A New Model of Economics for Christmas

A New Model of Economics for Christmas
Vitality Magazine December-January 2010/2011
By Helke Ferrie

“It is assumed that the momentum for change must come from outside the situation, rather than from the self-reflection and creativity of those within the situation to restructure their own patterns of interaction.”

From Elinor Ostrom’s  speech when receiving the 2009 Nobel Prize for Economics*

Christmas has been largely hijacked by capitalism, it is true – but the underlying desire to meet another’s need and fulfill a loved one’s dream has neither died nor is it likely to as long as human beings exist. Many of us shop till we drop to find that perfect gift.  Of course, we all now realize that there is another invisible price tag attached to what we buy: it has to do with human health and the natural environment on which our health depends.  That second price tag also involves the challenged health of slave laborers in those countries to whom our profit-hungry corporations outsource as much work as possible, and our own health when we buy goods made by that slave labor often laced with all kinds of chemical toxins in fabrics, foods, furniture, electronics, etc.  The wealth of nations can now be readily interpreted in terms of the health of a nations’ people. The pursuit of profit has brought a great deal of sickness for people and for our natural support system, the world of plants, animals, water, earth, and air. The core problem, however, is something very unemotional: economic inefficiency based on illusions about reality and negative assumptions about human nature.

Consider, for example, that 50% of Ontario’s annual budget goes into health care. Will there be money for anything else in the future? Political economist David DeGraw, discussing “economic terrorism”, points to the grim statistics: 50 million US citizens live in poverty and have no access to health care; 50% of all US children use food stamps. (In Canada a million children use food banks.) In 2009, about 1.4 million people filed for bankruptcy, an increase of 32% in one year, and 60% of those were due to medical bills, even though all of them had healthcare insurance, which turned out to be dramatically insufficient. Despite the high concentration of medical research, products, and technology in the US, it rates 37th in overall satisfactory healthcare in the world. The US unemployment rate hovers at 20% (when corrected for the massaged spin information). By 2011 the US national debt will surpass its entire gross national product of over $15 trillion.

Fuzzy stuff like love and respect for nature and valuing the common good above maximization of personal profit, do not generally get expressed in the language of mathematical models, empirical experiments, and hard-core economic analysis of real-life situations. Nor do they get enthusiastic support from publications like “Forbes Magazine” and “Fortune 500”.  But that is what happened when the 2009 Nobel Prize in economics went to  Elinor Ostrom of Indiana and Arizona universities. Her work represents the most radical departure from current economic thinking – and that of the last three centuries, possibly since Adam Smith. The Nobel Committee stated in their press releases on October 12, 2009, that “Ostrom challenged the conventional wisdom that resources held in common must be poorly managed [and showed] that common resources  can be managed successfully by the people who use them, rather than by governments or private companies.” Her many studies over four decades including user-managed fish stocks, pastures, woods, lakes, groundwater basins, decentralized police forces, and more, showed outcomes “better than predicted by standard theories.”  She analyzed the spontaneously arising collective behavioral and administrative rules and how these “promote successful outcomes.” Indeed, Ostrom created a solid research foundation for Margret Mead’s famous observation: “Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.”

To appreciate the tectonic shift involved, we need to look at what it is that Ostrom reinterprets.  The current mess is perfect for this. The world’s economy is dominated by notions of globalization, deregulation, and its attendant spin-doctoring of the emerging facts to suit the dogmas of the Church of Capitalism. These notions made corporate self-interest go viral and brought the world to the brink of a total economic melt-down in October 2008, as the President of the Bank of Canada recently explained so eloquently to CBC radio’s Michael Enright on November 21. (Nevertheless, $ 150 billion were paid out in bonuses to Wall Street executives in 2009 in apparent appreciation of the diligence which wrecked the US economy and messed up the world’s money supply.)

