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:
A further problem for consideration is that games in which enforcers have been arranged for by mutual agreement may be mistaken by analysts and public officials for games in which there have been no agreements about how to cooperate and enforce agreements. In other words, some examples of a ‘Game 5’ may be mistaken for a ‘Game 1.’ These situations may be construed to be ‘informal,’ carrying a presumption that they are not lawful. This goes to fundamental presumptions about the nature of governments as external authorities governing over societies.
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:
As noted earlier, if a number of similar orchards are located close to one another, one who hires bees to pollinate his own orchard will in some degree benefit his neighbors. Of course, the strategic placing of the hives will reduce the spillover of bees. But in the absence of any social constraint on behavior, each farmer will tend to take advantage of what spillover does occur and to employ fewer hives himself. Of course, contractual arrangements could be made among all farmers in an area to determine collectively the number of hives to be employed by each, but no such effort is observed. Acknowledging the complication, beekeepers and farmers are quick to point out that a social rule, or custom of the orchards, takes the place of explicit contracting: during the pollination period the owner of an orchard either keeps bees himself or hires as many hives per area as are employed in neighboring orchards of the same type. One failing to comply would be rated as a “bad neighbor,” it is said, and could expect a number of inconveniences imposed on him by other orchard owners. This customary matching of hive densities involves the exchange of gifts of the same kind, which apparently entails lower transaction costs than would be incurred under explicit contracting, where farmers would have to negotiate and make money payments to one another for the bee spillover.
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:
I have no grounds for criticizing Meade and other economists who follow the Pigovian tradition for their use of the bee example to illustrate a theoretical point: certainly, resource allocation would in general differ from what is observed if the factors were “unpaid.” My main criticism, rather, concerns their approach to economic inquiry in failing to investigate the real-world situation and in arriving at policy implications out of sheer imagination. As a result, their work contributes little to our understanding of the actual economic system.
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.