Theorising Internal Institutional Diversity: Elinor Ostrom on Rules and Social Conﬂict

Theorising internal institutional diversity: Elinor Ostrom on rules and social conﬂict

Duncan Law August 10, 2015

Abstract In this paper I analyse the work of Elinor Ostrom through the lense of Granovetter’s critique of New Institutional Economics. I argue that Ostrom’s work escapes Granovetter’s critique of theories that presup- pose either under- or over-socialisation of economic actors. I argue however that Ostrom’s theoretical apparatus, while accommodating high degrees of institutional diversity between economic institutions, falls short in its ability to theorise institutional diversity within economic institutions. This has implications for Ostrom’s ability to analyse both social conﬂict and institutional change. While Ostrom’s work therefore represents an important advance on some alternative forms of institutional economics, a more complete theorisation of economic institutions must be capable of better analysing internal institutional diversity.

1 Introduction

In his seminal paper on embeddedness, Granovetter (1985) contrasts economics with economic sociology by arguing that the former unrealistically abstracts from the social norms that inﬂuence all economic action. For Gra- novetter, economics oscillates between theories of under- and over-socialisation: the economic actor is seen as either a rational atomised individual, without any social determinants of action, or as so completely constrained by others’ decision-making as to lack agency altogether. The speciﬁc object of Gra- novetter’s critique is ’New Institutional Economics’, as represented by the

1 work of Oliver Williamson (1975). Granovetter argues that Williamson’s theorisation of his fundamental distinction between markets and hierarchies treats actors within firms as over- and within markets as under-socialised, thereby replicating a core feature of the neoclassical economics that new insti- tutionalism otherwise appears to reject. Granovetter advocates a ’third way’ between these extremes of absent and absolute socialisation - and proposes economic sociology as the discipline best placed to realise this approach. Influential though Williamson’s work is, however, it is only one of the theoretical strands within ’New Institutional Economics’. In this paper I will examine the work of Elinor Ostrom, the co-recipient, with Williamson, of the 2009 Nobel Memorial Prize in Economic Sciences. I will argue that Ostrom’s approach to new institutional economics walks a line between individual agency and local social constraints that escapes Granovetter’s critique. Nevertheless, I will argue that there are important weaknesses in Ostrom’s theorisation of socialisation in economic institutions. Specifically, I will argue that Ostrom retains a tacitly unitary and homogeneous understanding of socialisation, which is not adequate to her own empirical insights into social conflict and conflictual norms within economic institutions.

2 Ostrom on the commons

The principal focus of Ostrom’s work is the analysis of commons governance institutions. In a very wide range of case studies Ostrom analyses governance structures that fall outside the traditional dichotomy of market exchange versus state or firm hierarchy. In particular, Ostrom studies the institutions that manage common-pool resources: depletable resources like fisheries, irrigation systems, pastures and forests, where over-exploitation of the resource is a danger, and access to the resource is difficult or costly to restrict. For traditional economics, such common pool resources will ’naturally’ be over-exploited by narrowly self-interested economic agents: a ’tragedy of the commons’ in the sense defined by Garrett Hardin (1968). On that approach, over-exploitation can only be averted by either centralised state control of the resource, or the enforcement of exclusive property rights. For Ostrom, however, this traditional approach underestimates the range of governance structures that can effectively manage common pool resources. In her influential book Governing the Commons (1990), Ostrom discusses a wide range of case studies of local ’polycentric’ commons governance systems

2 - cases where local communities have self-organised governance structures in- volving neither top-down state control nor private property rights: communal land management in small communities in Switzerland and Japan; irrigation systems in Spain and the Philippines; groundwater basin management in the US; and others. In all these case studies Ostrom is concerned with understanding what makes for effective commons governance institutions. Methodologically speaking, Ostrom’s approach to this question has three dimensions. First, the collection of detailed qualitative data examining how specific commons governance systems function in practice; second, the de- velopment of a theoretical framework aiming to understand in very general terms how to model institutions and institutional change; third and finally the application of this framework to the empirical data, in an attempt to dis- cover both shared features of successful commons governance systems, and common features of institutions that fail. As Ostrom notes, the theoretical dimensions of this approach cannot be cleanly separated from the empirical:

