On a late-summer afternoon of 1938, two eleven-year-old girls waded into the water in Stora Rör harbor on the Baltic island of Öland. They were awaiting their mother, who was returning by ferry from a hospital visit on the mainland. Unbeknownst to the girls, the harbor had been recently dredged. Where there used to be shallow sands, the water was now cold, dark, and deep. The girls couldn’t swim. They drowned mere feet from safety—in full view of a powerless little sister on the beach.
The community was shaken. It resolved that no such tragedy should ever happen again. To make sure every child would learn to swim, the community decided to offer swimming lessons to anyone interested. The Stora Rör Swimming Association, founded that same year, is still going strong. It’s enrolled thousands of children, adolescents, and adults. My grandmother, a physical-education teacher by training, was one of its first instructors. My father, myself, and my children all learned how to swim there.
It’s impossible to know if the association has saved lives. It may well have. The community has been spared, although kids play in and fall into the water all the time. Nationwide, drowning is the leading cause of death for Swedish kids between one and six years of age.
We do know that the association has had many other beneficial effects. It has offered healthy, active outdoor summer activities for generations of kids. The activities of the association remain open to all. Fees are nominal. Children come from families of farmers and refugees, artists and writers, university professors and CEOs of major corporations, locals and tourists.
The benefits extend beyond the participants themselves. Local young adults can work as swimming teachers. They get money, training, and early work experience. The cold seawater may even build character. Lifelong friendships have been forged in the water, or on the shoreline. Meanwhile, the association has become a trusted community partner. The city that owns the beach and its facilities turns to the association for information about what improvements and services are needed, helping funnel tax money into the projects most valuable to the community.
The association itself is entirely self-funded. It receives no taxpayer money at all. To keep fees low and activities accessible, it needs a dependable source of revenue. For better or worse, Sweden doesn’t have a tradition of charitable giving like that found in the U.S. or U.K. Direct donations are entirely insufficient. Instead, the association gets a good chunk of its revenue from an annual charity auction. Members donate home-baked goods, home-made jams and marmalades, original art—or whatever they happen to be good at making. The donated goods are then auctioned off to other members.
The auction generates hilarious amounts of revenue because members compete to bid the most absurd amounts. A modest, although delicious, home-baked cake can easily fetch the equivalent of £75 or more. The auction works, not only in the sense that it raises the requisite funds with minimal transaction costs but also in the sense that it extracts the funds from those people who can most afford to give. Members who are strapped for cash don’t need to bid at all. Others can fork out as much as they want in exchange for cinnamon buns, the satisfaction of having won a bidding war with their neighbors, and a reputation for gracious generosity.
In economic terms, the Stora Rör Swimming Association is an institution. It’s a set of rules, or “prescriptions,” that humans use to structure all sorts of repeated interactions. These rules can be formalized in a governing document. The constitution of the association says that you have to pay dues if you want to remain a member in good standing, for example. But the rules that define the institution don’t need to be written down. They don’t even need to be formulated in words. “Attend the charity auction and bid on things if you can afford it.” “Volunteer to serve on the board when it’s your turn.” “Treat swimming teachers with respect.” These are all unwritten rules. They may never have been formulated quite like this before. Still, they’re widely—if not universally—followed. And, from an economic perspective, these rules taken together define what sort of thing the Swimming Association is.
Economist Elinor Ostrom studied institutions throughout her career. She wanted to know what institutions do, how and why they work, how they appear and evolve over time, how we can build and improve them, and, finally, how to share that knowledge with the rest of us. She believed in the power of economics to “bring out the best in humans.” The way to do it, she thought, was to help them build community—developing the rich network of relationships that form the fabric of a society.
Elinor Ostrom believed in the power of economics to “bring out the best in humans.” The way to do it, she thought, was to help them build community.
She did not believe in laissez-faire economics, which advocates standing by while waiting for things to sort themselves out. Nor did she believe in command-and-control solutions, which favor fixing problems by means of central planning and social engineering. Instead, Ostrom believed the economist should properly act as a catalyst of self-governance. That means helping people build institutions that work for them, given where they are.
Ostrom’s research earned her the Nobel Memorial Prize in 2009. She was the first woman economics laureate. Her book Governing the Commons is a citation classic, with more than 47,000 citations at the time of writing.
Ostrom did original field research, studying things such as the management of groundwater basins in the 1960s and policing in large U.S. metropolitan areas. This research was done on location, sometimes in the back of police cars and on city streets. She and her team performed a long series of laboratory experiments, which allowed her to independently vary different parameters in a controlled setting. She did her own large-scale studies, e.g., on irrigation systems in Nepal and forest management across the world. Finally, she built a database of case studies from a variety of fields: anthropology, sociology, history, ecology, political science, forestry, etc. Her multifaceted approach allowed her to make inferences about what worked and what did not.
Ostrom found that some communities remain “remorsefully trapped into destroying their own resources,” while others “have broken out of the trap inherent in the commons dilemma.” Which internal and external factors predict whether a community will remain shackled by the commons dilemma, she asked, and which will succeed in breaking out of it?
