “subtractability of use” rather than “rivalry of consumption” • Seeing this use and excludability on a continuum rather than 0,1

18. …more types of goods (continued) • Added 4th type: Common-pool… subtractability like private goods and difficulty of exclusion like public goods: Examples include forests, water systems, fisheries, global atmosphere • Changed name of “club” to “toll” goods… due to many of these goods provided by small scale public as well as private associations

19. Four Types of Goods (p. 413)

20. Developing the IAD • Framework has a nested set of building blocks, recognizing need to go beyond two kinds of goods, two kinds of institutions, and one kind of individual • Builds upon: • Transactions (Commons, 1924) • Logic of the situation (Popper, 1961) • Collective structures (Allport, 1962) • Frames (Goffman, 1974) • Scripts (Schank and Abelson, 1977) • Larger set of considerations in human behavior and outcomes (Koestler, 1973; Simon, 1981, 1995)

21. “Nested” idea: • Framework with most general set of variables, with the “action situation” within it • Theories used to specify working parts of the framework, seeing several compatible theories, including game theory, microeconomic theory, transaction cost theory, public goods/common-pool resource theories • Models make precise assumptions about the motivation of actors and the structure of the situation they are in

22. Framework External Variables Biophysical Conditions Action Situations Interactions Attributes of Community Evaluative Criteria Rules-in-Use Outcomes

23. In specifying structure, theorist needs to posit (p. 415): • Characteristics of the actors (e.g. motivations) • Positions held by actors • Set of actions actors can take • Amount of information actors have • Outcomes that actors jointly affect • Set of functions that map actors and actions at decision nodes into outcomes • Benefits and costs related to actions and outcomes

24. Rational Individuals Helplessly Trapped in Social Dilemmas? • Classic case of Prisoner’s Dilemma: Don’t have capabilities to solve this problem • Keep them apart, in the prison, will “rat” on each other • Solution always is: Government OR market (p. 416) under the presumption that the individuals are “without capabilities to change the structure themselves” (p. 416)

25. Also presumes that individuals cannot solve the collective problem by themselves • So, have rational individuals trapped in social dilemmas (N: Fascinating, in that it is presumed these individuals are not rational enough, we might surmise, to analytically solve the collective problem…but are rational enough to act in markets, or vote-in/bring-in the just right set of government structure and action)

26. Scholars Examining this Proposition • Scholars from diverse disciplines are analyzing • National Research Council brought together team • Meta-analysis of common-pool resource cases • 47 irrigation systems, 40 percent high performance • farmer managed, over 70 percent high performance • Fisheries …some high performance, too

27. On findings about rules, users had created: • Boundary rules for who could use the resource • Choice rules related to the allocation of the flow of resource units • Active forms of monitoring and local sanctioning by the rule breakers (p. 419) • Found no evidence of the “grim trigger” i.e. form of punishment suggested in theory

28. Bundles of Property Rights • Common pool resources in real world had wide array of property rules • Individuals found to have property rights even when could not sell such rights (p. 419) • Drew on Commons (1924) who pointed to “bundles” of rights • Five property rights identified in the case studies: • Access • Withdrawal • Management…right to transform, regulate internal use • Exclusion • Alienation…right to lease or sell any of the other 4-rights

29. Linking Internal Parts: Seven External Rules • Boundary: Specify how actors are chosen for the position, entering and leaving same • Position: Specify a set of positions • Choice: Actions assigned to an actor in a position • Information: Specify channels of communication among actors, and what is in the channel • Scope: Specify the outcomes that could be affected • Aggregation: Individual choices map to larger, intermediate and final outcomes • Payoff: Specify how benefits and costs were to be distributed to actors or positions

30. Design Principles • Boundaries (p. 422): • User Boundaries: Clear and locally understood boundaries • Resource Boundaries: “Clear boundaries that separate a specific common-pool resource from a larger social-ecological system” • Congruence with local conditions: • “Appropriation and provision rules are congruent with local social and environmental conditions” • “Appropriation rules are congruent with provision rules; distribution of costs is proportional to the distribution of benefits”

31. Collective-Choice Arrangements: “Most individuals affected by a resource regime are authorized to participate in making and modifying its rules • Monitoring: • Users: “Individuals who are accountable to or are the users monitor the appropriation and provision levels of the users” • Resource: “Individuals who are accountable to or are the users monitor the condition of the resource” • Graduated Sanctions: Start very low, but become stronger if user repeatedly violates the rule

32. Conflict-Resolution Mechanism: “Rapid, low-cost, local arenas exist for resolving conflicts among users or with officials” • Minimal recognition of rights: “The rights of local users to make their own rules are recognized by the government” • Nested Enterprises: “When a common-pool resource is closely connected to a larger social-ecological system, governance entities are organized in multiple nested layers” (p. 422).