Milton Friedman is the guru of the privatization doctrine (Nobel 1976); Prime Minister Stephen Harper wrote his master’s thesis at university on Friedman’s economic theory. Ostrom’s work has shown Friedman’s theories to be hopelessly flawed. According to Friedman, corporations and free markets unencumbered by government regulation are the source of all wealth; corporations, he insisted, have no social responsibilities whatsoever because, as property of its shareholders only and not of society, the expectation of profit maximization is the corporation’s sole purpose. It’s all about competition for resources and customers and the promise (nightmare?) of endless economic growth. In the 2003 documentary The Corporation, Dr. Robert Hare, an expert in the psychology of psychopaths, identified this attitude as institutionalized psychopathy: such people relate to others superficially, manipulate everything to their own ends, display grandiose notions (“we are number one”), lack empathy, are fundamentally asocial, refuse to accept any responsibility for their actions, and are unable to feel remorse.

The underlying assumption of Friedman’s theory is also that people cannot self-organize without imposed corporate structures. This assumption became well-known through a famous article published in Science in 1968 by Garrett Hardin: “The Tragedy of the Commons.”  He suggested that when people are left to manage a resource they become “trapped in an inexorable tragedy” because each individual will exploit that resource strictly in their own interest until they all contribute to the destruction of that resource and their futures.

Ostrom’s contribution to economic theory transcends that worn-out polarization between modern capitalism on the one hand, which advocates privatizing everything, versus socialism on the other hand which is perceived as advocating only government regulation. Ostrom focused on those successful economic systems  that don’t see people as “either voters or consumers” and which did not succumb to the “tragedy of the commons”.  Instead, they shared a common resource by making “a binding contract to commit themselves to a cooperative strategy they themselves worked out”. They thereby protect and use a common resource. She calls this “polycentric governance”, in contradistinction to the one-size-fits all policies of either the corporation or the state; both state and private corporation require “the burden of organizing collective action through one individual [i.e. a CEO or a government, both with experts pushing paper and ignorant of changing local conditions], whose returns are directly related to the surplus generated.” (Recall the recent $ 150 billion in bonus payouts to CEOs.)

Given that the whole planet, and everything that conventional economic thinking identifies as useful for making big bucks, is in actual fact the birthright of the whole human race, Ostrom’s analysis of these real-world situations is breath-taking, especially  when seen in the context of the current mess. That mess took a long time to evolve – but just as it gets really bad, this 77-year old lady turns up and presents her life’s work glittering with new ideas, new solutions, and a new understanding of human nature to boot. Instead of buying into the “tragedy of the commons” assumption, that people can’t help but kill themselves through rampant self-interest, Ostrom explains in her classic book, Governing the Commons: “… [as I] study empirical phenomena, I presume that individuals try to solve problems as effectively as they can… Instead of presuming  that some individuals are incompetent, evil, or irrational, and that others are omniscient [both assumptions being absurd], I presume that individuals have very similar limited capabilities to reason and figure out the structure of their complex environments.” Strangely, her assumption disproves the tragedy of the commons and explains the tragedy of our current illusory system.

Ostrom questioned this fundamentally amoral quality of the modern economic model and especially its underlying assumption that sees people as viruses, as Agent Smith in the great sci-fi flick, The Matrix, describes them: humans gobble up everything and when they have ruined one environment, they move on to the next to destroy. She also questioned the assertion that this tragedy of the commons could be avoided only through strict externally imposed regulation.

Stated in an oversimplified manner, it seems that North America bought into the psychopathic free market idea with its attendant disregard for environmental limits and social values, while Communist nations chose absolute centralized regulation with its attendant disregard for human rights and corruption among the regulators. Both systems are broke now; both vandalized the planet; both turned out to be very bad for human health.

Ostrom shook off both those ideologies and went out to see what actually happens – what people really do when resources are held in common. She found seven characteristics in successful user-owned projects. These show why they remain  environmentally sustainable as well as beneficial to its users. These observations can be summarized in two principles:

First, successful economic systems, large or small, show continuous communication between all the people who use that resource; it becomes over-exploited only when the users are unable to communicate with each other and then cannot adjust to changing local knowledge and developments. Ostrom observes that “bureaucrats do not have the correct information, while citizens and users of resources do.” That also explains why economies fail when controlled unilaterally top-down (e.g. the Stalinist era) or are shrouded in spin and are non-transparent (e.g. Enron and the current mess). Second, not surprisingly Ostrom found that decentralization was always the cure to a resource-management problem, because the reliance on or imposition of an external expert caused abuse of the resource. When everyone assumes responsibility and is involved in the structure of the project, the infantile reliance on an external, omniscient saviour becomes replaced by a dynamic collective intelligence.

Ostrom¹s research projects were conducted all over the world and include Swiss mountain villages, agriculture in Nepal, decentralized police forces in the U.S., etc. Another example of her type of work done by others is: On Bali, the “Green Revolution” which brought with it chemical fertilizers and centralized organization by foreign experts, nearly ruined the island’s prosperous rice agriculture. It had been regulated for a thousand years by a complex water-temple irrigation network run by the farmers, with each group
focusing on its own area requirements, but all sharing the information. In the end, Bali’s farmers returned to their water-temple system and rescued their rice production.

Ostrom’s principles are also in evidence at Canada’s Mountain Equipment Co-op, Toronto’s Big Carrot Market, the Slow Food and Slow Money movements, and the now famous micro-credit Grameen Bank. The decline of violent crime and all-cause mortality was observed in communities where all members became active participants.  On a much larger scale, those principles operate in the Fortune 500 Lincoln Electric company, established in 1895 and still maintaining billion dollar revenues as if the current economic melt-down never happened. Spain’s Mondragon Co-op, founded in 1956 by a Jesuit priest, employs half a million people who all own 250 enterprises in 40 countries.
Recently, the United Steelworkers in the U.S. decided to join forces with Mondragon in a project of co-operative ownership combined with union representation.

Germany leads world exports since 2003 (no – not China).  US labor lawyer Geoghegan observes: “Germany – that colossus of European socialism – has somehow managed to create a high-wage, unionized economy, without shipping all its jobs abroad or creating a massive trade deficit, or any trade deficit at all.”  Richer than the US, its economic miracle includes six weeks of paid vacation every year, and they have a far healthier population than North America. Germany evolved a “rival form of capitalism” in which workers’ councils and so-called co-determining boards decide how the entire manufacturing sector is run. The law requires that workers “get to elect half the [firm’s] board – the same number of voting directors that the hedge funds get to elect.” Workers have “total access to all financial records as well as the planning documents as if they owned the place” – well, they actually do. It is, of course, in the workers’ interest that shareholders are happy – but the whole system has a rational break on it so that conflicts of interest don’t get out of hand. Everybody in the system knows what’s happening, who makes how much, how the company is performing, and decides on changes as needed.

Could Ostrom’s principles be useful to health care? Her work made such an impact that Obama appointed Dr. Donald Berwick to oversee the US health care reform along those lines she developed. Citing Ostrom in a recent major address, Dr. Berwick sees healthcare as being stuck in the illusion of “the tragedy of the commons”, preventing an efficient health care delivery and in danger of ruining the whole system through overexploitation – from expensive drugs and services that don’t actually cure or prevent disease. He outlined his plan for the implementation of reform explicitly along the lines of Ostrom’s seven characteristics that make a common resource successful.

In July, the UK government totally dismantled the National Health Service bureaucracy and gave the responsibility for the nation’s health to the GPs, who now work together in small local groups. This will be very interesting!

Ostrom’s principles would undoubtedly help to stop the sickness industry which currently fuels much of the stock market; it became possible only because of increasing centralization that recognizes human suffering as a financial opportunity and recast patients as “health care consumers”.

When Ostrom was  asked if the Nobel Prize was a surprise, she could have said yes. After all, everybody was surprised that the Nobel Committee got it that amazingly right at last in their evaluation of economic theory. Oddly, what she did say was: “I was both happy and relieved.” Relieved?! She explained: “Well, relieved in that I was doing a bunch of research through the years [four decades] that many people thought was very radical and people didn’t like it …. I was relieved that, after all these years of struggle, someone really thought it did add up. That’s very nice.”

