V, the Value

When evaluating and designing institutional arrangements, E. Ostrom (Reference Ostrom, Batie and Mercuro2008) considers values such as efficiency, resilience, fairness, and participation rate. Similarly, Jorgensen and Bozeman (Reference Jorgensen and Bozeman2007) suggest an entire list of attributes: stability, social cohesion, common good, responsiveness, adaptability, productivity, and effectiveness.

We make no attempt to delve into the philosophical complexities of this discussion. It is nonetheless useful, given its implicit role in the discussion, to briefly focus on the distinction between personal preferences (values in the common economic sense) and social norms (values in the broader normative sense). When we are talking about public values, in this context we are by necessity placing ourselves in the realm of the discussion about social norms, rather than mere personal preferences. However, this distinction between personal preferences and moral values is often fuzzy and ever changing because preferences can become moralized or norms can devolve back into mere personal preferences (Rozin Reference Rozin, Brandt and Rozin1997; 1999). One way to make sense of this fuzziness is to see social norms as a subset of preferences, a special kind of preferences about other people's behavior (see Fig. 1). Namely they are preferences about other people's behavior that one wants everyone else to have as well (i.e., it is unacceptable for anyone not to have them). One thus could see how moral phenomena are intrinsically connected (both ontologically and analytically) to individual preferences (Buchanan and Tullock, [Reference Buchanan and Tullock1962] 1999, 27–30) and that the two could be addressed in conjunction in various models of complementarity or tradeoffs. Our approach is to follow Buchanan and Tullock's classic discussion of the matter in the Calculus of Consent and to identify the values, in the normative sense, as a very special kind of preference, precisely for the purpose of being able to use the rational choice apparatus in understanding them.

FIGURE 1.

Social norms as a special subset of preferences about other people's behavior

For the current discussion, further delving into the ontological nature and epistemological status of values is irrelevant. What is important to note is that, when we talk about value creation, we are not talking about creating or reinventing new foundational normative principles. We are talking about new states of affairs A (induced by production, exchange, or mere reconfiguration) in the light of a value V.

E, the Evaluator

The second element in the puzzle is the holder of values, the actor making the normative judgment. Who is assessing and considering the state of affairs as valuable? The evaluator may be either an individual or a collective actor (a family, a corporation, a state, or the like).

Once the evaluator is a collective entity, the problem gains additional, multiple dimensions. Moreover, what is at stake is rarely a good-or-bad, yes-or-no matter. There are different levels or degrees of realization of the favored state of affairs; that is, the evaluator has a certain “aspiration level,” L, relative to each value (Baier and Rescher Reference Baier and Rescher1969). For example, if the value under consideration is equity, one would ask how equitable an individual, an institution, or a policy has to be for the evaluator to declare that the value has been instantiated. Similarly, if the value is universal education or the eradication of poverty, the aspiration level to which E subscribes is the level of education or affluence whose achievement by everyone would constitute the realization of the state of affairs that E favors. Hence the aspiration level of value V from evaluator E's perspective needs to be specified, because the failure to do so may lead to unnecessary confusion. In brief, the evaluator element is a source of multiple heterogeneities.

A, the State of Affairs

Assertions such as “This public service agency is responsive” or “This public policy advances the public good” or “This public transportation system is resilient” define a situation in which a public value is identified and asserted regarding a state of the world, in a specific domain. By action, individual and collective, the world (or, more precisely, a specific aspect of it) changes in such a way that these possible states of affairs are realized—in the context of our analysis, that means to create and to produce value.

S, the Observed System

When talking about a relevant state of affairs, one needs to be precise about the type of entity whose features are constituted in a state of affairs favored by E, the evaluator. A, the state of affairs, is a feature of an observed system, S (a state, municipality, individual, group, public service, organization, etc.). For instance, we may look at individuals not as evaluators but as the intended value bearers, as observed systems. They might be further identified by sex, age, education, or social role. The state of affairs. A, deemed valuable regarding them is a certain mindset, feature, capability, or resource reflecting a certain value, V. One may also distinguish, as in the case of evaluators, between individual and collective actors. Institutions and policies may also be seen as observed systems. Also institutions and policies may be seen as observed systems. The adjectives “individual,” “institutional,” or “policy” specify the nature of the value bearer, S. For instance, the evaluator E may have in mind the realization of a certain state of affairs in which certain individuals are acting fairly. Or equity, as one of E's institutional values, might mean that E favors a state of affairs constituted by certain institutions that generate fair outcomes in a systematic fashion. The first approach is an ethical perspective focusing on changing the values that guide individual choices irrespective of the imposed structure of penalties and rewards, whereas the second one is an institutional perspective focusing on the incentive structure within which individuals act irrespective of the moral norms to which individuals adhere. Such a difference of approach can obviously lead to very different normative positions and evaluations, although they are partly complementary.

To make sense of such differences of nuance, we can describe the matter as an evaluator E having a certain perspective P on S, the observed system. Although different evaluators, E₁ and E₂, may agree about the physical identification of the observed system (for instance, they may agree that the “system” consists of the individuals in a certain geographical region), they may nonetheless have different perspectives on it. The issue of perspectives can sometimes take more radical forms of framing. For instance, E₁ may see all the individual value bearers as belonging to the same group, whereas E₂ may separate them into two categories—the “natives” and the “immigrants”—and apply different value standards to “immigrants.” A Marxist evaluator will perceive employers of various corporations as belonging to a single class and focus on the presumed conflict between owners of capital and workers. To a liberal evaluator, defining the observed system in such a manner makes little sense (Baier and Rescher Reference Baier and Rescher1969). Thus, the same reality can be perceived not only from slightly different perspectives but also can be organized in radically different ways.

Perspectives also matter in regard to institutional and policy values. Institutions can be of different types: governments, corporations, churches, clubs, universities, and so on. Here too we can specify the evaluator's perspective. For example, universal elections with secret ballots and respect for democratic procedures may be among E's institutional values, but he or she may apply them only to the sovereign state level and not to corporate management or non-Western underdeveloped societies. The same “observed systems” (as value bearers) can be at the same time citizens, employees, and members of churches. The perspective on them, and the values considered relevant, obviously differ depending on the context.

These considerations may seem pedantic, but they are essential for understanding the magnitude of the challenge posed by any attempt to collectively generate states of affairs that are considered “publicly” or “collectively” valuable. Summarizing, we can view this process as an interaction between the evaluator E and the observed system S, with the evaluator having values V and a certain aspiration level L for each value, as well as a perspective P about the observed system and its state of affairs A:

\begin{eqnarray*} E(V(L),P(S_A )) \leftrightarrow S_A \end{eqnarray*}

This synthetic formula illustrates the complexity of any discussion about values in general and public or collective values in particular. A large number of combinations are possible even under ceteris paribus conditions. The questions of interest are as follows: What is public value and what is private value in situations that are structurally defined by such a complex mesh of variables? How do we draw the line between public and private in deliberation, preference aggregation, and social action and construction?

Let us consider as an example the situation mentioned by Rozin (Reference Rozin, Brandt and Rozin1997; 1999), in which a certain value V, such as an environmental concern or vegetarianism, has not (yet) gained universal acceptance. Nonetheless, people who adhere to it do so very strongly and in a moralized fashion. Things are obviously at the borderline between private and public. Suppose there is a sharp public divide on this value (i.e., an even bimodal distribution of value V among evaluators E). Is 51% adherence sufficient to make it “public”? Considering different levels of aspirations, different perspectives, and even different observed systems makes the matter even more complicated. When does a private preference about the behavior of others become a public value that needs universal enforcement? Where stands the threshold by which one can decide that this or that state of affairs needs to be generated because it is of “public value”? Mobilizing in our help the notion of catastrophe or extinction (usually in combination with a version of the precautionary principle) is tempting but misleading: It may have a powerful rhetorical impact but no relevant operational or analytic traction for the vast number of real-life relevant cases.

Similarly, when the observed system is a socioeconomic class or an ethnic group, it may be hard to decide whether we are dealing with a public value bearer or a private one. By contrast, the distinction between a private or public evaluator seems much more straightforward. However, even here, the distinction is not perfect. Is a nongovernmental organization (NGO) a private or a public entity? By what criteria? The classic distinction between excludable and nonexcludable goods also seems fairly straightforward. Yet, even it includes a gradualist quantitative aspect (some goods are easier to exclude than others, rather than being purely excludable or nonexcludable).The availability or nonavailability of the so-called property rights technologies that are able to implement exclusion (Anderson and Hill Reference Anderson and Hill2001) may make the difference. Moreover, as we have already mentioned, whether something counts as an externality has a subjective element to it.

These are basic, even simplistic examples, all of which point out to one conclusion: The answer to the question—what makes something “public”?—may differ depending on whether we focus on the value V, on the value bearer S and its state of affairs A, or on the evaluator E. If we look at the various possible combinations of all these elements, if we add perspectives and levels of aspirations, we understand why the usual approaches based on game theory are good starting points for a discussion that nonetheless has to go well beyond the boundaries set up by them.

These are not mere exploratory conjectures. Studies of preference formation, deliberation, aggregation, public interest, voting, and bureaucratic mechanisms in democratic systems (Bozeman Reference Bozeman2007; Gaus Reference Gaus2011; Knight and Johnson Reference Knight and Johnson2011; Kukathas Reference Kukathas1999) have revealed from multiple angles that the line between public and private, or collective and individual, is actually much fuzzier. Using the “stylized facts” of game theory to define, identify, and disentangle public goods and public value production situations works only up to a point. There are many consequential situations in which the private/public distinction is not easily discernible. In such cases, one needs to move beyond formally preset models and identify and unpack the variety of mechanisms and processes that always seem to be strongly driven by circumstantial details. As Bozeman (Reference Bozeman2002; 2007, 13), whose work has been extensively dedicated to the in-depth exploration of the problem of public value, has explained, what is the public interest and what is public, and what is not, “changes not only case by case but also with the same case as time advances and conditions change.” The idea of public and, by extension, of private is dynamic. As Bozeman elaborates, this suggests “the relevance of learning and empiricism” and of the ongoing processes of social discovery, construction, and reconstruction, out of which various formulas of “the public” emerge (13). As a major philosophical reference point he identifies the pragmatist philosophy of John Dewey, an author whose works V. Ostrom has considered of defining importance as well. What both Ostrom and Bozeman note is precisely that “the public” is not something static, ex ante, and objectively defined, but rather emerges as a result of an ongoing social-political process of inquiry and negotiation.

The intuition that value heterogeneity and ambiguity require a matching type of institutional heterogeneity to accommodate them in a process in which social discovery, social choice, and social production of publicly valuable states of affairs are intertwined is prima facie plausible. Yet, the case needs to be detailed, illustrated, and analytically articulated. The question is how is that process happening, more precisely? What are the social and institutional forms that discovery, production, provision, and consumption take in given, specific circumstances? The types of channels, processes, and mechanisms connecting and forging the realm of subjective preferences and values and the realm of institutional polycentricity that constructs them as “public” need to be pinpointed and analyzed.

A good starting point is to say that there are multiple ways in which social actors and groups engage in this process of shaping and reconfiguring the state of affairs of their social environment. On top of the public values/private values divide, one may use a typology distinguishing among four types of economic processes (production, provision, exchange, and consumption) and two levels at which these processes can occur (individual or collective). The divide with respect to values decides which services and goods should be available to all out of some normative consideration, whereas the typology describes the detailed ways in which the economic processes involved may work. As one may see, the combinatorial potential is huge. Each combination, including the variety of possible institutional arrangements involved in each of the basic types, has significant operational and institutional consequences. Many of them deserve to be isolated and analyzed in depth. In the Ostroms’ research program, several such combinations have emerged as highly salient. In the next section we focus on one of them: the case of co-production. This is a phenomenon of major (but relatively neglected) importance, which may be used as an excellent illustration of the broader class of phenomena that link the realm of the private and subjectivity on the one hand, and that of the public and its institutional architecture, on the other hand.

Before moving ahead, let us note that we are getting closer to the domain of one of the most profound problems in social science: How does “the public” emerge from “the private”? How is “the private” grounded in “the public”? What is involved in individuals’ and groups’ efforts to create states of the world of “public value” out of the apparent chaos of heterogeneity? As V. Ostrom (Reference Ostrom1997, 147) put it, “The conduct of public affairs requires the pooling, rearranging, and compromising of existing interests—in the constitution of common knowledge, shared communities of understanding, patterns of social accountability, and mutual trust—that are subject to challenge and to being reestablished and reaffirmed through processes of conflict resolution.” With such questions we are at the fons et origo of social order where, as Vincent Ostrom put it, following John Searle's work, which he greatly admired, social reality is constituted and “brute facts” make room for “institutional facts” (Ostrom Reference Ostrom1997, 25). On the one hand, we have intentionality and subjectivity, and on the other hand we have the entire realm of the intersubjective that has given way to “the objective facts of the worlds that are facts only by human agreement” (Searle Reference Searle1995: 2006, 1–2). These are states of affairs that are not a matter of “mine and yours,” subjective values, preferences, or evaluations. Yet they are anchored in the subjectivity of values and preferences. The Ostroms’ investigations have prepared the path for one way of dealing with this problem, one way of studying how humans cross the bridge from the conceptual, mental, and psychological to the social and institutional. By exploring co-production, we get closer to understanding one possible path on that bridge.

The Model and Some of Its Consequences

First, some terminology: The producer that the standard consumer theory assumes to be fully responsible for production is called the “regular producer,” and the consumer's input in the production process is taken into consideration by means of the “consumer producer” concept.

The theory is built in terms of the following factors: Q, the quantity produced; R, regular producer inputs; w, wage rate for regular producers (or their marginal cost); C, consumer producer inputs; and o, opportunity cost for consumers to become involved in the production process. Parks et al. (Reference Parks, Baker, Kiser and Oakerson1981) consider two types of production functions:

1. (a) substitution: Q=αR+βC;

2. (b) interdependency: Q=kC ^αR ^1−α.

The optimal co-production is found by maximizing Q subject to the budgetary constraint:

\begin{eqnarray*} B = wR + oC \end{eqnarray*}

In the case of the substitution production function, optimal production is done either entirely by the regular producer (i.e., standard theory of production) or entirely by the consumer producer (i.e., self-sufficiency). The more interesting case is that of interdependency. The optimal co-production is

\begin{eqnarray*} \left\{ {\begin{array}{c} {C = \frac{{\alpha B}}{o}} \\[6pt] {R = \frac{{(1 - \alpha )B}}{w}} \\ \end{array}} \right. \end{eqnarray*}

\begin{eqnarray*} C = \frac{\alpha }{{1 - \alpha }}\frac{w}{o}R \end{eqnarray*}

The parameter α describes the technical details of the co-production process, whereas w and o describe the relative costs involved in the regular production process and in the consumer contribution to the production process. We see that, as expected, the higher the opportunity cost of contributing, the lower the consumer participation is relative to regular production. Several simple predictions follow: Higher income individuals are less likely to participate in co-production (because they have higher opportunity costs); technologies that make customers’ involvement easier increase their participation ratio (because they decrease the opportunity costs); and higher wage costs for regular production increase consumer participation (because regular production decreases and consumers compensate to some extent).

The real problem, of course, is that one does not know the value of parameter α. In case of purely private co-production (such as concerts, customer service, websites, or health care), the competition between different regular producers is bound to gradually structure the co-production process, by means of a trial-and-error process (Alchian Reference Alchian1950), somewhat close to its optimal form. However, this process is not perfect in the Parks et al. (Reference Parks, Baker, Kiser and Oakerson1981) sense, because regular producers maximize profit, QP–wR, rather than output Q. This means that regular producers have an incentive to over-involve their customers in the production process by under-producing themselves. This leads to a very interesting insight that may well be interpreted as an unexplored type of market failure. In fact, this phenomenon takes place at the boundary between a market failure and what Bozeman (Reference Bozeman2002, 150–51) calls “public-value” failure; although the logic of model construction differs from Bozeman's, who builds a list of “public-value” failure heuristic criteria by mirroring the logic of market failure, this type may well be considered an addition or complement to Bozeman's list.

Figure 2 shows the difference between the produced output under profit maximization (solid line), computed numerically assuming that the price is equal to the marginal cost, P=w, and the optimal production under output maximization (dashed line). Lowering the opportunity cost pushes the actual output closer (but not identical) to the optimal output, because the regular producer can profit more if it stimulates the co-production partner and consumer, but the extent to which it can do so depends on the consumer's opportunity cost.

FIGURE 2.

Co-production underproduction (solid line: profit maximization; dashed line: output maximization). (a) The opportunity cost of the consumer producer is large; (b) the opportunity cost of the consumer producer is small

For a given wage w, the profit-maximization regular producer output is R′, whereas the optimal regular producer output is R*. The respective consumer producer output is C′ and C*, determined from the budgetary constraint. The co-production deadweight loss is thus

\begin{eqnarray*} Q^* - Q' = \frac{k}{{o^\alpha }}\left[ {(B - wR^* )^\alpha R^{*\,1 - a} - (B - wR')^\alpha R'^{1 - \alpha } } \right] \end{eqnarray*}

Let us also look at the effects of a budget reduction (or increase) for a given level of the opportunity cost faced by the consumer producer (Fig. 3). An interesting result is that, for a given level of w, the effect of the budget reduction is smaller on the profit-maximization regular producer output than on the total output-maximization regular producer output: δR′<δR*. Consequently, this leads to a more optimistic view of what happens when government spending is reduced. Intuitively, this happens because, under profit maximization, the regular producers tend to over-involve the consumer, and thus, the budget reduction has less of an effect. To give a concrete example, assuming realistically that professors are profit maximizers (rather than altruistically doing everything in their power to get the maximum educational output out of their students; i.e., professors are shirking to some extent), students have to spend more time studying (and less time doing other things) than would be optimal. The effect is that if professors’ wages are cut, the effect on educational output is not as large as it would have been in the situation of idealized, nonshirker professors. The same effect holds for all public services involving co-production, such as police, health care, and so on. This may seem like an obvious effect, but it is missing from previous accounts of co-production because they assumed that all the agents are engaged in output maximization rather than in profit maximization. It opens the door for more concrete studies. For example, how important is this co-production inefficiency for explaining why in the past decades the quality of education in the United States has been stagnant, despite a large increase in the education budget?

FIGURE 3.

The effect of a budget reduction, with the opportunity cost of the consumer producer held fixed (thicker line = bigger budget; solid lines: profit maximization; dashed lines: output maximization)

Keeping in mind the co-production deadweight loss can also lead to a more nuanced view of privatization. A disadvantage of privatization, as we can see, is that the profit maximization output may be lower than the efficient output. So if government failures (Winston Reference Winston2006) are kept at bay by various political mechanisms, such as transparency and accountability, and a public interest focus is successfully pursued, it may be the case that the production or provision of certain services may be more efficient in a collective governance than in a fully privatized arrangement.

And thus we have come to illuminate from a unique angle the contours and the texture of the “third sector.” Its position and significance become more evident. As Brandsen and Pestoff (2006, 492) intuited, “The concept of co-production potentially offers a means of capturing a significant part of the quality of this dynamic” concerning “the role of the third sector in public service provision and the manner in which such services are produced.” Indeed, the third sector may be a means to elude government failures and pursue a public interest agenda, and this co-production analysis shows why it may be a more efficient form of provision and production of public services than either the state or the profit-seeking firms.

Reframing the Decentralization Debate

As Oakerson and Parks (Reference Oakerson and Parks2011) have noted in their works that further develop and apply these notions, the discusssion about the third sector is related to the important distinction between political fragmentation and functional fragmentation. The first deals with the geographical separation of public administrative bodies, each of which “provides and produces all local services for its citizens”; the latter deals with specialized profit or nonprofit enterprises, each of which “provides and produces each distinct service for all citizens” (151). As we discuss in the next section, functional fragmentation is often more efficient than political fragmentation. This is another reason why privatization often looks like a good idea, but it is also a reason for relying on the third sector (which is also compatible with functional fragmentation). The advantage of functional fragmentation is that it is more competitive. Political fragmentation has only “voting with your feet” Tiebout competition between geographical areas (which often involves prohibitive transaction costs and cannot deal with the problem of bundling many public services together). Functional fragmentation involves, however, competition inside each geographical area. For example, the competition of NGOs for private donors is imperfect (due to the “warm glow giving” phenomenon [Andreoni Reference Andreoni1990]), but it is probably still a lot more effective than Tiebout competition. The situation of a government monopoly producer is probably even less effective because the monopoly eliminates the incentive to find more efficient co-production structures and may also further reduce output.

If we compare the co-production market failure to the better known team production market failure (Alchian and Demsetz Reference Alchian and Demsetz1972), which has opened the door for an entire literature on principal-agent problems (Miller Reference Miller1992), we see that much of the discussion about centralization or decentralization has been going on under the unstated assumption that the production of public goods by the public administration at various levels is a form of team production, in which the “team” is made up of various administrative units and citizens are passive receivers of the services—rather than a form of co-production, in which the citizens are critical elements of the production processes. The arguments for centralization are very similar in form to Alchian and Demsetz's theoretical explanation that firms (i.e., islands of nonmarket centralized management) emerge because of the necessity for monitoring. A centralized public administration is supposed to be more efficient for a similar reason, because it would be able to stir and monitor the use of resources in a preferred direction, rather than allowing them to be wasted by the decentralized administration, which is supposedly duplicating efforts (Aligica and Boettke Reference Aligica and Boettke2009; Oakerson and Parks Reference Oakerson and Parks2011).

