A Note on the Nobel Awards

by Dollars and Sense

The Nobel Prize for economics was awarded today to a pair of American professors, Elinor Ostrom and Oliver Williamson. Besides being the first economics Nobel to be awarded to a woman, the choice was notewothy on several other accounts. Both laureates were not considered frontrunners, at least by the London bookies who actually take bets on such things, and both teach at public universities, rather than the usual coterie of MIT, Harvard, Stanford and the University of Chicago. But the most interesting characteristic concerns Ostrom: she's not even an economics PhD, but a political scientist. In a field like professional economics, which is compulsive to a ridiculous degree about who qualifies as an economist, this is a very welcome change.

It's also welcome inasmuch as both Williamson and Ostrom are practitioners of what is known as "institutional economics". Institutional economics focuses on the way economic outcomes are conditioned by institutions which provide rules of the game--which often-times clash, and are not always transparent, and hence evolve--for individuals party to dealings and transactions that have economic significance. Needless to say, such a contribution have served to flesh out stagnant and superficial ideas of individual rationality and utility maximization that were for all too long taken as axiomatic in conventional economics. In recent years, they've also be increasingly amenable to empirical analysis, though there's still a long, long way to go on this score.

Both Williamson and Ostrom were honored because of work they did which has come to replace standard thinking that derives from two classical contributions to conventional welfare economics by Ronald Coase. Williamson expanded on Coase's theory of the size of the firm, which states that the firm exists because it reduces operational costs that would be forbiddingly large if firms didn't exist, and all operations within a firm were carried out by independent contractors with individual contracts. He went beyond Coase by remarking upon ways in which markets were inefficient, as well as by showing how "transactions costs"--the sort of costs of the structures that exist so business can be done in the first place--can be minimized by creating certain organizational structures that address specific problems arising from market encounters themselves characterized by information asymmetries and other sometimes unavoidable impediments to the efficient functioning.

Ostrom's work challenged "Coase's theorem," which implies that only the establishment of private contracts can prevent the inefficient distribution of public goods. A more contemporary cahracterization of the problem refers to the "tragedy of the commons," in which goods available to anyone without cost will inevitably involve incentives to maximize utilization of resources to an unsustainable degree. But Ostrom's work details all manner of arrangements which result in the efficient and equitable distribution of natual resource pools, but are not enforced by contracts. Instead, local communities are capable of devising implicit rules transmitted often by custom alone, which are often ingenious and complex enough to regulate distribution of scarce natural resources for long periods.

So, the choice is progressive in a kind of weird way (and it's also progressive inasmuch as Eugene Fama, the founder of the Efficient Markets Hypothesis, which was taught in a simplistic and dogmatic fashion to a generation of market movers, and certainly contributed in some way to the current crash--and who was the favorite to win--did not win): it's nice that, particularly in Ostrom's case, factors not reducible to purely economic ones are being investigated and acknowledged as having economic significance, but it's ironic that this is only happening as many such structures have been reduced or even eliminated under the relentless onslaught of marketization for several decades. In this sense, this award, like the one awarded to Joseph Stiglitz, which, by implication, would have been very useful, if heeded, in reducing the horrific scope of the financial crisis, may amount to too little, too late.

Labels: Coase's Theorem, Efficient Markets Hypothesis, Elinor Ostrom, Eugene Fama, Nobel Prize in economics, Oliver Williamson, Ronald Coase, The Ideal Size of the Firm

 

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10/12/2009 02:22:00 PM