33. Design Principles Synthesize • Ostrom argues these design principles (or “best practices” as she refers to them in fn. 5) work “to synthesize core factors that affect the probability of long-term survival of an institution” (p. 422) • Around 2/3 of 100 cases showed that the “successes” were characterized by these principles (N: hypothesis has to be that empathy-sympathy was a more prominent force in these “success” cases)

34. Common Pool Experiments • Tested game theoretic models consistent* with IAD • Could allocate tokens toward a Market 1 with a fixed return or a Market 2 which functioned like a common-pool resource with returns affected by the actions taken by everyone in the experiment (p. 423) • Subjects overinvested, even worse than Nash equilibrium

35. Then, allowed communication, face-to-face • Provided opportunity for cheap talk • No external party ensured that the promise would be fulfilled • Opportunity for repeated face-to-face communication was extremely successful in increasing joint returns (p. 424)

36. Communication is key variable • Communicate face-to-face, could find good outcomes • Enough communication to design own sanctioning system, works even better • Predictions of noncooperative game theory work only without communication (and then only roughly so)

37. Field experiments gave similar results (p. 425), in Columbia, over 200-users of forests… both face-to-face and not, designs • Another experiment of different design: Given chance to communicate face-to-face in the next round, after a baseline set of experiments, finding that rule forced behavior crowded out cooperative choices

38. Public goods experiments, addressing fishers in an open-access lake in northeastern Brazil; found “other-regarding* preferences” operant • Most if not all the experiments show that: • More cooperation occurs than predicted • Cheap talk increases cooperation • Subjects invest in sanctioning free-riders • Motivational heterogeniety** in all cases

39. More Field Studies Needed • Need field studies that use the IAD framework to develop questions • Looked at irrigation studies in Nepal • Found farmer managed irrigation systems to out perform other organizational forms (p. 427) • Government organizations performed poorly relative to the farmer organizations • Same kind of findings in Japan, India and Sri Lanka

40. Studying forests around the world • Looked at diverse forest governance arrangements in multiple countries • Favorite policy recommendation: Government owned, protected areas • Local monitoring, with some local rights to harvest, generally produces better outcomes; governance has to match the local conditions, and individuals at local level need to be involved

41. Current Theoretical Developments • Earlier theories of rational, helpless individuals trapped in a dilemma: Don’t hold up under scientific scrutiny (p. 429) • Yet, cannot be overly optimistic the dilemmas will always be solved • So, when will a group of individuals be able to self-organize • Need “better theoretical understanding of human behavior” (p. 429)

42. More General Theory of the Individual • Frameworks like IAD organize diverse efforts • Theories are efforts to build understanding by making core assumptions about part of the system, making general predictions • Models used to predict behavior in a particular situation, e.g. a rational choice model tends to work in a highly competive market for private goods

43. Scholars positing (as Ostrom sees this) in three realms: • Capability of boundedly rational individuals • Use of heuristics in making daily decisions • Preferences that individuals have related “to benefits for self as well as norms and preferences related to benefits to others” (p. 430)

44. Rules of thumb, heuristics, often used • Frequent interaction with others helps form these heuristics • Shocks to a system, however, may not be well addressed this way • Individuals may also adapt, learn norms • Strength of an internal commitment could play a role • Valuing outcomes achieved by others is another way to frame this phenomenon

45. …on norms (continued) • “Inequity aversion” is one such “internal norm” • Individuals who regularly work in teams more likely to adopt norms, trust each other • Cannot just assume individuals will, however, adopt norms, especially in situations with large groups • Individual behavior is “strongly affected by the context in which interactions take place” (p. 431)

46. Central Role of Trust • Most efficient “mechanism” to enhance transactional outcomes (citing K. Arrow, 1974) • Yet, collective-action theory has focused on payoffs, rather than trust • Ostrom points to studies that confirm the role of trust*

47. Microinstitutional Level of Analysis • Asserting that context matters is not sufficient to task of explaining how and why individuals often solve social dilemmas • Two contexts at work: • Micro-context, and specific attributes of an action situation • Broader social-ecological context, system in which groups of individuals make decisions

48. Attributes* of micro-context include: • Communication is feasible with the full set of participants • Reputations of participants are known • High marginal per capita return • Entry and exit capabilities • Longer time horizon • Agreed upon sanctioning capabilities

49. Broader Context in the Field • Attributes of the social-ecological system (SES) need to be related to the microcontext • Individuals take actions that are affected by and affect a resource system, resource units, and the governance system • More agreement about microinstitutional variables (coming out of experimental studies) than about the SES variables

50. Several variables have been isolated: • Size, productivity, predictability of a resource system • Extent of mobility of the resource units • Existence of collective-choice rules that the users may adopt authoritatively “in order to change their own operational rules” (p. 434) • Four attributes of users: number, existence of leadership/entrepreneurship, knowledge about the SES, importance of SES to users