Ostrom found that some communities remain “remorsefully trapped into destroying their own resources,” while others “have broken out of the trap inherent in the commons dilemma.”
Ostrom did not believe in quick fixes and one-size-fits-all solutions. Any successful solution, she believed, must fit the specific social and ecological setting. It must be responsive to local knowledge, tradition, and values. The scheme that worked in one place won’t necessarily work elsewhere. “By ‘successful,’” Ostrom wrote, “I mean institutions that enable individuals to achieve productive outcomes in situations where temptations to free-ride and shirk are ever present.”
She articulated her fundamental insights in the form of eight design principles. The principles are not laws of nature. No one principle or set of principles will guarantee success. Nor did she mean to suggest that communities that developed successful institutions necessarily had articulated these principles or been guided by them. But institutions consistent with these principles, Ostrom believed, were more likely to deliver the goods in a sustainable and acceptable manner.
Elinor Ostrom’s eight design principles:
1. Clearly defined boundaries
It needs to be clear which specific resource the institution is supposed to govern, and how to distinguish it from the broader social and ecological system of which it is part. Relatedly, the size of the institution needs to be matched to the size of the problem.
2. Congruence between rules and local conditions
Rules need to be tailored to local conditions. Rules that fail to match local conditions are unlikely to succeed, no matter how well they have worked elsewhere. Again, no set of rules will work everywhere.
3. Collective-choice arrangements
The people who are affected by institution rules should be allowed to participate in making and modifying them. This ensures first-hand knowledge is incorporated into the rules. Giving insiders a voice might also make them more invested in the institution, and more favorably disposed to following its rules.
Someone needs to pay attention to the condition of the common-pool resource or public good, and to the performance of users and providers of the good. The monitors can be other users or providers.
5. Graduated sanctions
There must be sanctions in place. Sanctions, like monitoring, don’t need to be 100 percent effective, but some sanctions are required if we want individual incentives to be aligned with the common good, and people to follow the rules.
6. Conflict-resolution mechanisms
Users and providers must have access to some arena in which they can air and resolve their disagreements. The procedure should be low in cost, both in time and in other resources.
7. Minimal recognition of rights to organize
Governmental authorities must recognize, or at least not challenge, the right of users and providers to build their own institutions.
8. Nested enterprises
Successful communities build multiple stable and long-lasting institutions of different sizes, operating at different levels, to manage the resources and goods in the social and ecological system of which they are part at that level. The result is a system of overlapping and nested institutions, each of whose size is matched to the size of the problem.
The Stora Rör Swimming Association is a perfect example of the sort of institution that occupied Ostrom her entire adult life. The association emerged as a solution to a problem identified by the people most affected by it. It’s modest in size and scope. It’s as large as it needs to be to fix the problem, but not much larger than that. It’s run in a manner consistent with the values of the community. It’s taken a form that the original members did not design and could not have predicted, but which reflects knowledge of local conditions and available resources. It blurs the distinction between individual and collective, as it appears on a scale different from both. It also blurs the distinction between market and state, as it’s not taking advantage of either market or government solutions. Above all, it operates with the consent of the governed. People willingly—enthusiastically, even—agree to be bound by association rules in order to take advantage of its benefits. People consent because the benefits vastly exceed the costs—and the burdens and joys are distributed fairly across the community.
Where people living together face problems that have not yet been solved, there’s a good chance that the solution could take the form of an institution.
Perhaps you find the story about the Stora Rör Swimming Association entirely unremarkable. You may feel an urge to point out that organizations of this kind exist all over the world, and not just on windswept Baltic islands. And you’d be right. That’s the point! Institutions like this exist everywhere people live together in communities. They appear in rich countries and in poor, in peacetime and in war. Sometimes they’re legally chartered, sometimes entirely informal. Sometimes they’re smaller, involving merely a handful of people or households. Sometimes they’re larger, even approaching the size of a country or federation. They exist because they solve problems facing people living together in communities. The problem doesn’t have to be children drowning, although it obviously can be. It can also be a matter of providing potable water, keeping the environment clean, fairly dividing up a limited resource—or anything at all that people care about.
Even more importantly, where people living together face problems that have not yet been solved, there’s a good chance that the solution could take the form of an institution.
If you don’t read about modest institutions like the Stora Rör Swimming Association very often, it’s not because they’re not numerous enough. It’s because they’re less dysfunctional than national politics. Local institutions don’t always work, of course. Sometimes they fail in a manner spectacular enough to garner national attention. But, more frequently, they deliver the goods. Local institutions are the pillars of the community. If we want to build a society that works, we need to build and support our local institutions. If we want to help, though, we first need to understand how they work and why—and under what conditions they flourish. That’s what Elinor Ostrom can teach us.
Adapted from How Economics Can Save the World by Erik Angner. Published by Penguin Business. Copyright © 2023 by Erik Angner. All rights reserved.