Eleanor Ostrom, Steven Cheung, the 5-1 Error

Given how I’ve complained about how bad economists are at naming their ideas, I should probably think twice about attempting to give a name to an idea myself. Still, I feel like tempting fate by badly naming an idea from the work of Elinor Ostrom, which I believe generalizes to even broader applications. The bad name I occasionally use (usually when talking to myself) to describe this phenomenon is “the 5-1 error.”

First, a little background. In her fantastic book, Governing the Commons, Elinor Ostrom examines ways of dealing with common pool resource problems. A common pool resource is something which anyone can access, and over which nobody has a well-defined property right. The tragedy of the commons, as described by Garrett Hardin, results in the resource being overused. Think of a pond with a limited fish supply, which can be used by anyone. If I know everyone else can use it, I might want to rush out there now to catch fish before anyone else does. Everyone else has the same idea. Ultimately, 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.

She lays out five different ways this problem can turn out, described as five different games. Summarized, the list goes as follows:

Game 1: The standard tragedy of the commons unfolds, and the common pool resource is depleted.

Game 2: Central authority is implemented in a way which resembles how regulation works in some textbooks and the minds of some pundits – that is, it effectively achieves its intended aims. The problems are solved, and resources are allocated efficiently.

Game 3: Central authority is implemented, but very poorly. So poorly, in fact, that the outcome is even worse than the result of Game 1.

Game 4: Yet again, central authority enforces rules over the commons, but its mistakes are kept within a narrow enough band that the outcome is better than 3, though not quite as good as 2.

Game 5: The people with direct access to the common pool resource make, monitor, and enforce agreements and contracts among themselves. Over time, these evolve into a unique order to deal with the unique circumstances of that common pool resource.

Ostrom’s goal was to better understand how Game 5 works and how it can arise. She did not believe Game 5 is a panacea capable of solving all collective action problems, or that Game 1 is a nonissue. But she did argue that Game 5 was underappreciated. In a key passage, Ostrom notes one reason Game 5 gets overlooked:

Game 5 is difficult to see in any specific circumstance, because we don’t know in advance what we’re looking for. We may not notice the evolved institutions, and may even undermine them, because we’re too busy searching for designed institutions. That’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 focused entirely on top down, centralized rules.

So, what would be a real-world example of a 5-1 error? In a classic paper called The Fable of the Bees, Steven Cheung identifies one related to externalities. He criticizes the work of J. E. Meade, who argued that beekeeping represents a market failure. Orchard farmers use beehives to pollenate their crops, but at least some bees from one farmer’s hives would travel to and pollinate plants in a neighboring farmer’s crop. Since one farmer can’t feasibly charge another farmer for those pollination services, the market would underprovide for bees.

Or so Meade argued. Cheung pointed out that all sorts of bottom-up customs emerged to deal with this (and other) issues:

So Meade is committing a 5-1 error. He was blind to the informal institutions that developed to deal with the issue because he only understood solutions as coming from explicit regulations. Cheung’s final comment on the results of such an error is well worth pondering: