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This post explains why conventional economic advice to developing countries is designed to cause damage to the economies, not to create growth. Similar comments apply to the current predicament of Greece and others trapped in the European Union of High Finance.

An Islamic WorldView

published in The Nation, on 17th April 2018. Summary of Pre-Budget Seminar at QAU on 17th May 2016. 23m Video Recording of Talk:

Many successful examples show that it is possible to achieve high growth. BRICS countries have achieved enviable economic progress. In particular, Chinese workers have gone from using oxen-driven carts to automobiles within a lifetime, while median income has doubled within a decade. Similarly, the East Asian miracle is a recent event. Even our neighbors, India and Bangladesh, have had higher growth trajectories than those of Pakistan.

It is obviously possible to achieve high growth, but it has not been happening. So, what are the obstacles to achieving high growth rates? The greatest obstacles lie not in the lack of material resources, but in the wrong economic theories, which lead us to wrong policy decisions. On the patterns described in “Confessions of an Economic Hit-Man”, powerful international organisations…

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(continuation of previous post on ET1%: Blindfolds Created by Economic Theory)

Economists have performed an amazing piece of magic, successfully creating a mass deception which has taken in the vast majority of the population of the world. Seeing through this complex and sophisticated trick requires separating, studying and understanding many different elements which all combine to create this illusion. One of the elements is a binary theory of knowledge, according to which theories are either true or false, and this is the only characteristic of theories that we should study. This prevents us from looking at the historical context in which the theories originate, and the functions that these theories serve, in terms of advancing the interests of powerful groups in the social struggles then going on. Social theories cannot be understood without this context, and hiding this context, and the relationships between knowledge and power, is an essential component of the WMD — weapon of mass deception — deployed by the economists to create a mass hallucination. In this post we analyze briefly the concept of Scarcity, which is at the heart of modern Economic Theory.

According to this concept, which was made central to Economics by Lionel Robbins in 1932 (Nature and Significance of Economic Science), there are not enough resources to satisfy the unlimited needs and wants of all people. Accordingly, solutions require increasing resources, or economic growth.  On the surface, this seems like a straightforward statement of the factual position: we need more resources in order to take care of the needs of the poor. Hidden beneath this simplicity is a strategy which is massively favorable to the interests of the top 1%. We bring out some of these hidden implications below.

1.     Failure to Distinguish Needs and Wants

Food supplies per capita have been steadily increasing over the past century, contradicting the Malthusian idea that population grows faster than food supply. In fact, as Gandhi said, “There is enough for everyone’s need, but not enough for everyone’s greed.” Today, there are sufficient resources on the planet to amply take care of the basic needs in terms of food, clothing, housing, health and education.  In particular, the money being spent on treatments for obesity is more than sufficient to provide for all the hungry on the planet. This illustrates the general principle that scarcity for some is caused by excess spending by others, and NOT BY LACK OF RESOURCES.  Concentration of wealth in a few hands is the cause of scarcity, and re-distribution, not growth, is the solution.

My paper on “The Normative Foundations of Scarcity” explains how three separate normative principles are built into the hidden foundations of scarcity. One of these three principles is treating needs and wants as being on par; for example, Samuelson and Nordhaus state the economists must strive to satisfy all needs and wants, whether they are genuine or artificial. This means that the desire of the millionaire for an alligator skin briefcase worth $10,000 dollars takes precedence over the demand of poor hungry children for milk and bread, since there is no money backing the latter demand. Furthermore, while genuine needs are satiable, and there is no shortage of resources to provide for all needs, wants are unlimited, and expand as they are fulfilled.

Islam prohibits, rather than encourages, fulfillment of artificial wants (idle desires, or Hawa). This is in direct opposition to Economists views, which tell us to not question or investigate the origin of wants, and treat them all equally.

ET90%: Genuine needs must be distinguished from, and given priority over, artificial wants. The fundamental problem of economics should be: how can we fulfill the (finite, satiable) basic needs of the entire population, rather than attempting the impossible task of trying to fulfill the insatiable wants of those with wealth, especially since these wants keep increasing as they are met.