Moreover, from a team production perspective, it would appear that privatization, or functional fragmentation more generally, makes monitoring more difficult and thus decreases efficiency. From a co-production perspective, we get the exact opposite result. Rules need enforcement in order to be “in-use” rather than merely “in-form” (i.e., to be really guiding and shaping the practice as opposed to just being evoked but not applied), but for enforcement itself to be more than just “in-form,” monitors also need monitoring. This seems to create a paradoxical infinite regress of monitors of monitors of monitors, and so on. Co-production solves this problem by creating a “circle” of rules rather than a linear hierarchy. For instance, to use a common-pool resources management example from E. Ostrom (Reference Ostrom2005, 265), in a group of agents where the agents themselves take turns at being monitors, the problem is diminished to manageable levels because each monitor will now have a vested interest in making sure that the rules are followed and thus will not need outside monitoring. More generally, all systems of rules are ultimately built on a foundation of self-governing rules, and such self-governing rules exist as a result of the agents’ self-interest in having them enforced (Leeson Reference Leeson2011).

These self-governing rules are important as the foundation, but they are not the only types of rules. The point is that systems that depart at great lengths from self-governance tend not only to lack legitimacy but also to be rife with corruption, rent-seeking, and widespread inefficiencies simply because the monitors and enforcers have less of an intrinsic interest in doing their job properly and thus it becomes more costly to make sure that they are indeed doing their job. It is thus always important to consider the incentive structure of those responsible for monitoring and enforcement, as well as for rule design in general (E. Ostrom Reference Ostrom2005, 260–61; Ostrom and Ostrom Reference Ostrom and Ostrom2004). Economies of scale considerations have to be analyzed not only under realistic assumptions about the efficiency of the monitoring system at large scales but also under the co-production framework, rather than just assuming that the public producer can work independently of the consumer's inputs. Both these considerations work in the direction of favoring more functional decentralization for production and of separating production and provision, while at the same time trying to find the appropriate balance or relationship within the triad of production–provision-consumption.

The Ostroms linked the problem of co-production (as they did with social dilemmas in commons or collective action) to the observation that, even in the case of public goods and services that the market and the state cannot supply efficiently, people can nonetheless develop complex institutional arrangements to produce and distribute them, even when no single center of authority is responsible for coordinating all relationships in such a “public economy.” The Bloomington scholars have extensively demonstrated the limits of having a single governing body at a fixed geographic scale and of assigning to this governing body a host of responsibilities to manage many different common-pool resources and public goods (Boettke, Palagashvili, and Lemke 2013; McGinnis Reference McGinnis1999; Oakerson Reference Oakerson1999; Oakerson and Parks Reference Oakerson and Parks2011; E. Ostrom Reference Ostrom1972; Ostrom, Bish, and Ostrom 1988). There is no one-size-fits-all solution. Depending on the exact nature of the good, the structure of the most effective co-production process (i.e., the process that creates the highest public value) can vary.

Democracy as a Rules Co-production Process

This analysis puts us in the position to approach from a fresh angle a peculiar but crucial type of “production”—the production of good rules for system governance. From such a perspective, representative democracy may be seen as an exemplary case of co-production. Representatives are in the position of the regular producers, whereas citizens are in the position of the consumer producers. Democracy as an ideal is the view that the production of rules in all their aspects, including monitoring and enforcing, must involve the “customers” of those rules in various ways and capabilities. Dahl (Reference Dahl1989, 89) offers one way to formulate the problem when he writes that, ideally, democracy

We can articulate the problem even more specifically by noting that a social system is a complex web of laws, contracts, and cultural norms that can be seen as emerging from a co-production process involving the state and civil society, with R and C now representing the quality of rules instead of quantity variables as before. The formal rules create constraints for the types of contracts that can be enacted and may determine changes in the social norms (assuming that social norms adapt over the long term on roughly rule-utilitarianism grounds; i.e., people tend to subscribe to those norms that, on average, give them benefits in the existing technological and legal environment, and deleterious social norms are gradually weeded out). Conversely, the social norms create constraints on the realm of formal rules by making certain laws difficult or impossible to enforce or by preventing them from “sticking” due to legitimacy issues (Boettke, Coyne, and Leeson 2008; Crawford and Ostrom Reference Crawford and Ostrom1995).

Regardless of whether we consider the simple representative democracy model or the complex social system model, the co-production perspective leads to the same conclusion: It is likely that the quality of rules increases if the competition between rule creators is increased. As such, we can interpret the majority of typical public choice problems as co-production of rules failures. A social order that has multiple rule creators acting as centers of power and authority in overlapping jurisdictions creates the conditions for improving the rules of the co-production process. We have thus reached the very concept of polycentricity, the capstone of the Ostromian system.