Since I’ve complained about how bad economists are at naming their ideas, I should probably think twice before trying to name an idea myself. However, I want to tempt fate by misnaming an idea from the work of Elinor Ostrom, which I believe generalizes to even wider applications. The wrong name I occasionally use (usually when talking to myself) to describe this phenomenon is “the 5-1 error”.
First, a little background. In his fantastic book, Governing the commons, Elinor Ostrom examines ways to address common pool resource issues. A common resource is something that anyone can access and over which no one has a definite right of ownership. The tragedy of the commons, as described by Garrett Hardin, results in overuse of the resource. Think of a pond with a limited supply of fish that anyone can use. If I know everyone can use it, maybe I should rush there now to catch some fish before everyone else. Everyone has the same idea. Eventually, the pond becomes totally depleted of fish, and everyone is worse off. Ostrom set out to investigate how people in the real world deal with this challenge.
It presents five different ways to solve this problem, described as five different games. In summary, the list is as follows:
Game 1: The standard tragedy of the commons unfolds and the commons resource is exhausted.
Game 2: Central authority is implemented in a way that resembles the operation of regulation in some textbooks and in the minds of some experts – that is, it achieves its intended goals effectively. Problems are solved and resources are allocated efficiently.
Game 3: The central authority is implemented, but very badly. So badly, in fact, that the result is even worse than the Game 1 result.
Game 4: Again, the central authority enforces commons rules, but its errors are kept in a narrow enough band that the result is better than 3, but not as good as 2.
Game 5: People with direct access to the common resource enter into, monitor and enforce agreements and contracts among themselves. Over time, these evolve into a unique order to deal with the unique circumstances of this common resource.
Ostrom’s goal was to better understand how Game 5 works and how it can happen. She didn’t believe that Game 5 was a panacea capable of solving all collective action problems, or that Game 1 was a non-problem. But she did argue that Game 5 was underrated. In a key passage, Ostrom notes one reason why Game 5 is overlooked:
Another issue to consider is that games in which execution officials have been arranged by mutual agreement can be confused by analysts and public officials with games in which there has been Nope agreements on how to cooperate and enforce the agreements. In other words, some examples of “Game 5” can be confused with “Game 1”. These situations can be interpreted as “informal”, implying the presumption that they are not legal. This refers to fundamental assumptions about the nature of governments as external authorities governing societies.
Game 5 is hard to see in specific circumstances, because we don’t know in advance what we’re looking for. We may not notice the evolved institutions, and even undermine them, because we are too busy looking designed establishments. It’s a 5-1 error – at least that’s what I call it. I also generalize the term beyond common-pool resource management and extend it to any area where informal institutions are overlooked by those whose understanding is entirely centered on centralized, top-down rules.
So what would be a concrete example of a 5-1 error? In a classic article titled The fable of the bees, Steven Cheung identifies one related to externalities. He criticizes the work of JE Meade, who argued that beekeeping represents a market failure. Orchard farmers use hives to pollinate their crops, but at least some bees from one farmer’s hives would visit and pollinate the plants of a neighboring farmer’s crop. Since a farmer cannot charge another farmer for these pollination services, the market would undersupply the bees.
Or so Meade supported. Cheung pointed out that all kinds of bottom-up customs have emerged to deal with this problem (and others):
As stated earlier, if a number of similar orchards are located in close proximity to each other, whoever hires bees to pollinate their own orchard will benefit their neighbors to some degree. Of course, strategic placement of hives will reduce bee overrun. But in the absence of any social constraints on behavior, each farmer will tend to take advantage of the spillovers and employ fewer hives himself. Of course, contractual arrangements could be made between all the farmers in an area to collectively determine the number of hives to be employed by each, but no such effort is observed. Recognizing the complication, beekeepers and farmers are quick to point out that a social rule, or orchard custom, replaces explicit contracting: during the pollination period, the owner of an orchard either maintains bees himself, or rent as many hives per area as are employed in neighboring orchards of the same type. Anyone who did not comply would be considered a “bad neighbour”, it is said, and could expect a number of inconveniences imposed on them by other orchard owners. This usual matching of hive densities involves the exchange of gifts of the same type, which apparently results in lower transaction costs than would be incurred under an explicit contract, where farmers would have to bargain and pay each other for bee fallout.
Meade therefore makes a 5-1 error. He was blind to the informal institutions that developed to deal with the issue because he only understood the solutions as coming from explicit regulations. Cheung’s final comment on the results of such an error is worth pondering:
I have no reason to criticize Meade and other economists who follow the Pigouvian tradition for their use of the example of the bee to illustrate a theoretical point: certainly, the allocation of resources would in general be different from what is observed if the factors were “unpaid”. My main criticism, instead, concerns their approach to economic inquiry by failing to investigate the real situation and arriving at policy implications out of sheer imagination. As a result, their work contributes little to our understanding of the real economic system.
Kevin Corcoran is a Marine Corps veteran and health economics and analytics consultant. He holds a Bachelor of Science in Economics from George Mason University.