Ethics at Work: Going beyond the markets

Ethics at Work Going be

The Nobel Prize for economics was awarded this week to Elinor Ostrom, "for her analysis of economic governance, especially the commons," and to Oliver Williamson, "for his analysis of economic governance, especially the boundaries of the firm." Their common denominator was the dynamics of economic activity that takes place outside of markets. Ever since Adam Smith published The Wealth of Nations in 1776, the world has become aware of the unique power of the "invisible hand" - the way the market system and the price system channel self-interest to serve the general interest. By buying cheap and selling dear, we are really obtaining resources in the least wasteful way and turning them to their most productive uses. Non-market "command" economies such as Soviet Russia or Maoist China (or current-day North Korea) turned out to be dysfunctional. Yet the victory of markets remains quite partial. In fact, the majority of people in market economies never make a penny by buying cheap and selling dear. The vast majority of us are employees who get paid for following orders - just like in Soviet Russia or Maoist China. Some people get bonuses or commissions, but such incentives exist in planned economies as well. Most of our "marketplace" transactions are not really very market-like. Most economists study only markets, but Williamson and Ostrom studied firms and non-market governance. Williamson's work is rather technical, regarding the precise characteristics of production technology that make firms superior to markets and of limited interest to ethicists. The main ethical import I would attribute to his work is the insight that there are good reasons for consolidating and integrating firms besides monopolizing the market, and that today people realize that many firms were dragged into court unjustifiably for antitrust violations. Ostrom's studies are of salient ethical importance. Economists are inclined to think that because people are motivated by self-interest, common ownership is bound to be a disaster. Common pastures will be over-grazed, common fisheries will be over-fished, etc. The solution is to introduce property rights. If one person owns the land, he will charge for access and be motivated to make optimal use of the resource. However, Ostrom found time and again that users of commons (sometimes call "common-pool resources," or CPR) are not as naive as economists make them out to be. They typically make governance agreements, sometimes quite elaborate ones, that have their own ways of solving the "commons problem." The outcomes are always better than traditional analysis would predict, and in many cases are better than markets can achieve. In particular, Ostrom found that under the right circumstances, people are willing to be much more selfless in adhering to rules and enforcing sanctions than simplistic self-interest would imply. Systems work well when they are democratically established and enforced by users, not when they are imposed from above and enforced from outside. Legitimacy and accountability are key factors. While Ostrom's work is often explained in the economic vocabulary of what we call "enlightened self-interest," and what economists call repeated games, in my opinion it is a reminder that while people have a natural tendency to pursue their individual interest, they have an equally natural tendency to pursue collective interests and be good citizens. Certainly people can be selfish and short-sighted, but Ostrom's Nobel Prize acknowledges that we also have a natural gift for cooperation in managing our precious common resources. Asher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).