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Popular Economics Weekly

One-half of the 2009 Nobel Prize in the Economic Sciences was won by a Political Scientist, Elinor Ostrom, the first woman to win the economics’ prize. Professor Ostrom won because she decided to study how peoples and institutions cooperate to manage resources rather then compete for them, from forests to fisheries. And this is leading to a rethinking on whether public or private entities are the better managers of public resources utilized by all.

Her award is a water shed event, because it highlights a growing consensus that collective or community governance may trump individual ownership—the argument for privatization—when one is concerned about sustainability, whether it is conserving resources or maintaining public services.

Wikipedia’s entry describes her work: “Ostrom is considered one of the leading scholars in the study of common pool resources (CPR). In particular, Ostrom’s work emphasizes how humans interact with ecosystems to maintain long-term sustainable resource yields. Common pool resources include many forests, fisheries, oil fields, grazing lands, and irrigation systems. Ostrom’s work has considered how societies have developed diverse institutional arrangements for managing natural resources and avoiding ecosystem collapse in many cases, even though some arrangements have failed to prevent resource exhaustion.”

She is therefore helping to debunk a popular myth, the Tragedy of the Commons, that grew out of the Greek city-state of classical times. It spawned a belief in the superiority of private ownership, the foundation of modern free market capitalism.

Aristotle stated in the Third Century, B.C., “For that which is common to the greatest number has the least care bestowed upon it. Every one thinks chiefly of his own, hardly at all of the common interest; and only when he is himself concerned as an individual. For besides other considerations, everybody is more inclined to neglect the duty which he expects another to fulfill; as in families many attendants are often less useful than a few."

The latest financial market collapse in fact supports the opposite conclusion. Self-interest that wasn’t controlled by communally generated rules and regulations resulted in concentrating on short term profit, to the neglect of longer term economic health.

There was news of a more sustained economic recovery, as well. The Conference Board’s Index of Leading Economic Indicators (LEI), a gauge of the economic outlook for the next three to six months, climbed a greater-than-forecast 1 percent contributing to the biggest six-month gain in 26 years, said the New York-based private research group.

This means growth could continue into next year. “We are mindful that there are headwinds, like there are in every recovery,” said a Credit Suisse economist, “but the leading index is telling you there won’t be a double dip,” referring to a relapse into another recession.

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One of the growth engines is industrial production, which as been rising strongly since July thanks to surging exports. Recovering real estate sales are also providing a boost. The S&P Case-Shiller existing-home price index just had the largest price increase in its history. The 10-City Composite Home Price Index for the U.S. rose 3.6 percent between April and July. This followed a 4.8 percent decline from January to April. The “suddenness of the shift surprised me,” said Dr. Robert Shiller.

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And inventories of existing-home dropped to an 8.5 months supply in September. Sales decreased, but inventory decreased more, so "months of supply" declined. A normal market has under 6 months of supply, so this is still high.

Professor Ostrom’s work confirms that communal interest can be superior to self interest, but the rules cannot be imposed from above. “Groups that can communicate and design their own rules achieve substantial improvements….whereas, subjects who have rules imposed on them…begin to cheat on one another relatively rapidly.”

Will this enable more success in other areas where a communal effort is necessary, such as global warming? That is of a much greater magnitude, but with the advent of the Internet effective worldwide communication is possible, and so international cooperation is becoming more attainable on problems that heretofore were unsolvable.

Harlan Green © 2009