Islamic principles are aligned with finding from happiness research that additional consumption over the level of basic needs has no correlation with happiness. Conventional economics embodies the ridiculous view that the purpose of our lives is to maximize the pleasure we obtain from consumption. In fact, consumption is just a necessaity for maintaining our lives, and lasting pleasure and fulfilment comes from pursuit of higher purposes. This is recognized by the Mahbubul-Haq and Amartya Sen theories about Human Development as being the goal of development.  For elaboration, see short post on “the Coca-Cola Theory of Happiness,” or the longer explanation in Prosperity as Human Development, not Wealth

2.     Emphasis on Growth rather than Redistribution

By pointing to shortage rather than excess wealth in the hands of the top 1%, scarcity points us in the WRONG direction regarding how to solve the economic problem. It suggests that we need to have additional resources, in order to be able to feed the poor. This ignores the fact the we currently already have enough resources to feed the poor, so the solution must lie elsewhere. It also ignores the fact that amazing growth has taken place over the past century, but the number of the poor has only increased, rather than decreasing. This is because the majority of the fruits of growth are captured by the rich and powerful, rather than going to the poor. For instance, recent research shows that 85% of the gains in growth have been captured by the top 1% over the past decade, while the bottom 50% have not gained anything.

Amartya Sen’s analysis reveals that famines are caused by lack of “entitlement” of the poor to food, rather than lack of food. Thus it is not scarcity, but the libertarian social norms of absolute rights to property, which need to be changed, to solve the problem of poverty.  The fundamental normative choice which must be made is the following: which of the two takes precedence, the right to property or the right to food and basic needs? Economists have sanctified the right to property over the right to food in the form of the Pareto Principle, and assert that we cannot say whether welfare would be improved if we take wealth away from the ultra-rich in order to feed the hungry. However, there are many ways to argue that the right of the poor takes precedence. For example, Cooter, R. and Rappoport, P (1984) ‘Were the Ordinalists Wrong About Welfare Economics?’ Journal of  Economic Literature, 22 (2) June, 1984, pp. 507-530 argue that we can use objective measures of well-being to show that transfers of superflous wealth of the super-rich to those who need it would lead to increased social welfare. Cardinal utility allowed for this type of reasoning, but ordinal measurement led to the idea that we could not compare welfare across persons, which violates both intuition and social consensus to the contrary. We can base a counter to ET1% on this idea.

ET90%: The responsibility of society to take care of basic needs of all members takes precedence over the right to property of the wealthy.

This principle is firmly endorsed by Islamic Economics. The Quran states that the poor have a right in the wealth of the rich, creating the “entitlement” that is identified as the key to prevention of famines by Amartya Sen. The cause of scarcity is the “stoppage” of the circulation of wealth, as commanded in the Quran. When the wealthy concentrate wealth in their banks, instead of allowing its free circulation, they prevent it from reaching the hands and mouths which need it. Islam offers a two pronged carrot and stick approach to the root problem which creates scarcity:

  1. The compulsory payment of zakah at the rate of 2.5% ensures that a small part of the wealth concentrated in hands of the rich should reach the poor.
  2. In addition, generosity is recognized and praised as a virtue, and the rich are encouraged to spend excess wealth on others who are needy.

It is well known that human behavior is strongly motivated by social recognition, and so recognition and praise for generosity create such behavior, which is an essential component of the solution to our economic problem. In fact, as explicitly recognized by Karl Polanyi in the Great Transformation (see also Gertrude Himmelfarb’s The Idea of Poverty), the market society creates poverty as a social problem by removing the entitlement of the poor to social support, so as to  create a labor market. This requires changing social norms so that selfishness and greed become praiseworthy, while generosity become irrational sentimentality. Solutions to problems of poverty require recognition of the subtle inculcation of pro-property and anti-poverty norms, without explicit mention, in ET1%. This conforms exactly to the necessity of deception to fool the poor into supporting ideas which favor the wealthy, which is the hallmark of ET1%.

3.  Scarcity Versus Abundance Thinking

A diverse literature has emerged from different sources which identifies scarcity as a way of thinking, rather than an objective condition. This is the familiar issue of whether the glass is half full or half empty. The insights from this literature conform to the Islamic view that “True richness is the contentment of the heart”. A rigorous analysis of how the psychology of scarcity affects our behavior and decisions, is given in Mullainathan, Sendhil, and Eldar Shafir. Scarcity: The new science of having less and how it defines our lives. Picador, 2014.

A conscious decision was made in Western societies to encourage greed, so as to create the accumulation of wealth. For instance, Keynes said that:

I see us free, therefore, to return to some of the most sure and certain principles of religion and traditional virtue – that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow. We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin.

But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight.

Keynes believed that sufficient would remove the problem of economic necessity, and lead to economic bliss. However, both empirical evidence and Islamic teachings show that this is not true. Surveys of millionaires show that they do not feel they have sufficient money for economic security. The Easterlin paradox shows that massive amounts of growth has not led to increased happiness. The reasons are simple. As wants are fulfilled, more are generated, since people seek to improve upon the average level of consumption. As stated in Islamic teachings, if you give a man a valley of gold, he will desire another one. Nothing will fill his stomach except the dust of the grave.

Once the psychological nature of scarcity is understood, the remedies for the problem take a radically different shape from those currently being pursued all over the globe. The following measures to handle scarcity are all in harmony with Islamic teachings and would form the basis of an ET90% designed to oppose ET1%

  1. Encourage Abundance thinking. For example, the Quran says that the Lord has provided bountifully for all.
  2. Prohibit envy, and prohibit conspicuous consumption — both of these steps are contained in Islamic teachings.
  3. Prevent excessive consumption (called israf and tabzeer in Islamic teachings), and encourage simple standards of living. This will prevent the rat-race for ever increasing living standrads, wihch causes harm to all.
  4. Encourage gratitude for the blessings we enjoy, and the feeling of contentment. Encourage generosity, which creates the feeling of abundance.
  5. Encourage social responsibility for each other, fostering cooperation and community, which creates social networks which are the source of comfort and support, creating psychological security.

For a more detailed discussion of Scarcity from an Islamic perspective see Scarcity: East and West Journal of Islamic Economics, Banking and Finance, Volume 6, Number 1, January-March 2010. p. 87-104. For a secular discussion of how the concept of scarcity appears objective, but conceals within its framework three different questionable normative judgments, see my paper on The Normative Foundations of Scarcity

 

In my paper on “The Empirical Evidence Against Neoclassical Utility Theory: A Survey of the Literature”, I have argued that economic theories act as a blindfold, preventing economists from seeing basic facts about human behavior, obvious to all others. For instance, economists consider cooperation, generosity, integrity (commitments), and socially responsible behavior, as anomalies requiring explanation, while all others consider these as natural aspects of human behavior.

Far deeper insight into the blindfolds created by economic theory is obtained when we realize that these are not random mistakes, made due to defective reasoning or neglect of empirical evidence. If the shopkeeper systematically makes mistakes which always increase the total bill, we can conclude that the mistakes are purposeful. Similarly, strong and repeated commitment of exactly the same mistakes, flying in face of all empirical evidence, reveals the deep ideological commitments which create these systematic errors.  In particular, the goal of this note is to show that modern economics is not what it claims and pretends to be: an objective, factual and scientific description of the laws governing capitalist economies. Instead, it is actually a branch of moral philosophy, and provides a justification for the inequality and injustice built into the system, by “showing” that these are necessary for the functioning of the system, and the system itself is fair for all participants, and leads to the best possible outcomes.

Contrary to the Shakespearean claim that names do not matter, research shows that desert-dwellers recognize different types of sand using more than seventeen different names, while those who do not have these names in their language also cannot recognize these differences. To highlight the difference, and help recognize it, we will label conventional economics as ET1% — the Economic Theory of the top 1%. In contrast, Islamic Economics champions the cause of the poor, and can be called as ET90% — the economic theory of the bottom 90%. Below, we will illustrate how these two theories are diametrically opposed to each other in the context of eight core concepts of modern economics. We do not claim that this list of deceptions is complete – there are many more ideas which are misleading. However, an understanding of how these eight concepts, listed below, are used to deceive the public will provide sufficient evidence for our central thesis that economic theory should be recognized for what it is: ET1%.

  1. Scarcity
  2. Pareto Efficiency
  3. The Invisible Hand
  4. The Production Function
  5. GNP per Capita
  6. Separation of Economics from Politics/Power
  7. Private Property
  8. Utility Maximization

I will explain, in separate posts, how each of these is a deceptive concept. But before we discuss specific details of how these concepts deceive the general public, some basic principles must be highlighted. Note that the number “1%” is used metaphorically; the actual number of people who benefit massively from capitalism is far less. According to recent OXFAM statistics, about 60 people own more than half of the total wealth on this planet. In any case, the number of people at the top is too small to enable them to establish favorable political and economic systems by force. Instead, they must rely on persuasion. Their strategy is create theories which become widely accepted by the vast majority, which present the economic system as necessary, just, and efficient. As Karl Marx recognized, capitalism works not by force, but by persuading the laborers of the necessity and fairness of their own exploitation. In this process of persuasion, the middle 9%, including especially the intellectuals and the academia, play a crucial role. The educational institutions train and tame the populace into accepting injustice as a natural part of the system. Those who participate in this process of indoctrination are duly rewarded by being allowed the perks and privileges of managing the entire system on behalf of the elite 1%.

One implication of this is that ET1% must have the appearance of fairness and objectivity – that is the only way it can be persuasive to the bottom 90%. However, hidden beneath this appearance must be the reality that the theory is extremely favorable to the interests of the super-rich. Thus, by definition, ET1% is deceptive. We will show, in separate posts, how each of the eight concepts listed above satisfy these criteria, concealing a strong bias towards the rich hidden within an attractive framework which would appeal to all.  In this first post, we just provide an illustration of this principle to clarify the concept.

Mazdak was an ancient Persian prophet/philosopher who preached against private property, and argued in favor of communal ownership of all resources. This would obviously appeal to the poor, who would thereby acquire a share of ownership in the palaces, wealth, and luxuries of the rich. However, the practical effect of the philosophy was the opposite of this egalitarian dream. The rich and powerful were able to defend their properties, and also were able to occupy and take over the property – including wives and children – of the poor, because they had the power to enforce their will upon others. The philosophy provided a cover for their actions because it deprived the poor of their rights to their own property. This is exactly how ET1% works: by appealing to the poor, while working against their interests.

Ten years ago, the collapse of the investment bank Bear Stearns marked a prelude of the 2008 global financial crisis. Founded in 1923, it became one of the world’s largest investment banks and its stock market capitalization was $20 billion in 2007. Extremely active in the hedge fund business, the funds High-Grade Structured-Credit Strategies Fund and Enhanced Leverage Fund owned $20 billion in collateralized debt obligations as of 2006. These derivatives, based on mortgage-backed securities, started losing value in September 2006 since housing prices began to fall.

In January 2008, Moody’s downgraded Bear Stearns’ mortgage-backed securities and this event put pressure on the bank’s  liquidity management. In March 2008, the Federal Reserve held its first emergency weekend meeting in 30 years and finally lent up to $30 billion to Chase to purchase Bear Stearns in order to avoid that the bankruptcy of other over-leveraged investment banks, such as Merrill Lynch and Lehman Brothers (Amadeo, 2018).

After Septmeber 2008, the financial crisis acquired a manifold character involving the socio-economic structures at worldwide level. Although the crisis was triggered in the financial sector, it marked the culmination of a long-term trend of financialisation of the economic system (Herman and Madi, 2018).

Throughout the last forty years, most governments around the world supported the long-run process of neo-liberal reforms that turned out to be characterised by the financialisation of the capitalist economy. In this historical scenario, monopoly-finance capital became increasingly dependent on bubbles that, both in credit and capital markets, proved to be globally the sources of endogenous financial fragility. This process was reinforced, in a vicious circle, by a distribution of income, wealth and power. By negatively influencing labor and working conditions, it rendered increasingly difficult for effective demand to reach (or even approach) the level of full employment. In response to this situation, banking and credit policies also supported by governments and supranational institutions were inducing consumers to expand their spending.

While public spending on social and infrastructural objectives was severely restricted, it expanded for sustaining the income and the demand of powerful groups. In this situation, corporate decision making was increasingly subordinated to speculative financial commitments. A financial conception of investment gained ground in the context where financial innovations aimed to achieve short-term profits with lower capital requirements. Managers and owners of firms privileged financial gains often based on speculative shifts of shareholder values. Changes in corporate ownership, through waves of mergers and acquisitions, created new business models where companies, while highly powerful and concentrated, turned out to be simply bundles of financial assets and liabilities to be traded. Hence, current corporate governance came to have the privilege of mobility, liquidity and short-term profits based on high levels of debt.

In the new millenium, a trend of high expansion of financial assets, while economic growth remains limited and sporadic, gave way to widespread unemployment, income gaps and less welfare. The same policies that obliterated social services and kept labor cheap favoured global enterprises and financial deepening. Besides, the onset of the new millennium represents a new age of democracy where democracy allows for election to office but not to power. These questions reflect on issues of current power, politics and economics in a social context where democratic institutions are being threatened (Madi, 2015).

Indeed, in contemporary capitalist societies, the global financial architecture favoured the expansion of financial assets, capital mobility and short-term investment decisions – increasingly subordinated to rules of portfolio risk management. In this scenario, changes in productive organisation were based on competitiveness and corporate governance criteria. Therefore, job instability and fragile conditions of social protection turned out to put pressure on the redefinition of survival strategies. As a result of the new trends in capital accumulation and production, workers turned out to redefine their skills, become informal entrepreneurs or migrate, among other examples of the current worldwide challenges to citizens. Considering this background, governments faced increasing challenges to support an ethically defensible approach to working conditions. While money is an end in itself social behaviours have mainly turned out to be guided by the profit motive. Consequently, social cohesion was reduced since groups of specific interests turned out to spread their actions and expectations in ways that are desirable to the interest group. Indeed, the outstanding conflicts between solidarity and particular interests revealed growing tensions between ethical values and individual principles in capitalist societies.

This situation poses a major challenge to economic theory and policy action. In fact, after ten years from the 2008, it is evident by now that not much changed in the “mainstream way” of addressing the economic crisis. The prevalent tendency has been to conceive the crisis as caused by an excess of imprudent speculation, with little questioning of the economic and institutional “fundaments” that paved the way to that course of events. Consequently, the policies addressing the crisis rarely went beyond short-term proposals. Indeed, the policy measures have been far from still solving the structural aspects of the crisis.

In the next decade: will a new reality of disruptive innovations in business and markets create higher levels of inequality within and among nations? Will massive investments in green technology lead the world toward a cleaner future? How can we assess the model of governance and development of China?

In short, how will we look back on 2018 a decade from now?

 

References

Amadeo, K. (2018) Bearn Stearns, Its Collapse, and Bailout. How a Bank That Survived the Depression Started the Great Recession, March 14. https://www.thebalance.com/bearn-stearns-collapse-and-bailout-3305613

Arestis, P. and Sawyer, M. (eds.) (2010) 21st Century Keynesian Economics. Annual Edition of International Papers in Political Economy. Houndmills, Basingstoke: Palgrave Macmillan.

Davidson, P. (2009) The Keynes Solution: The Path to Global Economic Prosperity. Basingstoke: Palgrave Macmillan.

