The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Ostrom, Elinor (1933–2012)

  • Paul Dragos Aligica
  • Peter Boettke
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2923

Abstract

Elinor Ostrom, a recipient of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2009, had a foundational contribution to the Public Choice movement and to the rise of the new institutionalism and has been a key figure in the resurgence of political economy. Her studies of common pool resources, economic governance and institutional diversity are an attempt to transcend the ‘markets vs. states’ dichotomy and are marked by a distinctive approach, relying on multiple methods, interdisciplinary collaborative teamwork and the primacy of empirical observations in field and laboratory settings.

Keywords

Common pool resources Economic governance Institutionalism Public choice Public economies Political economy 

JEL Classifications

B31 

Elinor Ostrom is Distinguished Professor and Arthur F. Bentley Professor of Political Science, Indiana University, Bloomington; Senior Research Director, Workshop in Political Theory and Policy Analysis, Indiana University, Bloomington; and Founding Director, Center for the Study of Institutional Diversity, Arizona State University, Tempe. She was born in Los Angeles in 1933 and received her Ph.D. in Political Science from UCLA in 1965. Ostrom is a recipient of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2009, made a foundational contribution (together with her husband, and co-founder of the Bloomington Workshop in Political Theory and Policy Analysis, Vincent Ostrom) to the Public Choice movement (President of the Public Choice Society, 1982–1984), and has been associated with efforts leading to the resurgence of political economy in economics and political sciences (President of the American Political Science Association, 1996–1997). Also, she has been recognised as a key figure in the rise of the new institutionalism and as an influential advocate of a specific form of methodological pluralism that emphasises intensive empirical work and interdisciplinarity.

Ostrom’s contribution has been complex, prolific and multifaceted, but several themes have gained widespread recognition for her work: her contribution to a better understanding of the nature of economic governance; the development of the notion of ‘public economy’ involving a challenge of the ‘markets vs. states’ dichotomy; her role in the metropolitan governance reform debate; the efforts to develop analytical frameworks for the study of action situations and institutional arrangements; and indeed, her contribution to the study of the ‘commons’ and self-governance. In addition, her distinctive approach to social research, relying substantially on the primacy of empirical observations in field and laboratory settings as well as collaborative teamwork, deserves a special note. This article will briefly outline some elements of these themes.

Beyond Hobbes and Smith

As Elinor Ostrom described it herself, her work is a systematic attempt to transcend the basic dichotomy of modern political economy. On the one hand, there is the tradition defined by Adam Smith’s theory, focused on the pattern of order and the positive consequences emerging out of the independent actions of individuals pursuing their own interests within a given system of rules. On the other hand, there is the tradition rooted in Thomas Hobbes’ theory, in which individual actors, pursuing their own interests and trying to maximise their welfare, behave in ways that lead inevitably to chaos and conflict. From that is derived the necessity of a single centre of power imposing order. These two theories were assumed to be able to answer all important questions. In this context, when confronted with a question such as ‘how far the logic of market organisation can be applied to the organisation of productive activities beyond strictly private goods’ the answer was given by introducing concepts such as market failure and by prescribing a centralised authority to provide for collective goods. In other words, Smith’s concept of market order was considered applicable for all private goods and Hobbes’s conception of the single centre of power and decision for all collective goods (Ostrom 1998b).

But what if the domains of modern political–economic life could not be understood or organised by relying only on the concepts of markets or states? Answering that challenge is probably one of the best ways to see Ostrom’s work: a theoretically informed, empirically based contribution to a larger and bolder attempt to build an alternative to the basic dichotomy of modern political economy. ‘The presence of order in the world’, Elinor Ostrom (1998a) writes, ‘is largely dependent upon the theories used to understand the world. We should not be limited, however, to only the conceptions of order derived from the work of Smith and Hobbes’. We need a theory that ‘offers an alternative that can be used to analyze and prescribe a variety of institutional arrangements to match the extensive variety of collective goods in the world’.

In response to that need, Ostrom has explored a new domain of the complex institutional reality of social life – the rich institutional arrangements that are ‘neither states nor markets’. They are small and large, multi-purpose or just focused on one good or service: suburban municipalities, neighbourhood organisations, condominiums, churches, voluntary associations, or informal entities like those solving the common-pool resources dilemmas. As such they could be seen as a ‘third sector’ (‘public economy’ was one of the suggested names for it), related to, but different from, both ‘the state’ and ‘the market’. Irrespective of how this domain is named, the fact is that a theoretical perspective that takes it into account is substantially different from one based on the classical dichotomy.

If that important aspect is considered, one could get a more nuanced view of Ostrom’s place in Public Choice economics – an intellectual movement with which her work was associated from the very beginning Ostrom 1968, 1986; Ostrom and Ostrom 1971. Buchanan (1977) and Tullock (1970), argue convincingly that state failure is even more systematic and perverse than market failure. The Public Choice theory of Buchanan and Tullock is a theory of state failure. The state’s efficiency must be proved, not postulated. Ostrom – while initially also contributing to the typical arguments regarding ‘state failure’ – went beyond the Buchanan and Tullock demonstration of the fact that in numerous cases the state is far from being ‘the solution’, for her emphasis was not on the ‘bad news’ but on the ‘good news’: a demonstration that, even in the case of public goods and services that the market and the state cannot supply efficiently, people can solve complex cooperation and coordination problems of governance and can develop complex institutional arrangements in order to produce and distribute precisely those goods and services. Self-governance is possible.

Governance and Public Choice

From the very beginning, Ostrom’s work was grounded in the incipient Public Choice revolution. Her doctoral dissertation was an empirical extension of the pathbreaking article by Ostrom et al. (1961) ‘The organization of government in metropolitan areas: a theoretical inquiry’, an article that used modern economic theory to challenge the mainstream views regarding centralised administration and governance. She also drew on The Calculus of Consent by Buchanan and Tullock (1962) and Stigler’s (1962) work on the functions of local government, as well as on Schumpeter’s (1942) discussion of entrepreneurship. Ostrom’s dissertation focused on the collective management of groundwater basins in Southern California and examined the processes used by those individuals that formed water associations to cope with the problem of water availability and quality when no political jurisdiction had the same boundaries as the groundwater basins.

This dissertation experience drew her attention to how disparate individuals could collectively band together to protect a common resource – what would become a defining theme for Ostrom’s work. The experience was also instrumental in shaping her attitude towards ‘heavy duty’ empirical research through case studies and field work, another defining feature of her approach for the rest of her career: ‘Undertaking this study, she wrote, gave me a deep respect for individual case studies based on intensive fieldwork. (…) Individual case studies are a very important method to include along with larger- n field studies, meta-analysis, formal models, and experimental research. None of these should be viewed as the only way or best way to do research’ (Ostrom 2010).

One of the best illustrations of Ostrom’s work is the metropolitan governance reform debate, a debate that she engaged in enthusiastically soon after being offered an Assistant Professor position at Indiana University Bloomington in 1965. Conventional wisdom had been that a metropolitan region should be organised as one large administrative unit functionally integrated by bureaucratic hierarchies. Advocates of metropolitan reform argued in favour of centralisation and against what they called ‘fragmentation’ of urban services (Zimmerman 1970; McGinnis 1999).

Ostrom’s early work (developed together with Vincent Ostrom) challenged the basic tenets of the ‘reformers’. She argued that the optimum scale of production is not the same for all urban public goods and services. Some services may be produced ‘more efficiently on a large scale while other services may be produced more efficiently on a small scale’. Therefore, the existence of multiple agencies interacting and overlapping, far from being a pathological situation, ‘may be in fact a natural and healthy one’, the result of the fact that scale efficiencies and the principles of division of labour, cooperation and exchange function in the public sector too. ‘One need not assume a priori that competition among public agencies is necessarily inefficient’, she wrote. ‘Duplication of functions is assumed to be wasteful and inefficient. Yet we know that efficiency can be realized in a market economy only if multiple firms serve the same market. Overlapping service areas and duplicate facilities are necessary conditions for the maintenance of competition in a market economy. Can we expect similar forces to operate in a public economy?’ (Ostrom and Ostrom 1965).

In addition, Ostrom demonstrated that the variety of relationships between governmental units, public agencies and private businesses coexisting and functioning in metropolitan areas can be coordinated through patterns of inter-organisational arrangements that ‘would manifest market-like characteristics and display both efficiency-inducing and error-correcting behavior’. Coordination in the public sector, she argued, ‘need not rely exclusively upon bureaucratic command structures controlled by chief executives. Instead, the structure of inter-organizational arrangements may create important economic opportunities and evoke self-regulating tendencies’ (Ostrom 1983; Ostrom and Ostrom 1965).