Theories aﬀect the way that a problem is framed, not simply the particular assumptions used in an explanation. (Ostrom 1990: 46)

Two presuppositions in particular have, in Ostrom’s view, lead many economists astray in their analysis of commons governance. First the idea that commons governance is best modeled game-theoretically as a ’prisoner’s dilemma’ - that is, a game in which ’rational’ self-interested strategic play is likely to lead to the outcome of universal non-cooperation, despite the fact that all players would receive greater beneﬁts from universal cooperation. The prisoner’s dilemma, Ostrom argues, is one possible incen- tive structure associated with commons governance; but it is not the only one. Second the idea that the rules of the ’game’ that constrain social actors’ decision-making are given and unchangeable. Ostrom argues that while some of the constraints on economic actors’ decisions are indeed exogenous to social action, at least in the short term - for example, the material constraints of environmental attributes - many such constraints are themselves social, and can therefore be transformed by collective social action. To challenge these presuppositions, Ostrom makes several related moves. First, she distinguishes the rules that shape actors’ actions into three kinds:

3 those that indicate what social actions are permitted, forbidden and required. Second, she analyses institutions in terms of ’nested sets’ of rules:

All rules are nested in another set of rules that deﬁne how the ﬁrst set of rules can be changed. (Ostrom 1990: 51)

This allows Ostrom to develop an account of how social actors can change the constraints they are operating under, remaking the social game they play into one more likely to incentivise stable and cooperative outcomes. For Ostrom the ordinary day-to-day decisions made by economic actors take place within a framework of ’operational rules’: who has access to which resources when; what sanctions will be directed at those who transgress those rules; and who is responsible for monitoring actors’ behaviour and imposing sanctions. These ’operational rules’ are, however, nested within ’collective choice rules’, which govern how economic actors can form or transform the operational rules; and these are in turn nested within ’constitutional rules’ which govern how collective choice rules are made and applied. Ostrom’s system is not reliant on this speciﬁc tripartite division; the important point is that each set of rules is nested within another, ’deeper’ set of rules that governs how the lower level rules can be transformed. By shifting to this ’multi-level’ analysis Ostrom aims to explain how prisoner’s dilemmas can be overcome, not just through cooperative play within the dilemma, but by transforming the entire institutional framework within which decisions are made. This approach marks a signiﬁcant advance on many traditional approaches. At the same time, however, there are important weaknesses in Ostrom’s theoretical account. In the remainder of the paper I will explore one such weakness: Ostrom’s unitary and homogeneous understanding of institutional rules.

3 Rules as common knowledge

For Ostrom, as for Douglass North (1990: 5), institutions should be understood as the ’rules of the game’ that structure economic action (cf. Ostrom 2005: 3, 179). But how does Ostrom understand these rules as inﬂuencing economic life? In Governing the Commons, Ostrom argues that these rules must be shared by all the members of an institutional space:

4 One should not talk about a ’rule’ unless most people whose strategies are aﬀected by it know of its existence and expect others to monitor behaviour and to sanction nonconformance. In other words, working rules are common knowledge (Ostrom 1990: 50)

Ostrom is not here using term ’common knowledge’ in its ordinary-language sense, but as a technical term from game theory:

Common knowledge implies that every participant knows the rules, and knows that others know the rules, and knows that they also know that the participant knows the rules [and so on]. (Ostrom 1990: 50)