Foster, W.T. and Catchings, W. (1926) The Dilemma of Thrift. Pollak Foundation for Economic Research.

Galbraith, J.K. (1958) The Affluent Society. New York: Mariner Books, second edition 1998.

Hansen, Alvin H. (1939), “Economic Progress and Declining Population Growth”, American Economic Review, 29(1): 1-15.

Harcourt, G. and Kriesler, P. (eds.) (2013) The Oxford Handbook of Post Keynesian Economics. Oxford: Oxford University Press.

Hermann, A. (2014a) “The Essays in Persuasion of John Maynard Keynes and Their Relevance for the Economic Problems of Today”. In Hölscher, J. and Klaes, M. (eds.) Keynes’s Economic Consequences of the Peace: A Reappraisal. London: Pickering and Chatto.

Hermann, A. (2015) The Systemic Nature of the Economic Crisis: The Perspectives of Heterodox Economics and Psychoanalysis. London and New York: Routledge.

The root cause of our hopelessly defective economic theories is a fundamentally misguided model of human behavior. Modern economic theory assesses the impact of policies by replacing all human beings with homo economicus, which is a brain connected to a mouth and stomach. Because the heart and soul of human beings is removed from the picture before the economist begins his calculations, economists are routinely baffled by behavioral economics, based on actual behavior instead of hypothesis. Topping this deep ignorance is an amazing arrogance about “microeconomic foundations” — that even if macro is wrong, at least our micro theories rest on solid foundations! Such assertions leave me speechless; what can you say to someone who confidently claims to be Napoleon Bonaparte ?

Because of complete failure to understand human beings, economists subscribe to a ridiculous theory of human welfare — it is monotonic in consumption. All of us act as if our sole purpose in life is to maximize the utility obtained from consumption. Economists have never heard of the Buddha who taught that the root of suffering is attachment to material pleasures obtained from consumption. Yet the illusion that increasing consumption leads to increasing welfare has been clearly exposed by Easterlin. Economists continue to struggle to counter and explain away the Easterlin Paradox, since it contradicts their firm belief in the “Coca-Cola theory of happiness”. This is briefly described below, in an excerpt from my previous post on “The Search for Knowledge” :

The second idea that we must unlearn is the “Coca-Cola theory of happiness”, which is at the heart of modern economics. If a cool and refreshing drink makes a hot and thirsty man very happy, he should not deduce that he has stumbled upon the formula for a lifetime of happiness. It would be very foolish of him to build a hot sauna next to a refrigerator stocked with cases of cola, and market it as the ultimate pleasure machine. The economists’ idea that the purpose of our lives is maximization of the utility of lifetime consumption is equally foolish. Consumption and acquisition of material goods provide short run happiness but have zero correlation with long-term happiness. Long run happiness depends not on consumption, but rather on cultivation of character traits like gratitude, contentment, and compassion, as well as cultivation of social relationships – loving, and being loved.

Heterodox economists are attempting to find a technical fix to the problems of modern economic theory. In my view, we cannot launch a revolution by changing the equations we use. The changes required are much deeper — we need to change the way we understand human beings. We need to understand that “Revealed Preference” is a disastrous mistake — by avoiding thinking about the unobservable preferences in our hearts, and replacing them by observable behaviors, we prefer a shallow understanding to a deep understanding. The choice may be guided by feelings/emotions which are inherently unobservable, but we can learn about them by looking into our own hearts, since we are human beings. By ruling out introspection, and asking human beings why they do what they do, we rule out the possibility of understanding human behavior. Economists are religiously committed methodologically to “rational” behavior. They will not consider models of human behavior which allow humans to be whimsical or emotional. Even the alternative models, like Prospect Theory, which are being constructed, endow human beings with computational and informational capacities they do not possess. This blocks the possibility of knowledge. Unless we re-introduce the heart and soul into human beings, we will continue to fail to understand human behavior in any of the realms of economics, politics and society.

