Eleanor Ostrom, Steven Cheung, the 5-1 Error

Given how I complain about how bad economists are at naming their ideas, I should probably think twice about trying to name my own ideas. Still, I feel like tempting fate by misnaming an idea from Elinor Ostrom’s work, which I believe generalizes to broader applications. The bad name I sometimes use (usually when talking to myself) to describe this phenomenon is the “5-1 error.”

First, a little background. In his excellent book, Commons rule, Elinor Ostrom examines ways to deal with common pool resource problems. A common pool resource is something that anyone can access and over which no one has a specific property right. The tragedy of the commons, as Garrett Hardin describes, is the overuse of resources. Think of a pond with a limited supply of fish, which can be used by anyone. If I know that everyone else can use it, I want to rush to fish now before someone else does. Everyone else has the same idea. Eventually, the pond is completely depleted of fish and everyone is worse off. Ostrom set out to investigate how people in the real world deal with this challenge.

He describes this problem in five different ways, described as five different games. Briefly, the list goes as follows:

Game 1: The standard tragedy of the commons unfolds, and common pool resources erode.

Game 2: Central authority is implemented in a way that some textbooks and some scholars have in mind how regulation works—that is, it effectively achieves its intended goals. Problems are solved, and resources are allocated efficiently.

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

Game 4: Again, the central authority rules over the commons, but its errors are kept within a narrow enough band that the result is better than 3, though not as good as 2.

Game 5: People with direct access to common pool resources create, monitor, and enforce agreements and contracts among themselves. Over time, this common pool of resources evolves into a unique order to deal with unique situations.

Ostrom’s goal was to better understand how Game 5 works and how it might develop. He did not believe that Game 5 was a panacea capable of solving all collective action problems, or that Game 1 was not a problem. But he did Argue that Game 5 was underrated. In a key paragraph, Ostrom notes one reason to overlook Game 5:

A further issue to consider is that games where enforcers are arranged by mutual agreement may be mistaken by analysts and government officials who have played them. no Agreement on how to cooperate and enforce agreements. In other words, some instances of ‘Game 5’ may be mistaken for ‘Game 1’. These situations may be construed as ‘informal’, carrying a presumption that they are not legitimate. This leads to fundamental assumptions about the nature of government as an external authority ruling over society.

Game 5 is hard to watch in any given situation, because we don’t know in advance what we’re looking for. We may not notice evolved institutions, and may even undermine them, because we are too busy searching designed Organization It’s a 5-1 error – at least, that’s what I call it. I generalize the term beyond general pool resource management and extend it to any area that ignores informal institutions whose understanding is focused entirely on top-down, centralized rules.

So, what would be a real-world example of the 5-1 error? A classic paper called The fairy tale of the bee, Steven Cheung identifies one related to externality. He criticized the work of JE Mead, who argued that beekeeping represented a market failure. Garden farmers use bees to pollinate their crops, but at least some of the bees in a farmer’s hive will travel to and pollinate neighboring farmers’ crop plants. Since one farmer cannot potentially charge another farmer for those pollination services, the market will supply less bees.

Or so Mead argued. Cheung notes that all sorts of bottom-up customs have emerged to deal with these (and other) problems:

As noted earlier, if many similar gardens are located close to each other, a person who employs bees to pollinate his own garden will benefit his neighbors to some extent. Of course, strategically placing hives will minimize bee spillover. But in the absence of any social constraints on behavior, each farmer will tend to take advantage of the spillover and employ fewer hives himself. Of course, contractual arrangements could be made between all farmers in an area to collectively determine the number of hives to be employed by each, but no such effort is observed. Acknowledging the complexity, beekeepers and farmers are quick to point out that a social norm, or garden practice, replaces the obvious contract: an orchard owner either keeps bees himself or rents as many hives per area as possible during pollination. Similar types are employed in neighboring gardens. One who failed to comply would be rated as a “bad neighbor”, and was said to expect many inconveniences imposed on him by other garden owners. This traditional matching of hive density involves the exchange of similar gifts, which apparently incurs lower transaction costs than under explicit contracts, where farmers must negotiate and pay each other for bee spraying.

So Meade commits a 5-1 error. He was blind to the informal institutions that had developed to deal with the problem because he understood solutions to come only from explicit regulations. Cheung’s final comment about the consequences of such errors is worth considering:

I have no basis for criticizing Mead and other economists who, following the Pigovian tradition, use the bee example to make a theoretical point: of course, the allocation of resources will differ from what would normally be observed if the factors were “illegal”. My main criticism, rather, concerns their approach to economic inquiry in failing to investigate real-world situations and reaching policy implications beyond mere imagination. As a result, their work contributes little to our understanding of actual economic systems.

Kevin Corcoran is a Marine Corps veteran and a consultant in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason University.

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