Paul Romer on Elinor Ostrom

There’s been plenty of debate about the first female recipient of the Nobel prize for economics, Elinor Ostrom.

The first female winner of the Nobel prize for economics, Elinor Ostrom

The first female winner of the Nobel prize for economics, Elinor Ostrom

Now one of my favourite economists, Paul Romer, has written a perceptive blog post about her work, and what it tells us about the modern practice of social sciences:

Most economists think that they are building cranes that suspend important theoretical structures from a base that is firmly grounded in first principles. In fact, they almost always invoke a skyhook, some unexplained result without which the entire structure collapses. Elinor Ostrom won the Nobel Prize in Economics because she works from the ground up, building a crane that can support the full range of economic behavior.

When I started studying economics in graduate school, the standard operating procedure was to introduce both technology and rules as skyhooks. If we assumed a particular set of rules and technologies, as though they descended from the sky, then we economists could describe what people would do. Sometimes we compared different sets of rules that a “social planner” might impose but we never said anything about how actual rules were adopted. Crucially, we never even bothered to check that people would actually follow the rules we imposed.

A typical conclusion was that rules that assign property rights and rules that let people trade lead to good outcomes. What’s the skyhook? That people will follow the rules. Why would they respect the property rights of someone else? We had no idea. We might have had in mind something like this: police officers will arrest people who don’t follow the rules. But this is just another skyhook. Who are these police officers? Why do they follow rules? This is not an idle concern. Elinor showed that there are lots of important cases where people follow rules about ownership without police officers. One of the central challenges in understanding failures of economic development is that in many places, police officers don’t follow the rules they are meant to enforce.

Elinor’s fieldwork, followed up by her experimental work, pointed us in exactly the right direction. To understand BOTH why we don’t need police officers in some cases AND why police officers don’t follow the rules in other cases, we have to expand models of human preferences to include a contingent taste for punishing others. In reaching this conclusion, she arrived at a point similar to that reached by Avner Greif (whom the Nobel committee correctly cites.) They, more than anyone else in the profession, spelled out the program that economists should follow. To make the rules that people follow emerge as an equilibrium outcome instead of a skyhook, economists must extend our models of preferences and gather field and experimental evidence on the nature of these preferences.

Here’s a link to one of Ostrom’s best known books, Governing the Commons: The evolution of institutions for collective action.

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