Common knowledge in this sense is a very strong assumption for Ostrom to incorporate into her definition of rules. Notably, it is an assumption that has been rejected by many ’traditional’ game theorists. In an influential 1982 paper, for example, Kreps and Wilson showed that even very minor departures from the assumption of common knowledge can produce dramatic changes in equilibrium behaviour, including cooperative behaviour arising from ’reputational’ effects. Ostrom cites this paper favourably, but does not discuss why the common knowledge assumption is nevertheless incorporated into her own definition of game rules. Even if we do not take Ostrom to be committed to the strict ’common knowledge’ assumption, however, it is clear that for Ostrom an institution is a single set of rules shared by all its members. In other words, for Ostrom an institution is a unitary and homogeneous set of rules. The private interests and preferences of the members of an institution may differ, but the rules that are binding on their action are shared and agreed. By its nature, this theoretical framework does not permit Ostrom to theorise institutional structures that involve more than one set of conflicting rules. And yet such scenarios are common in economic life, including in case studies that Ostrom herself discusses. In the fifth chapter of Governing the Commons, for example, Ostrom discusses a case study by Anthony Davis, of small boat fishing communities in Southwest Nova Scotia (Davis 1984). Davis describes the incompatibilities between locally enacted property rights and practices and the regulations mandated by the Department of Fisheries and Oceans. In Davis’ words:

5 these two sets of systems and rules often have different origins, reflect different principles and are motivated by different objec- tives. In fact, much of the conflict between small boat fishermen and the policies and regulations of the federal government can be explained by these differences. (Davis 1984: 140)

Similarly, in a later work on decentralised forestry management (Karma- charya, Karna, and Ostrom 2008), Ostrom and her coauthors write about conflicts over Leasehold Forest usage in Nepal. In a number of the authors’ case studies, government-assigned community usage rights were perceived by local forest users to conflict with traditional community usage, leading to social conflict over access to the land. Some communities resolved these conflicts by shifting de facto usage rights to coincide with local community norms; in other case social conflict was reported to be ongoing and destruc- tive. In her qualitative overview of these cases, Ostrom discusses the conflicts created by different economic actors having different perceptions of the rules that should or do govern usage of these common pool resources. But Ostrom’s theoretical framework cannot easily accommodate this class of ’collective action failure’ since, as we have seen, for Ostrom institutional rules are, by definition, shared by all participants. In terms of Ostrom’s theoretical framework, therefore, conflicts between rules must be understood in one of two ways. Such conflicts can be understood as either:

1. An outright failure of collective action, in which no institutional rules have been established at all.

2. An established institution with agreed-upon rules failing due to high rates of non-compliance among its members.

However, neither of these approaches fully capture the relevant social re- ality in cases like those just discussed. It is not accurate to present a scenario in which multiple conﬂictual sets of rules inhabit the same institutional space as a failure to establish any rules. Lack of consensus around rules and lack of rules are not the same. Furthermore, what may appear from the perspective of one social actor as non-compliance with a consensus set of rules governing the institution, may appear from the perspective of the non-complying actor as compliance with a diﬀerent set of rules which that actor also takes to be - de jure or de facto - governing the institutional space. As sociologists are

6 well aware, one person’s deviance is another person’s norm - but Ostrom’s theoretical framework is unable to capture this insight. Ostrom’s approach is therefore unable to theorise scenarios in which multiple sets of rules inhabit the same institutional space. It is also, for related reasons, unable to capture important classes of institutional transformation.