 

The Islamic conception of “knowledge” differs radically from the western concept. Thus, necessarily, methods for seeking knowledge — research methodology — must also differ. This lecture explains some of the major differences in Eastern and Western approaches to knowledge.

An Islamic WorldView

Published in The Nation, 12th Mar 2018. This is a summary of a lecture at PPMI conducted for training of new inductees at the MoPD&R. An 85m video of the entire talk: Research Methodology Training Lecture:  shortlink: bit.do/azs4k

The Search for Knowledge (2265 word summary) 

As Muslims, we are asked to “seek knowledge from the cradle to the grave”. As a first step, it is essential to have clarity about our goals: “what is the knowledge we seek?”. Surprisingly, the definition of knowledge is a matter of ongoing debate and controversy.  To understand this better, it is useful to consider two categories – knowledge of the external world around us, and knowledge of our internal world. The two categories complement each other, and both are necessary for our personal and collective affairs. It should be obvious that the methods required to pursue these two types of knowledge…

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Elinor Ostrom was born in the year of 1933 in California, United States. Almost tem years after getting her doctorate in Political Science (University of California), she became professor at the Indiana University Department of Political Science in 1974. Over her long academic career, her activities included extensive field experiences in underdeveloped countries and active participation in many professional associations, such as the American Political Science Association. She was awarded 12 honorary doctorates from universities around the world and three years before her death Elinor Ostrom and Oliver E. Williamson won the 2009 Nobel Prize in Economic Sciences. She was the only woman ever to win the Nobel  Prize in Economics.

Her approach to social and ecological systems highlights the complexity of natural and human systems. In her famous book, Governing the Commons: The Evolution of Institutions for Collective Action (1990), Elinor Ostrom focused on the capacity of people around the globe to create long-run resilient arrangements for protecting environmental resources. In particular, she studied how groups of people manage and preserve common-pool resources such as forests and water supplies. However, collective actions have not inevitably emerged in all groups of people. Ostrom defined common or common-pool resources as public goods with finite benefits. Therefore, common-pool resources can be potentially used beyond the limits of sustainability because of the lack of exclusion of users. This creates an incentive for increasing the rate of use of this resource above its physical or biological renewal. Besides, her research pointed out that common property is a kind of institutional arrangement that regulates ownership and responsibility.

Considering this framework, Ostrom developed a theoretical approach to the management of common-pool resources at local and global levels where polycentric systems of governance refer to build collective-actions. In this respect, she considered there is not one ideal governance regime, but a variety of regimes of governance that might include: rules of appropriation of  resources, rules of maintenance of resources, rules of monitoring and enforcement of the appropriation and obligation activities, rules for of conflict resolution,  besides the evaluation of the performance of the resource system and the strategies of participants to change previous rules. Indeed, the users of common-pool resource can work together to enhance the  sustainable governance of  their commons by collective action. Indeed, under her view, successful commons’ self-governance institutional arrangements depend on: the coherence between the resource environment and its self-government structure, the enforcement of rules through effective monitoring and sanctions, and the adoption of low-cost conflict resolution mechanisms.

According to Ostrom, adaptive governance is related to changing rules and enforcement mechanisms over time since institutional arrangements are able to cope with human and natural complex systems. As a result, citizens, governments, businessmen, and resource users  might deal with collective-action problems in diferente ways at diverse scales. When considering the relations between urban public policies and the commons, her latest works highlighted the challenges to collective-action in metropolitan areas where  citizens can less effectively articulate preferences, define problems and choice packages of urban public goods and services. Under her understading, the competition for contracts in urban goods and services might foster technological innovations and social co-production to find out new ways to face the social and environmental needs.

Indeed, Elinor Ostrom´s contribution adds to our understanding how collective actions and polycentric arrangements of governance  can influence economic outcomes, human behaviours  and institutions towards growing resilience and sustainability. In this attempt, she crossed traditional boundaries between political science and economics.

 

References.

Madi, M. A. ( 2017) Puralist Readings in Economics: key-concepts and policy tools for the 21st century. Bentham Publishers.