Thursday, October 24, 2013

Boundedly rational, but resourceful

Traditional economics assumed that human beings were rational but helpless. Rational in the sense that they had well defined preferences and objectives, and everything they did was consistent with them. But helpless in the sense that when their decisions have impacts on others that do not have any role in deciding outcomes, individuals needed external help, in the usual form of government intervention. Instead, the late Elinor Ostrom, in her Nobel Prize lecture in 2009, argued that real human beings are boundedly rational but resourceful. Individuals are more complex than originally assumed by economists. Real humans are affected by systematic biases in their judgment and decicion-making, but also have resources, such as social preferences, to overcome collective dilemmas. Ostrom also emphasizes that goods are also more complex than originally assumed: we don't have only purely private and purely public goods, but there are goods with intermediate degrees of rivalry and excludability (the two dimensions that define whether a good is private or not). Relatedly, forms of economic organization should not be restricted to government versus market, but many different or intermediate forms, such as communitarian or mixed forms of provision, are very often desirable. But Ostrom had a special distrust for those external interventions that try to impose (usually one-size-fits-all) solutions upon communities without exploring first the ability of communities themselves to find institutions that may alleviate collective problems. A potential interpretation of her words is that social problems should not be left to technocrats, or experts (as suggested by libertarian paternalists such as Thaler and Sunstein), but to communities themselves. Ostrom devoted her career to show that features such as communication, trust, egalitarianism, transparency, participation and long horizons promoted cooperative institutions with just the minimum necessary external intervention. One can interpret this as a call for a minimum government, but I prefer to interpret it as a vote in favour of a better democracy as opposed to technocracy.

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