Once upon a time, the Nobel Prize in economics was reserved for the titans of macroeconomic schools. For years, the prize also went exclusively to men. Not this year. Elinor Ostrom -- Arthur F. Bentley Professor of Political Science and co-director of the Workshop in Political Theory and Policy Analysis at Indiana University -- is the first woman to take home the Nobel Prize in economics since the inception of the prestigious award in 1969.
The Nobel committee gave the award to Ostrom for her "analysis of economic governance, especially the commons." While studying how natural resources are commonly shared, Ostrom found that the economic principle "the tragedy of the commons" (which states that people will destroy a shared public resource that's limited in supply) doesn't hold true universally.
Ostrom shares the prize with Oliver Williamson, a professor at the University of California, Berkeley, for his separate work on the analysis of economic governance.
At a time when the environment is front and center in many people’s minds, and businesses such as Hewlett-Packard (NYSE: HPQ), Intel (Nasdaq: INTC), and Adobe Systems (Nasdaq: ADBE), are beginning to explore green energy, it is befitting that Ostrom be recognized for her research on real-life commons and managing natural resources.
In a recent interview, Ostrom discussed her research with me, as well as her thoughts on how her theory can be applied to business. Here is an edited transcript of my conversation with the Nobel laureate:
Jennifer Schonberger: Congratulations on winning the Nobel Prize in economics and for being the first woman to do so!
Elinor Ostrom: This is a humbling event for me and one that I deeply appreciate. … We're going to have all women in science winning prizes left and right!
Schonberger: "The tragedy of the commons" is a cornerstone of economics, and one that you have turned on its head. For our readers who are not familiar with [the term], what is the "tragedy of the commons" and why isn't it so tragic any longer, given your findings?
Ostrom: It can still be tragic, but it is not a universal. Garrett Hardin [who developed the theory] told a parable about people using a pasture -- he could have thought of a fishery or a lake or anything else. [The idea is that by] my use [of a resource], I obtained and reduced what was available for others, and I would be motivated to use as much as I could. If all of us did this, we would overuse it and destroy it. Now he did this on a universal basis, which is why he called it a tragedy.
I think it's better to call it a problem of the commons -- and it's still a problem. It can be that people do indeed get into a competitive race -- they've done it in regard to fisheries and the oceans repeatedly. But Hardin indicated that people involved could under no circumstances solve it themselves. That was also wrong. In many small-to-medium-sized resources around the world, people have figured it out, worked together, created their own rules and managed their local resources well. However, this is not true of everyone.
For example, many of the local communities within China have regulated local resources for centuries. China's reforestation rate is better than most other places in the world. But there are places in China that are devastating. So we can't just be optimistic and say there are no problems.
Schonberger: Your research can be applied to real-life issues such as climate change, which are relevant to businesses that will pursue an economic advantage in better environment/green energy. Will your theory be advantageous for these companies?
Ostrom: The theory that my husband developed long ago on polycentric governance is relevant. There will be a report for the World Bank coming out in the next several weeks that I wrote in the spring of last year, where I discussed that there can be positive benefits to locals of reducing greenhouse gases that we should be encouraging ways of developing.
So when a family decides to bike to work, their health is better and their pocket is less drained in buying gas. It helps us all because it reduces greenhouse gases. Now we can't just say, "Everyone will bike to work and that solves it." But we shouldn't ignore that building bike paths locally can make a big difference.
Trying to develop more solar energy in urban areas can make a huge difference, and [so can] finding ways that families and businesses can put solar on their roofs and then tie into the local power firm when they're not using it. There are ways of doing this that can be very effective, and they should be part of the solution. We shouldn't just wait for the big solution to be worked out by the negotiators at international levels.
Schonberger: Companies including technology titan Apple (Nasdaq: AAPL), and three utilities, Exelon (NYSE: EXC), PG&E, and PNM Resources (NYSE: PNM), dropped out of the U.S. Chamber of Commerce recently because they disagree with the business group's stance on climate change policy. There seems to be a corporate movement toward change as it pertains to the environment. What role, if any, can the private sector play in the pursuit of climate change in conjunction with the government?
Ostrom: They can play an immense role. It's in their budget. Companies can save a lot of money if they retool and refit their buildings such that they do two things at the same time: They save money and they reduce greenhouse gas emissions. But it is expensive in the short run. So, [they can find] ways of financing investments in better insulation, investments in windows and shades that enable you to get more sun through during the winter, but less in the summer when you have to have more air conditioning. So weather-specific ways of doing things can save a lot of money and help the environment.
Schonberger: What's the best argument for "cap and trade"?
Ostrom: It is one way of enabling people to negotiate. If, for example, they don't really need their full cap, they can sell it to someone else and can make adjustments in reasonable ways. The cap will have to come down. You can't ever cap it at the level that you'll need to eventually, so you keep reducing it. But it does give people an opportunity to seek out efficient ways of solving the problem.
Schonberger: What's the best argument against "cap and trade"?
Ostrom: The argument against, for some, is that it's unfair because those people have already been the biggest [challengers]. We're going to have a hard time solving that equity problem, and just putting a very vigorous tax on everyone -- maybe unfairly, too, because the wealthy can pay it easier.
Schonberger: Besides the climate, can we apply your research to other public goods such as the Internet?
Ostrom: Yes. In fact, Charlotte Hess and I already have a book out called Understanding Knowledge as a Commons. [In this case,] we have the difference [from natural resources] that knowledge isn't subtractive, but we can start looking at the production processes. We can look at how we can protect people from having their work stolen. For instance, you write a story and you find it in the press another week with someone else's name on it.
But at the same time, we shouldn't put such rigid limitations on it so that somebody else -- like a publisher who's making a fortune out of it for years -- can't make a living. For example, there are new copyright arrangements, which allow quotation without checking, but with due recognition of who the author is.
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