1. Division of Resource Economics 07.07.2016 / 40 Institutional Resource Economics IV: the Relevance of Nature-related Transactions Konrad Hagedorn Humboldt University Berlin Division of Resource Economics Philippstrasse 13, 10099 Berlin, Germany Phone: + 49-30-2093 6305, Fax: + 49-30-2093 6497 E-mail: k.hagedorn@agrar.hu-berlin.de www.agrar.hu-berlin.de/wisola/fg/ress/ DAAD Workshop on: “Developing Multi-level and Decentralized Implementation Capacity for Natural Resource Management and Environmental Policies: a contribution to polycentric governance in an emerging democracy“, Kiev, September 7-11, 2009 1

2. Division of Resource Economics 07.07.2016 / 40 Guiding Ideas ○ Transactions are different in nature-related sectors (agriculture, horticulture, fishery, forestry, resource management, nature conservation) ○ Properties of transactions and the actors’ interdependence associated with them need to be characterised and classified differently ○ Institutions and governance structures for governing nature-related transactions also differ from those existing in less nature-related sectors. 2

3. Division of Resource Economics 07.07.2016 / 40 Main Steps and Arguments 1/2 Institutional analysis in nature-related sectors should account for particular properties of transactions ! □ Interaction of social and natural systems is associated with nature-related transactions between actors □ “Institutions of Sustainability”: an analytical framework: transactions, actors, institutions, governance structures □ Conventional frameworks: can they actually show how properties of nature-related transactions influence crafting of institutions and forms of governance? 3

4. Division of Resource Economics 07.07.2016 / 40 Main Steps and Arguments 2/2 Heuristic framework for ordering nature-related transactions: modularity and decomposability of structures and functional interdependence of processes □ Typology of properties of transaction: from ‘atomistic- isolated’ to ‘complex-interconnected’ transactions □ Decomposing the process of institutionalising transactions: ‘transaction-interdependence cycle’ □ Alignment principle: ‘atomistic-isolated transactions’ and ‘complex-interconnected transactions’ may correspond to ‘segregative and integrative institutions’. 4

5. Division of Resource Economics 07.07.2016 / 40 Subarenas Scales ·International (EU / World) ·National ·Regional ·Local, etc. Action situations Action arenas Properties of transactions Transactions Characteristics of actors Types of governance Types of rules Fields ·Land, soil ·water, flood ·air, climate ·biodiversity ·GMO, etc. Actors Institutions Governance Structures Institutions of Sustainability Institutional innovation Institutional performance 5

6. Division of Resource Economics 07.07.2016 / 40 The Transaction as a Core Unit of Analysis Relevant distinctions: The physical and the institutionalised transaction Ex-ante or ex-post view on institutional change Frictions and linkages in systems Friction costs and coherence costs Commodities and non-commodities Human design in engineered systems Self-organisation in natural systems 6

7. Division of Resource Economics 07.07.2016 / 40 Dimensions of the Transaction o Avoid conflating the physical and the institutional dimension of a transaction! o This would assume that a transaction is already agreed upon - institutions and governance structures exist o ‘Ex-ante institutional change perspective’ - a physical transaction is planned without being institutionalised – instead of an ‘ex-post institutional change perspective’ o We will decompose the process into stylised steps to show how physical transactions become institutionalised o Institutionalised transactions represent transfers of entitlements or constraints on goods or resources 7

8. Division of Resource Economics 07.07.2016 / 40 Dimensions of the Transaction 2/4 o Institutionalised transactions represent transfers of entitlements or constraints on goods or resources o In this view, transactions ‘are the alienation and acquisition between individuals of the rights of future ownership of physical things’ (Commons, 1934: 58) o A transaction is a change in social relationships o A change in individual rights and mutual obligations constitutes a transaction (Schmid, 2004: 69ff.). 8

9. Division of Resource Economics 07.07.2016 / 40 Dimensions of the Transaction 3/4 o A transaction does not always imply a movement of a physical object (Schmid, 2004: 69ff.). Selling or leasing land does not mean that the land is physically moved. o The only requirement for an action to involve a transaction is that actors are affected due to a physical implication. o Instead of suggesting that a transaction is in all cases a movement located somewhere in a physical system, we only assume that it always has some form of physical realisation that is relevant for the actors involved. 9

10. Division of Resource Economics 07.07.2016 / 40 Dimensions of the Transaction 4/4 Williamson versus Commons? □ No, both consider transaction the basic unit of analysis □ Williamson (2000: 599; see also Williamson, 1996: 6, 12, 26, 45, 234) explicitly refers to Commons’ (1932: 4) demand that ‘the ultimate unit of activity... must contain in itself the three principles of conflict, mutuality, and order. This unit is a transaction’ □ He adds: ‘Not only does transaction cost economics subscribe to the idea that the transaction is the basic unit of analysis, but governance is an effort to craft order, thereby to mitigate conflict and realise mutual gains’ Both include the two sides of the coin, the physical and the institutional dimensions of a transaction. 10

11. Division of Resource Economics 07.07.2016 / 40 Decomposing the Transaction 1/4 Starting from the physical definition: □ ‘A transaction occurs when a good or service is transferred across a technologically separable interface. One stage of activity terminates and another begins’ (Williamson 1985: 1). □ Emphasis on frictions between activities which explain the need for a transaction to be governed by institutional and organisational arrangements □ By contrast, linkages between activities are equally important reasons why transactions require institutions and governance structures. 11

12. Division of Resource Economics 07.07.2016 / 40 Decomposing the Transaction 2/4 Activity 3 FRICTION as a problem of transaction COHERENCE as a problem of transaction Activity 1 Activity 2 Activity 4 12

13. Division of Resource Economics 07.07.2016 / 40 Decomposing the Transaction 3/4 Whether frictions or linkages are considered the most relevant transaction problems depends on the of systems where a theory of transactions has been developed Modularity and Decomposability Transaction Problem System Characteristic HighFrictionEngineered LowCoherenceNatural 13

14. Division of Resource Economics 07.07.2016 / 40 Decomposing the Transaction 4/4 o ‘Near-decomposability’: Simon (1969) analysed systems ranging from business organisations to biological systems o ‘The property of complex systems that enables each of their subsystems to perform most of its activities with only weak impact upon, and interaction with, its other modules’ o Modularity : notion of building blocks and additive partitions (de Jong, Thierens and Watson, 2004: 2); precondition for strong decomposability ► Additive partitions: associated with separability of modules ► But this not only depends on structural interconnectedness, but also on functional dependence 14

15. Division of Resource Economics 07.07.2016 / 40 Decomposing the Transaction 5/4 CONCLUSIONS Physical characteristics observed in engineered and natural systems are (partly!) different Therefore, transaction cost economics emphasises insecurity, frequency and asset specificity, institutional resources economics additional features such as jointness, coherence and complexity Both types of problem can cause interdependencies between actors that need to be governed – conflicts to be solved or opportunities for cooperation Both ‘friction costs’ (Williamson, 1985: 18f.), and ‘coherence costs’ play a role. 15

16. Division of Resource Economics 07.07.2016 / 40 1. Transaction cost theory: properties of transactions identified associated with separable activities - high degree of decomposability, modularity and independence 2. ‘Commodities’, i.e. goods produced by engineered processes within designed systems set up by humans 3. ‘Frictions’ in the systems are perceived as reasons why transactions needs need to be regularized by institutions and governance structures. Perception of Properties of Transactions in Transaction Cost Economics 1/2 16

17. Division of Resource Economics 07.07.2016 / 40 1. Institutional analysis in nature-related sectors: properties of transactions identified originate also from non-separable activities – coherence of the system, structural interconnectedness, functional dependence 2. ‘Non-commodities’: goods and services, resources and amenities, but also damages and nuisances, provided by processes of self-organisation not engineered by humans 3. ‘Linkages’ are perceived as reasons why transactions need to be regularized by institutions and governance Perception of Properties of Transactions in Transaction Cost Economics 2/2 17

18. Division of Resource Economics 07.07.2016 / 40 Transaction Properties in Engineered and Natural Systems Engineered Systems set up by humans Transaction problem: frictions (and less coherence) Transaction properties identified in Transaction Cost Economics: insecurity, frequency, asset specificity classified into various forms Natural Systems not designed by humans Transaction problem: frictions plus ubiquity of coherence Transaction properties: jointness and separability, coherence and complexity, standardisability and calculability, predictability and irreversibility, space and mobility, adaptability and observability 18

19. Division of Resource Economics 07.07.2016 / 40 ► Additional properties of transactions to be taken into account by institutional analysis in nature-related sectors: ► Jointness and absence of separability, coherence and complexity, limited standardisability and calculability, dimensions of time and scale, predictability and irreversibility, spatial characteristics and mobility, adaptability and observability, etc. ► Example: Nitrogen fertiliser use or pastoral systems include transactions that affect other actors in various ways, due to the interconnectedness of natural systems. Perception of Properties of Transactions in Transaction Cost Economics 3/4 19

20. Division of Resource Economics 07.07.2016 / 40 Properties of Transactions in Nature-related Institutional Analysis Frameworks 1/6 o Vatn emphasises ‘precision’, Ostrom refers rules and physical conditions, Young stresses ‘the problem of fit’ between biophysical conditions and institutions o Ménard, Valceschini, Van Huylenbroeck, Verhaegen (and others): nature-related transactions in food economics o Issues like credence attributes, asymmetric information, and traceability (Ménard and Valceschini, 2005: 426). [1][1] See also E. Ostrom’s proposal on conceptually decomposing social-ecological systems in Section 6.3. Processed goods have passed through processes of modularisation and standardisation, but still problems originating from interconnectedness of natural systems 20

21. Division of Resource Economics 07.07.2016 / 40 ‘What makes these regularities characteristic of hybrid arrangements is that … they rely on partners who maintain distinct property rights and remain independent residual claimants’ (Ménard, 2005: 351-354) [1][1] See also E. Ostrom’s proposal on conceptually decomposing social-ecological systems in Section 6.3. Properties of Transactions in Nature-related Institutional Analysis Frameworks 2/6 Food economics – plurality of modes of governance ► Van Huylenbroeck, Verhaegen: classification of hybrids ► Ménard and Valceschini: constitution of hybrids Conceptual similarity to the Ostrom School is striking, although theory and terminology are different! 21

22. Division of Resource Economics 07.07.2016 / 40 ► Ostrom school: complexity of natural systems requires institutional diversity and polycentric governance [1][1] See also E. Ostrom’s proposal on conceptually decomposing social-ecological systems in Section 6.3. Properties of Transactions in Nature-related Institutional Analysis Frameworks 3/6 ’ ‘Polycentric’ connotes many centers of decision making that are formally independent of each other. … To the extent that they take each other into account in competitive relationships, enter into various contractual and cooperative undertakings or have recourse to central mechanisms to resolve conflicts, the various political jurisdictions in a metropolitan area may function in a coherent manner with consistent and predictable patterns of interacting behavior‘ (V. Ostrom, Tiebout, and Warren 1961: 831). 22

23. Division of Resource Economics 07.07.2016 / 40 CONCLUSIONS Only a few approaches (Ostrom and similar concepts, hybrids in food economics) include complexity and interconnectedness in natural systems systematically Missing the causal connection between (1) these attributes, (2) transaction properties and (3) the choice of institutional and organisational arrangements This is in line with the observation made by Beckmann (2002: 8) that ‘Williamson had no real impact on environmental and resource economics’. [1][1] See also E. Ostrom’s proposal on conceptually decomposing social-ecological systems in Section 6.3. Properties of Transactions in Nature-related Institutional Analysis Frameworks 4/6 23

24. Division of Resource Economics 07.07.2016 / 40 Structural Modularity and Functional Dependence 1/2 □ General idea: inter-module interactions are less relevant than intra-module interactions □ Modularity only indicates structural interconnectedness of modules - reflects how likely immediate effects between two modules may be at the moment □ It does not say anything about dynamic relationships between modules over time, which determine how changes in one module affect changes of another module □ These relationships reveal the extent of functional dependence of a module on another module. 24

25. Division of Resource Economics 07.07.2016 / 40 Structural Modularity and Functional Dependence 2/2 □ ‘Structural modularity does not imply isolation, or near independence, of the dynamical behaviour of modules’ - ‘One module may be strongly and nonlinearly sensitive to small state changes in another module despite being sparsely connected’ (Watson, 2002: 1ff.). □ Concrete example: greenhouse effects on climate □ A system’s structural modularity should not be confused with its functional behaviour □ Low structural modularity and decomposability may be associated with different degrees of functional interdependence of processes at different scales 25

26. Division of Resource Economics 07.07.2016 / 40 A Heuristic Concept for Ordering Nature-related Transactions 1/3 1.Atomistic: transactions that occur physically within structures with high modularity and decomposability – transactions rather easy 2.Complex: structures with low modularity and decomposability imply that the subunits are multifaceted aggregates - transactions more difficult 3.Isolated: transactions that occur physically by processes with low functional interdependence - transactions rather easy 4.Interconnected: processes with high functional interdependence - transactions more difficult 26

27. Division of Resource Economics 07.07.2016 / 40 A Heuristic Concept for Ordering Nature-related Transactions 2/3 Modularity and decomposability of structures Functional interdependence of processes HighLow Atomistic-isolated transactions Complex-isolated transactions High Atomistic- interconnected transactions Complex- interconnected transactions 27

28. Division of Resource Economics 07.07.2016 / 40 A Heuristic Concept for Ordering Nature-related Transactions 3/3 o Observable properties of transactions appear to be arbitrary phenomena, without any causal commonality o Can they be traced back to “universal” attributes of the physical system where they occur (i.e. modularity / decomposability and functional interdependence?? o Theoretical example: asset specificity as a central argument in New Institutional Economics is actually due to a lack of modularity and decomposability o Empirical agrarian example: dairy cow barns are site specific and also specific to other conditions of the farm 28

29. Division of Resource Economics 07.07.2016 / 40 From the Heuristic Framework to a Typology CONCLUSIONS Typlogy based on the continuum between atomistic- isolated and complex-interconnected transactions Understanding and explaining obvious properties of transactions (asset specificity, frequency,uncertainty, jointness and separability, coherence and complexity, standardisability, dimensions of time and scale, predictability and irreversibility, spatial characteristics and mobility, adaptability and observability, etc.) Ordering types of transaction along the continuum between atomistic-isolated and complex-interconnected transactions and discover reasons for their differences. 29

30. Division of Resource Economics 07.07.2016 / 40 From Heuristic Framework to Typology Modularity of Structures Atomistic-isolated Transactions Complex-interconnected Transactions Functional Interdependence = Observed Transaction Properties 30

31. Division of Resource Economics 07.07.2016 / 40 Models of Interacting Social / Natural Systems o Ecosystem–human system model (Low et al., 1999: 228): characteristics in ecological and human systems o Biocomplexity approach (Jungcurt et al., 2005: 12) clusters transactions because they either do not take place in isolation, or are inextricably connected. o Ostrom (2007): danger of blueprint approaches to the governance of social-ecological problems o Ineffectiveness of universal panaceas derived from simple models of social-ecological systems (SESs). o Presents a general framework using broad categories 31

32. Division of Resource Economics 07.07.2016 / 40 Ostrom (2007: 15182) develops a general framework using the following broad categories to ‘organize an analysis of how attributes of 1.a resource system (e.g., fishery, lake, grazing area), 2.the resource units generated by that system (e.g., fish, water, fodder), 3.the users of that system, and 4.the governance system jointly affect and are indirectly affected by interactions and resulting outcomes achieved at a particular time and place’ Decomposing Social–natural Systems 32

33. Division of Resource Economics 07.07.2016 / 40 Conceptual Decomposability of Social–natural Systems Transposing an analytical objective that cannot be achieved at the physical level to the conceptual level: a) Modularity and decomposability of structures and b) Functional interdependence of processes may not exist at the physical level – proceed to conceptual level ► Process leading from an ‘ex ante institutional change situation’ to an ‘ex post institutional change situation’ ► Break it down conceptually into stages through which physical transactions become institutionalised ► This is the ‘transaction-interdependence cycle’ 33

34. Division of Resource Economics 07.07.2016 / 40 Transaction-Interdependence Cycle Choices by actors Physical Perspective on Transactions Physical context Social construction of transaction: interdependence of actors Physical aspect of transaction: effects from use of goods Social context Transaction as Unit of Analysis Physical context Social context Impact on system component Outcomes affect actors Adaptation by institutional change Adaptation by system change Transaction causes interdependence Interaction, negotiation, rule making Social Perspective on Transactions Impact on wider physical system 34

35. Division of Resource Economics 07.07.2016 / 40 The Transaction-interdependence Cycle 1/2 1.Actors choose an action (e.g. to use water for irrigation, to apply nitrogen fertiliser) that entails transactions 2.Such choices lead to a transfer of resource units (quantities of pumped water) or they affect ecosystem components by resource users (nitrate in water) 3.They may also impact on the wider context of the physical or natural system (extraction of groundwater resources exceeds regeneration, eutrophication in an adjacent lake) 4.Ecosystems or hydrological systems respond to these changes by adaptation processes (decline of regional water table, loss of parts of the fish population) 5.The outcomes affect other actors: a physical transaction occurs (households experience increasing scarcity of drinking water, fishermen lose part of their income) 35

36. Division of Resource Economics 07.07.2016 / 40 6.The actors participating in the transaction changes as recognise their interdependence regarding the use of the natural system and respond to it 7.This stimulates interaction between actors directly (water users) and indirectly (politicians) concerned such as negotiation, consensus building on rule making 8.Adaptation processes in the social system (e.g. regarding rules and organisation of water use and water pollution) result in institutional change and governance structures Actors will adjust their choices to the new rules and enforcement mechanisms. If they accept the outcomes, the transaction-interdependence cycle will end, otherwise it may start anew. The Transaction-interdependence Cycle 2/2 36

37. Division of Resource Economics 07.07.2016 / 40 Discriminating Alignment via Integrative and Segregative Institutions? CONCLUSIONS The continuum of atomistic-isolated and complex- interconnected transactions calls for a corresponding spectrum of institutional and organisational choices To match properties of transactions with the regularizing capacity of institutions and governance structures This is ‘… align transactions (which differ in their attributes) with governance structures (which differ in their costs and competencies) in a discriminating... way’ (Williamson, 1996: 46f.). Can this match or alignment be found in the dichotomy of ‘integrative and segregative institutions’? 37

38. Division of Resource Economics 07.07.2016 / 40 Discriminating Alignment via Integrative and Segregative Institutions? Integrative institutionsSegregative institutions Transaction cost inDuty to internaliseIncomplete duty to internalise Transaction cost exNo right to externaliseSome rights to externalise Beneficial effects Appropriate all benefits and leave no gains to others Forego some benefits and leave gains to others Adverse effects Accept all liability and shift no nuisance to others Deny complete liability and shift nuisances to others Atomistic-isolated transactions Integrative capacity of institutions less relevant Segregrative capacity of institutions may be sufficient Complex-intercon- nected transactions Integrative capacity of institutions more relevant Segregrative capacity of institutions likely insufficient 38

39. Division of Resource Economics 07.07.2016 / 40 Discriminating Alignment: Transactions and Institutions Increasing relevance of choice between integration and segregation Integrative Institutions Atomistic-isolated Transactions Complex-interconnected Transactions Segregative Institutions 39

40. Division of Resource Economics 07.07.2016 / 40 THANK YOU for your attention! --------------------------- Institutional Resource Economics IV: the Relevance of Nature-related Transactions 40