We are all relieved and happy and agree. It is very nice that some human sense has arrived to help sort out all that deadly abstraction and pompous theory whose arrogant presumptions about human nature have proven so harmful to life and the planet, and been so insulting to our innate spiritual intelligence.


J. Bakan. The Corporation – The Pathological Pursuit of Profit and Power, Viking, 2004

(See also the documentary film on this book, Mongrel Media, 2003)

BBC News: Health,  July 12, 2010: “National Health Service to undergo radical overhaul”, article by N. Triggle

D. M. Berwick, MD (appointed by President Obama to implement the Affordable Care Act) Plenary Address at 21st IHI Annual National Forum on Quality Improvement in Health care, Orlando, FL, December 8, 2009; see also Journal of the American Medical Association, November 24, 2010, vol. 304 no 20 – interview with Dr. Berwick

S. Chopra, Corrupt to the Core – Memoirs of A Health Canada Scientist, Kos 2009 (for “top-down” government derailment of drugs and food safety regulation)

E. Crowell, “Spain’s Mondragon Co-op joins with United Steelworkers”, CCPA Monitor, November 2010

C. Davidson, “US steelworkers plan to experiment with factory ownership”, CCPA Monitor, February 2010

D. DeGraw. “Economic Terrorism: The Consequences are Poverty and Mass Unemployment”, Global Research Articles – google

H. Ferrie. What Part of No! Don’t They Understand? Rescuing Medicine and Food from Government Abuse, Kos, 2008 (download free from www.kospublishing.com)

E. Finn (editor of the Canadian Center for Policy Alternatives Monitor),” National pride, to endure, must have a strong foundation”, CCPA Monitor April 2010

T. Geoghegan. “Consider the Germans” in Harper’s Magazine, March 2010

D. Healy, MD. Let Them Eat Prozac, Lorimer, 2003 (for information on Big Pharma’s “top-down” derailment of medical research)

S. Helfrich ed. Wem gehoert die Welt? Zur Widerentdeckung der Gemeingueter, Heinrich Boell Stiftung, 2009, ISBN 978-3-86581-133-2 (German publication; title in English: Who Owns the World? – Helke Ferrie’s article refers to chapter  3, which was authored by Elinor Ostrom – references are in Helke’s translation)

F. Koller. Spark – How Old-Fashioned Values drive a Twenty-First-Century Corporation: Lessons from Lincoln Electric’s Unique Guaranteed Employment Program, Public Affairs, 2010

J. S. Lansing. Perfect Order: Recognizing Complexity in Bali, Princeton, 2006

M. Lee et al. “Civic Community, Population Change, and Violent Crime in Rural Communities”, Journal of Research in Crime and Delinquency, 2010; vol. 47, issue 1

E. Ostrom. Governing the Commons – The Evolution of Institutions for Collective Action, Cambridge (1990) 22nd printing 2008

E. Ostrom. “Beyond Markets and States: Polycentric Governance of Complex Economic Systems”, revised text of Nobel Lecture delivered December 8, 2009

E. Ostrom etal. Lab Experiments for the Study of Social-Ecological Systems, Science, 2010, vol. 328 (5978):613-617

E. Ostrom, A. Poteete & M. Janssen, Working Together, in press

E. Ostrom in PNAS December 19, 2008, vol. 103 no. 51 p. 19221 f

E. Ostrom, April 18, 2010, Interview in Resilience Science, www.http://rs.resalliance.org

J. Porritt. Capitalism as if the World Matters, Earthscan, revised ed. 2007

R.A. Posner. A Failure of Capitalism – The Crisis of ’08 and the Descent into Depression, Harvard, 2009

Slow Food and Slow Money movements see www.alternet.org

J. Stanford. Economics for Everyone – A Short Guide to the Economics of Capitalism, Fernword, 2008

J. Stanford. “Even with Kerala’s limited economy, its people live better:” in CCPA Monitor, April 2010

W. Wagner & R. Steinzor. Rescuing Science from Politics – Regulation and the Distortion of Scientific Research, Cambridge, 2006

* Elionor Ostrom died June 12, 2012 at the age of 78

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