Elinor Ostrom and the Relevance of Economics

by Mario Rizzo  

The work of Elinor Ostrom, the first woman to receive the Nobel Prize in economics, is not very well-known among economists. In fact, I would venture the guess than most economists had not heard of her before the prize was announced yesterday morning.  

Two reasons for this are that her degree is in political science and she has written for publications outside of the mainstream economics journals. Additionally, her work, by and large, lacks the high degree of mathematical formalism now so characteristic of economics.  

Yet the Nobel Prize Committee has done a great service to economics and the greater social-scientific community. When a well-known economist receives the prize little is gained apart from the recognition of a job well done and perhaps some wider public recognition. I do not think that great contributions are made in any discipline because of the incentive effects of an improbable prize. However, in this case the Nobel Committee has brought extraordinary work to the attention of an economics discipline that has become excessively specialized and, perhaps increasingly irrelevant to the real world, as Paul Krugman and others have recently suggested. 

Professor Ostrom’s work is highly relevant to important issues in economic development, common-pool resources, the development of social norms, and the solution of various collective action problems. Her work is also methodologically diverse. She uses experimental methods, field research, and evolutionary game theory. She is not afraid to draw on various disciplines when appropriate: economics, political science, evolutionary psychology, cultural anthropology and so forth.  

She is a very worthy intellectual descendant of Adam Smith who realized that the study of trade based on self-interest needed to be supplemented by a broader view of humankind – individuals capable of the so-called “moral sentiments” like honesty, benevolence, and loyalty, as well as the standard vices.  

Much of Ostrom’s work centers on developing and applying a broader conception of rationality than economists usually employ. The standard conception of rationality is not the rationality of real human beings but the rationality of cognitively-unlimited lightning-fast calculators. This is a purely imaginary construct. On the other hand, Olstrom’s “thick rationality” is the result of trial and error, use of relatively simple heuristics, employment of rules, and the embodiment of cultural norms. To reject standard, improbable rationality is not to reject rationality. It is rather to develop more sophisticated, and yet more realistic, models of rationality.  

“Thick rationality” is a bottom-up phenomenon. It recognizes the importance of local knowledge and diverse approaches in the management of resources. For example, many top-down irrigation projects in developing countries have failed because they have concentrated on the physical aspects of water delivery. Ostrom believes that the institutional aspects are more important. Irrigation systems built by farmers themselves are often more efficient. They deliver more water, are better repaired, and result in higher farm productivity than those built by international agencies. Often these agencies take no notice of local customs, knowledge and incentive structures; the knowledge of the bureaucrat is inferior to the knowledge of the individuals on the ground. 

The central problem on which her employment of the notion of “thick rationality” can shed light is what she calls “social dilemmas.” These are circumstances in which interacting individuals can easily succumb to maximizing their short-term interests to the detriment of their long term interests. To return to our irrigation example, suppose farmers share the use of a creek for irrigation. They face a collective problem of organizing to clear out the fallen trees and brush from the previous winter. Each farmer would like to have the others do it. There are incentives to free-ride on the “public spiritedness” of others – however, everyone may think this way and nothing will get done. Ostrom finds that cooperation will often take place while the “thin” theory of rationality predicts that it will not. She finds that factors such as face-to-face contact (likely when there are small numbers), the equality of each farmer’s stake in the benefits of irrigation, and the ease of monitoring the farmer’s contribution to brush removal all make the likelihood of cooperation greater. 

Elinor Ostrom has and continues to expand the power of a broader conception of rationality – one that Adam Smith would have recognized and been comfortable with – to explain the multifarious forms of human cooperation that conventional economists have been unable to explain. This is a major contribution.

19 thoughts on “Elinor Ostrom and the Relevance of Economics

  1. The best statement I’ve read yet on Ostrom and the prize. I think NIE has been given a well-deserved boost at a time when it’s really needed — all the talk about changing economics by jettisoning rationality is disturbing. And apparently Fama was some sort of favorite among odds makers; ugh…his version of rationality is also disturbing.

    Chalk one up for the middle ground: economics for the real world.

  2. Thanks for this clarification. When I first read the WSJ’s description of Prof. Ostrom’s work, I thought, “Oh, no…another justification for a collectivist view of ‘the commons’.” This post puts her work in perspective.

  3. She is a very worthy intellectual descendant of Adam Smith who realized that the study of trade based on self-interest needed to be supplemented by a broader view of humankind – individuals capable of the so-called “moral sentiments” like honesty, benevolence, and loyalty, as well as the standard vices.

    Good post Mario, but are you suggesting in the quote that (for example) honest, benevolent and loyal behaviour cannot strictly be considered self-interested behavour? I’m not saying that this is implied but could you qualify?

    Is the focus on self-interest vis-a-vis the totality of human behavour too narrow, or is our concept of self-interest itself too narrow?

  4. Exciting stuff! As a layman, it seems to me that Ostrom’s work has increased opportunity for interdisciplinary work between anthropology and economics.

  5. Drewfus,

    This is a big story. The best treatment is by Jeremy Bentham as summarized in Henry Hazlitt’s “The Foundations of Morality.” Bentham talks about “extra (or other)regarding prudence.” This is the case of an individual doing something to help another for the purpose of advancing his own interest. For example,a storeowner may be kind, considerate to a stranger who visits his store because he is interested in getting and keeping customers. But there is also true beneficence which seeks to make the society in which one lives a better place with no thought of direct and concrete rewards to oneself.

  6. Very nice post.

    Elinor Ostrom’s work is a plea in favor of diversity, diversity of disciplines from which it borrows, diversity of methodologies employed and, of course, its call for a recognition of institutional diversity. (I’ll also add her sensitiveness to complexity in both the social and natural spheres which has been ignored by commentators.)

  7. Her work emphasizes the rational side of the basis on which the solutions could be built here forth. If we want to reduce the possibility of clashes and the so inevitable failures of the present models of development, conservation, strategies, economics, finance, ethics, philosophies, regional and religious interactions, and a lot others; then we are left with so less span of time and even lesser alternatives that this feature of her studies can no longer be ignored…

  8. […] Elinor Ostrom, who shared the Nobel Prize in economics last year, pioneered public choice research as to what makes for well governed commons—click for a review by Alex Tabarrok of George Mason University.  Professor Ostrom’s concept of bottom-up “thick rationality,” Mario Rizzo wrote in ThinkMarkets, “recognizes the importance of local knowledge and diverse appro… […]

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