Beyond markets and states: Polycentric governance of complex economic systems

Contemporary research on the outcomes of diverse institutional arrangements for governing common-pool resources (CPRs ) and public goods at multiple scales builds on classical economic theory while developing new theory to explain phenomena that do not fit in a dichotomous world of “the market” and “the state.” Scholars are slowly shifting from positing simple systems to using more complex frameworks, theories, and models to understand the diversity of puzzles and problems facing humans interacting in contemporary societies. The humans we study have complex motivational structures and establish diverse private-for-profit, governmental, and com munity institutional arrangements that operate at multiple scales to generate productive and inno vative as well as destructive and perverse outcomes ( Douglass C. North 1990, 2005 ). In this article, I will describe the intellectual journey that I have taken the last half century from when I began graduate studies in the late 1950s. The early efforts to understand the poly centric water industry in California were formative for me. In addition to working with Vincent Ostrom and Charles M. Tiebout as they formulated the concept of polycentric systems for gov erning metropolitan areas, I studied the efforts of a large group of private and public water producers facing the problem of an overdrafted groundwater basin on the coast and watching saltwater intrusion threaten the possibility of long term use. Then, in the 1970s, I participated with colleagues in the study of polycentric police industries serving US metropolitan areas to find that the dominant theory underlying massive reform proposals was incorrect. Metropolitan areas served by a combination of large and small producers could achieve economies of scale in the production of some police services and avoid diseconomies of scale in the production of others. These early empirical studies led over time to the development of the Institutional Analysis and Development (IAD) framework. A common framework consistent with game theory enabled us to undertake a variety of empirical studies including a meta-analysis of a large number of existing case studies on common-pool resource systems around the world. Carefully designed experimental studies in the lab have enabled us to test precise combinations of structural vari ables to find that isolated, anonymous individuals overharvest from common-pool resources. Simply allowing communication, or “cheap talk,” enables participants to reduce overharvest ing and increase joint payoffs contrary to game theoretical predictions. Large studies of irrigation systems in Nepal and forests around the world challenge the presumption that governments always do a better job than users in organizing and protecting important resources.