Empirical Research on ‘Public Economies’

Among the most distinctive aspects of Ostrom’s work has been her approach to empirical research. The series of studies produced as part of the metropolitan governance debate are exemplary in this respect. Among the key issues in the metropolitan debate was the impact of the size of a government unit producing a service: was the size affecting positively or negatively the output and efficiency of service provision? To test the competing hypotheses, Ostrom (1972) and her team built an entire research programme. She selected one governmental function (the police) and started to gather the data needed to measure the relationship between department size and the efficiency of policing. At the most basic level, the complex research design concentrated on large centralised police departments versus smaller departments serving similar neighbourhoods observed across multiple indicators. The investigation (based on field teams and participant observation) started in Indianapolis, continued with the Chicago Police Department, and was followed by a massive survey and field study in the St Louis metropolitan area, while replications were undertaken in Grand Rapids, Michigan and in the Nashville–Davidson County area of Tennessee. To test for external validity, the team drew on a large survey of citizens living in 109 cities with populations of more than 10,000, conducted by the National Opinion Research Center and on data from the Municipal Year Book.

In this full set of investigations, writes Ostrom, ‘no one found a single case where a large centralized police department was consistently able to outperform smaller departments serving similar neighborhoods across multiple indicators’. The study challenged on empirical grounds the notion that larger urban governments would always produce superior public services. The presumption that economies of scale were prevalent was wrong; the presumption that you needed a single police department was wrong; and the presumption that individual departments wouldn’t be smart enough to work out ways of coordinating was wrong (Ostrom 2010). Most aspects of police work in fact carried diseconomies of scale.

Ostrom (1976a, b) approached in a similar way the related question of the impact of the number of governments providing a service in a metropolitan area. With the support of the National Science Foundation, she developed a large study of the organisation of service delivery in metropolitan areas. Conventional wisdom and most prior studies had stressed the ‘chaos’ resulting from multiple units of government producing urban services in the same region. In what was to become one of her trademarks, Ostrom’s empirical results were again challenging the ‘self-evident truths’ (Ostrom 2000; Ostrom et al. 2007). But, even more important, they led to a series of empirical analysis-based insights regarding the nature of institutional arrangements that individuals and communities use in order to produce, deliver and consume goods and services. Ostrom et al. 1973, 1978a, b; Ostrom and Parks 1973, 1999.

Her investigations demonstrated that, even in the case of public goods and services that the market and the state cannot supply efficiently, people can develop institutional arrangements in order to produce and distribute. That was not a theoretical possibility but an empirical reality that challenged the theory-based conventional wisdom. For instance, using a conceptual framework based on two variables (the feasibility of exclusion and jointness of use) as well as the ensuing typology of goods (public, private, toll and common pool) she discovered situations when the units of government were ‘collective consumption units’ whose first order of business was to articulate and aggregate demands for those goods that are subject to joint consumption where exclusion is difficult to attain. In such situations, relationships are coordinated among collective consumption and production units by contractual agreements, cooperative arrangements, competitive rivalry and mechanisms of conflict resolution. In a similar way, there are situations in which larger governmental entities are optimal. No single centre of authority is responsible for coordinating all relationships in such a ‘public economy’. Market-like mechanisms can develop competitive pressures that tend to generate higher efficiency than can be gained by enterprises organised as exclusive monopolies and managed by elaborate hierarchies of officials.

To sum up, through an intensive empirical investigation combining multiple methods and teamwork, a complex system was revealed in which not only markets and hierarchies but also more hybrid and peculiar arrangements, including social networks and informal relations, were combined to generate a special institutional architecture. To name it, the notion of ‘public economy’ was introduced. The notion was purposefully chosen ‘to save the concept of “public” from the false notion that “public” meant “the State” (or “centralized systems of governance”) and to make clear the difference from the market economy’. In other words, ‘to show that it is possible to have systems that are neither markets nor states, and which preserve the autonomy and the freedom of choice of the individual’ (Ostrom and Ostrom 1977; Ostrom et al. 1992).

Social Dilemmas and the Commons

This is the context in which one could also read Ostrom’s celebrated studies of the ‘commons’. As the Nobel Prize 2009 press release put it, ‘Ostrom has challenged the conventional wisdom that common property is poorly managed’ by showing that ‘resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest, and she characterizes the rules that promote successful outcomes’.

Her work in this respect is better understood if we note that one of the most interesting and enduring features of her scholarship was a fascination with the dilemmas and paradoxes of social cooperation – ‘action situations’ that imply theoretical and empirical puzzles. A good introduction to this theme is the so-called ‘service paradox’: the conjecture that the increasing professionalisation of public services is accompanied by serious erosion in the quality of those services. To deal with this puzzle, Ostrom mobilised the usual combination of Public Choice conceptual instruments (in this case, the theory of goods) and hard-nosed empiricism. Her investigations revealed a whole series of cases wherein the collaboration between those who supplied a service and those who used it was the factor determining the effective delivery of the service. In other words, in many instances the users of services also function as co-producers, for production was not separated from consumption. And thus one gets to the solution of the ‘service paradox’: The standard assumption of the separation of production from consumption blinded everybody from identifying its source. When professional personnel, writes Ostrom, ‘presume to know what is good for people rather than providing people with opportunities to express their own preferences, we should not be surprised to find that increasing professionalization of public services is accompanied by a serious erosion in the quality of those services’. Hence a policy implication: the organisation of a public economy that ‘gives consideration to economies of consumption as well as of production and provides for the co-ordination of the two is most likely to attain the best results’ (Ostrom and Ostrom 1977).

In a similar way, Ostrom was fascinated by the collective action dilemmas identified by Mancur Olson (1965) and Garrett Hardin (1968). These dilemmas recognised that those harvesting from a common-pool resource (pasture, fisheries or groundwater basins) have incentives to harvest for individual gain as much as (and as fast as) they can, leading to depletion and long-term losses for all. Various empirical studies were indicating the capacity of local users to solve problems of the commons, contrary to the standard rational choice theory predictions. However, it was generally believed to be impossible for individuals involved in such situations to overcome the problems.

Challenged by Reinhard Selten and D. C. North, Ostrom decided to try to understand why some users overcame the tragedy of the commons, while others were unable to do it. In the typical manner, she started with large-scale empirical research. Together with her team from the Workshop in Political Theory and Policy Analysis, she identified over 1000 documented cases related to diverse resources (fisheries, forests, irrigation systems etc.) in many regions of the world. She developed with them the Common-Pool Resource (CPR) database, at that point the largest in the world. That in itself was a remarkable task: ‘Several years were devoted to screening cases to assess the quality and extensiveness of data collected, to record those cases with substantial information, to check with case authors when feasible to improve data quality, and to undertake careful analysis’ (Ostrom 1990, 1999, 2010; Ostrom et al. 1994). Field work in, among other countries, Nepal, Nigeria and Kenya, was combined with in-depth comparative case studies, formal modelling, statistical analysis and experimental studies to test specific hypotheses. In the end, this line of research not only generated a robust body of knowledge regarding CPR governance but also a series of insights about the potential and limits of institutional design principles.

In addition, the CPR research also led to contributions to the theory of property rights, broadly defined. For instance, contrary to the theory stressing the centrality of alienation rights (Demsetz 1967), Schlager and Ostrom (1992) found that user rights of access, withdrawal, management, exclusion and alienation were all important rights and were cumulative. ‘This led to a new conceptual terminology for analyzing bundles of rights within a hierarchy of possible rights (…) and demonstrated, among others, that users did not need alienation rights in order to manage a resource sustainably’ (Ostrom 2010). This conception of property rights is now generally accepted as the main framework for the analysis of property rights systems around the world.

Institutional Analysis: Frameworks and Methods

Throughout her career, an important part of Ostrom’s theoretical effort was dedicated to the development of operational analytical frameworks for the study of institutions (Aligica and Boettke 2009; Ostrom and Walker 2003). The most important in this respect is the Institutional Analysis and Development (IAD) framework (Ostrom 2005), a multi-tier conceptual map based on two elements: first, the distinction between three tiers of decision making (constitutional, collective choice, and operational) and the relations among them; and second, the operationalisation of a conceptual unit – called an action situation – meant to analyse behaviour within institutional arrangements at any of the three tiers of decision making. Ostrom’s endeavour to develop ‘a cumulative syntax that would enable future work on institutional analysis to have a common foundation’ has also lead to a typology of rules that potentially affect action situations. To illustrate the usefulness of analysing the rules that underlie action situations, she examined, among others, familiar models of the bargaining between elected and public bureaucratic officials over the output-cost combination to serve their citizens (Downs 1957; Niskanen 1971; Romer and Rosenthal 1978; McGuire et al. 1979). All these authors derived different predictions about the equilibrium outcome in a bargaining game. ‘Controversy existed’, writes Ostrom (2010), ‘as to whose model was correct. My analysis showed that they were all correct, given the differences in the underlying rules of each model. I was thus able to demonstrate that digging under competing models to examine the specific rules assumed by scholars, explained why the predictions made for the “same” bargaining situation differed so widely’.

Ostrom’s recent efforts have been dedicated to how individual case studies, meta-analyses of multiple cases, large-scale comparative field-based analysis, formal theory, experimental research and agent-based models could be combined in collaborative research practice (Poteete et al. 2010). By highlighting the multiple methods approach, she restates a basic but subtle tenet underlying her philosophy of social research as well as the success of her career: a deep conviction that it is both desirable and possible to build an alternative that goes beyond mechanical applications and formal interpretation and thus to reclaim the spirit of genuine empirical research based on data collection, observation and in-depth analysis.

See Also

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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Paul Dragos Aligica
    • 1
  • Peter Boettke
    • 1
  1. 1.