Market Governance and Polycentrism

The contemporary conversation concerning the market vs the state is one that tends to focus on value judgments between greed and altruism, prosperity and equality, and, especially as of late, freedom and security. However, there is an even more important and existential debate regarding whether the market or the state is the optimal mechanism through which to organize society. There are limited resources that exist and the flourishing of society and those within it calls for the most optimal method of allocating goods and services in the face of unlimited demand.

In humanity’s natural state, poverty and deprivation are the baseline. Some form of system, be it the market or the state, is needed to create the conditions for self-improvement via the creation of value and the exchange thereof. In order to manage society, we need a governing system; be it one of freedom and markets or one of authority and direction. This debate regarding the free market vs central planning, liberty vs authority is one that has raged for over a hundred years in the Western World. This essay seeks to deepen this conversation by expounding upon the systems of governance that exist within the free market that allow it to be a superior form of societal management rather than simply a chaotic realm of self-interested interactions.
The Importance of Polycentric Governance

The inspiration for this essay stems from the work of 2009 Nobel Laureate Elinor Ostrom, whose empirical work revealed the importance of polycentric governance: essentially a form of government where power is decentralized. As described in her Nobel Prize biography,

“Challenged the conventional wisdom by demonstrating how local property can be successfully managed by local commons without any regulation by central authorities or privatization.”

Her work described the necessity for power and decision-making rights to be dispersed rather than centralized under one authority. In an essay, Ostrom wrote,

“Research has repeatedly demonstrated that order and high performance are more likely to be achieved in effective, local public economies established within broader national systems where large, medium, and small governmental and nongovernmental enterprises engage in diverse cooperative as well as competitive relationships (see Frey and Eichenberger 1996).”

The most important element of Ostrom’s work is the separation of power via competition and diversity of decision-making rights. Systems become corrupted and incompetent when powerful interests of any kind obtain a monopoly on power. Ostrom is quoted in a book in which she says,

“While all institutions are subject to takeover by opportunistic individuals and to the potential for perverse dynamics, a political system that has multiple centers of power at differing scales provides more opportunities to innovate and to intervene so as to correct maldistribution of authority and outcomes. Thus polycentric systems are more likely than monocentric systems to provide incentives leading to self-organized, self-correcting institutional change.”

Efficient systems of political organization are often polycentric because they are able to incorporate diverse interests, empower those closest to the problem, encourage competition among interests, and prevent the domination of individual interests.

It is through this medium of analysis that we seek to explore how the market and market mechanisms successfully act as a form of polycentric governance. We recognize that Ostrom does not assert that complete privatization or governance by the market is representative of polycentric governance. Rather she advocates for a system that competently employs a combination of state and market mechanisms to address certain collective action problems. We acknowledge this and instead seek to use her insight regarding polycentric governance to explore how market mechanisms and individual liberty mirror the institutions of polycentric governance.

Markets as a Form of Polycentric Governance

Adam Smith observed and articulated in The Wealth of Nations (1776):

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