4 Transforming institutions

As we have seen, Ostrom analyses institutional change by giving a ’multi- level’ account of institutional rules. For Ostrom, day-to-day operational rules are embedded within collective-choice rules, which determine the processes via which operational rules may be changed. Likewise, collective-choice rules are embedded within constitutional rules that themselves determine how collective-choice rules may be changed. In this way, rules may be changed ac- cording to other ’higher level’ rules, through multiple ’layers’ of rule-making. However, just as Ostrom assumes that operational rules are shared by all participants, and is unable to theorise scenarios in which this is not the case, the same is true for collective-choice and constitutional rules. Ostrom’s approach works well for institutions that are embedded within clear consensus hierarchies of rules to determine rules - such as the institutions of US local government she studies in her early work. Ostrom’s approach can also be effective in scenarios where social actors are contingently committed to consensus agreement around rule transformation. However, in scenarios where lower-level rules emerge from higher-level conflict, or where consensus is established through de facto implementation rather than de jure agreement about the appropriate lower level rules, Ostrom’s approach falls short. These points can be illustrated with two classes of scenario. Both describe situations in which different social actors within the same institutional space regard different institutional rules as binding on their actions. In both scenarios a single set of rules ultimately emerges with de facto consensus; but in neither scenario does this happen because of a ’higher level’ process of rule-determination. In the first scenario, we imagine that different sets of actors converge on a single set of rules organically, not through agreement but through shifting expectations of other actors’ behaviours. This process might resemble the movement towards rules-as-equilibrium described by Masahiko Aoki in his Toward a Comparative Institutional Analysis (2001) - an approach which

7 provides a set of resources that in general provide a rich alternative to some of Ostrom’s theoretical commitments. Different actors’ perceptions of the appropriate rules governing their behaviour shift, as they observe others’ behaviours. Eventually, a broadly shared consensus around appropriate rules emerges, without any explicit, or rule-bound, process of rule-determination. We could call this the ’emergent’ possibility for rule-formation. In the second scenario, we imagine that one set of actors possesses suf- ficient social or economic power to simply impose its own preferences about institutional rules on the entire institutional space, by severely sanctioning those who transgress those rules. In this scenario, other social actors may strongly disagree about the appropriate de jure rules governing the space - but have no choice other than to comply with the rules that are de facto imposed, and which therefore attain de facto consensus status. We could call this the ’coercive’ possibility for rule-formation. It is important to note that the ’emergent’ and ’coercive’ possibilities are paradigmatic or ideal-typical. Since social behaviour always involves some level of sanctioning against those who transgress perceived social norms, it may in practice be difficult to draw the line between ’coercive’ and ’emergent’ rules: coercive sanctions are are intrinsic part of the social behaviours that cause a specific rule-consensus to ’emerge’. Nevertheless, the important point is not where or whether to draw the line between ’coercive’ and ’emergent’ rule-formation, but that neither process requires higher-level rules for the determining of lower-level rules. Ostrom’s meta-theory of institutions therefore appears to be unable to theorise important classes of institutional transformation.

5 Conclusion

I began this paper by discussing Granovetter’s classic critique of New Insti- tutional Economics. There Granovetter argued that New Institutional Eco- nomics presents economic actors as either under- or over-socialised. In this paper I have argued that Elinor Ostrom’s work successfully escapes this critique. Ostrom’s economic actors are not atomised individuals; they inhabit a normative space in which their actions are informed and constrained by collectively-determined rules. But neither are they automata whose actions are fully determined by social context. On the contrary, Ostrom’s actors exhibit agency in three distinct ways: a wide range of actions are avail-

8 able within the institutional framework they inhabit; actors can transgress the rules of that framework, in following individual preferences that do not match the expectations of the community; and actors can transform that framework, changing the rules of their institutions via collective social action. In all of these ways, Ostrom’s work provides a more nuanced and sophisticated account of socialisation within economic institutions than the forms of New Institutional Economics Granovetter criticises. I have also argued, however, that Ostrom’s account of this socialisation is ﬂawed in important ways. Most centrally, Ostrom assumes that all social actors within an institutional space regard the same rules as binding on their actions, and that all can participate in a ’higher level’ rule-governed process of institution-formation and -transformation. Several of Ostrom’s own case studies challenge these assumptions. In particular, Ostrom’s theoretical framework cannot easily accommodate internal institutional diversity - institutions in which more than one set of rules are operative - and this limits Ostrom’s ability to theorise important forms of social conﬂict and emergent behaviour. A more complete theory of economic institutions must be able to address this challenge.

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