A Nobel Prize in Economics Provides Timely Insight for Credit Unions

Last week Elinor Ostrom of Indiana University shared the Nobel Prize in Economics. Her insights speak directly to a critical issue in the credit union system today: the effective management of common resources.

 
 

Last week Elinor Ostrom of Indiana University shared the Nobel Prize in Economics. Her work is described as "practical economics" and "real world research" versus some of the theoretical contributions of prior winners. But most importantly her insights speak directly to a critical issue in the credit union system today: the effective management of common resources.

Refuting the "Tragedy of the Commons" Thesis

An earlier economist, Garrett Hardin, had presented the idea that when no one owns a resource, it will be overused because usage is not controlled and each person has an incentive to use as much as possible before others do. This point of view lead to the conclusion that resources must either be privately owned or controlled by government to prevent the abuse of "common wealth."

This point of view often underlies political and public policy debates such as the current prescriptions for health care reform. Some will argue that the only way to resolve problems is to let the market, that is privately-managed options, allocate the resources most efficiently. Others will say only a government-controlled solution can work effectively.

Ms. Ostrom showed this traditional critique of resources held in common to be an inaccurate description of reality. Using dozens of case studies of communal ownership, she found examples that worked as well as some that led to the tragic outcomes predicted by Hardin. Her award is for identifying the systemic rules for managing common pool resources effectively.

Effective Management of Common Resources

The Nobel award summarized her insights for management of collective resources as follows:

"Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated. Likewise, monitoring and enforcement work better when conducted by insiders than by outsiders. These principals are in stark contrast to the common view that monitoring and sanctions are the responsibility of the state and should be conducted by public employees." (emphasis added)

A Wall Street Journal columnist described the implications of Ostrom's work as follows: ". . .rules should clearly define who gets what, good conflict resolution methods should be in place, people's duty to maintain the resource should be proportional to their benefits, monitoring and punishing is done by the users or someone accountable to the users, and users are allowed to participate in setting and modifying the rules."

Credit Union's Common Resources

Credit unions, at every level of the cooperative system, are founded on the principle of commonly collected resources. Today NCUA directs over $150 billion of the system's resources. Much of these are outside the control of the credit unions that provided the resources in the first place. These include, among others, the NCUSIF at $10 billion, the CLF's $42 billion liquidity draw at Treasury, the $30 billion corporate stabilization fund, and the $50 billion in assets of the two largest corporates which have been put under NCUA's control.

Ms. Ostrom's work challenges this top down approach to the management of common resources. This approach leads to the "tragedy of the commons" in which resources available for common benefit are misused.

This tragedy is unfolding daily as credit unions that could benefit from the system's common capital pool and the CLF's liquidity are denied access. Whereas these same resources are used readily when NCUA puts itself in charge of the same institutions for which access had been previously denied.

The tragedy is not just failing to preserve the legacy of cooperative assets passed to our stewardship. It directly affects thousands of employees who have lost jobs and tens of thousands of members denied loans or other credit union assistance because of the failure to use common capital for the purpose it was collected.

Ms. Ostram's Advice for Credit Unions

Ms. Ostram has done extensive fieldwork all over the world looking at real world conditions rather than building theoretical mathematical models. At a news conference she emphasized the importance of combining political science and other fields with economics as follows:

"One of the most important factors is whether local people monitor each other. Not officials, locals. I'm not denigrating that officials can do something very positive. But what we have ignored is what citizens can do, and the importance of real involvement of the people as opposed to just having someone in Washington. . . make a rule."

 

 

 

Oct. 19, 2009


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