Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Elinor Ostrom breaks the Nobel moldFrom Kevin Gallagher, of Tufts' Global Development and the Environment Institute, in the Guardian. For thoughts on this year's econ Nobel from Larry Peterson of the D&S collective, click here.Elinor Ostrom breaks the Nobel mould The economics profession needs to be shaken up. Ostrom's Nobel prize should encourage us to take a fresh approach Kevin Gallagher | guardian.co.uk | October 13 2009 The economics profession is in such disarray that one of the Nobel prizes in economics this year went to political scientist Elinor Ostrom – the first woman to be awarded the economics prize. This is an excellent choice (in any year) not only because of what Ostrom has contributed to social theory but also because of how she goes about her work. In a nutshell, Ostrom won the Nobel prize for showing that privatising natural resources is not the route to halting environmental degradation. In most economics classes the environment is usually taught as being the victim of the "tragedy of the commons". If one assumes, like many economists do, that individuals are ruthlessly selfish individuals, and you put those individuals onto a commonly owned resource, the resource will eventually be destroyed. The solution: privatise the commons. Everyone will have ownership of small parcels and treat that parcel better than when they shared it. Many environmental experts also reject the tragedy of the commons argument and say the government should step in. Ostrom says the government may not be the best allocator of public resources either. Often governments are seen as illegitimate, or their rules cannot be enforced. Indeed, Ostrom's life work looking at forests, lakes, groundwater basins and fisheries shows that the commons can be an opportunity for communities themselves to manage a resource. In her classic work Governing the Commons: The Evolution of Institutions for Collective Action, Ostrom shows that under certain conditions, when communities are given the right to self-organise they can democratically govern themselves to preserve the environment. At the policy level, Ostrom's findings give credence to the many indigenous and peasant movements across the developing world where people are trying to govern the land they have managed for centuries but run into conflict with governments and global corporations. Some economists on the frontier of their discipline have started to use Ostrom's insights in their work. In their recent book Reclaiming Nature: Environmental Justice and Ecological Restoration, James Boyce, Liz Stanton and Sunita Narain, show how communities in Brazil, India, West Africa and even in the United States have managed their resources in a sustainable manner when given their rightful access to their assets. Indeed, Boyce and his collaborators find that communities should be paid for their services, since they can sometimes do a far better job than government or corporations at managing resources. Indeed, "payment for environmental services" has become a buzzword in development circles. Now even the World Bank has a fund for PES schemes across the world. In terms of methodology, Ostrom proves her findings three times over. As opposed to many economists who never leave the blackboard, Ostrom often conducts satellite analyses of resource depletion to measure amounts of degradation. Second, she actually goes out into the field and performs case studies of human and ecological behaviour all across the world. However, she doesn't stop there. When she gets back from her fieldwork she conducts behavioural experiments to see if random subjects replicate her findings in the field. The Nobel committee should be applauded for recognising such rigorous theoretical and empirical work. Shining light on Ostrom is a call to economists to spend a lot more time analysing human behaviour, rather than assuming that we are all rational selfish individuals. It is also a call on economists to become more empirical and to find ways to validate their theories. Adopting Ostrom's approach will not only help us forge a better relationship with the natural environment, but will help us become more realistic about the economy in general. It's time for a fresh approach to both. Read the original article. Labels: Elinor Ostrom, institutional economics, Kevin Gallagher, Nobel Prize in economics, tragedy of the commons Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A Note on the Nobel AwardsThe 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 Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The death of the Washington consensus?From today's Guardian:Paul Krugman's Nobel prize for economics signals the intellectual tide is turning against unrestricted free trade Kevin Gallagher guardian.co.uk, Tuesday October 14 2008 14.30 BST Last Friday the New York Times quoted the World Bank as saying "There's no question the Washington consensus is dead," indeed it "died at the time of the $700bn bail-out." If the bail-out is death, then awarding Paul Krugman the Nobel prize for economics is the nail in the coffin. Paul Krugman did not win the Nobel for his popular critiques of Bush-era economic policy in his New York Times column, though the column no doubt helped raise his profile outside the economics profession. The Nobel committee cited Krugman's theoretical contributions to the economics of international trade, the policy implications of which fly in the face of the Washington consensus ( where themantra is to free up trade every chance you get). Read the rest of the article. Labels: free trade, Nobel Prize in economics, Paul Krugman, washington consensus Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Real World NobelistLooks like the Nobel committee in Stockholm is doing another "Amartya Sen" (Sen, a noted Indian maverick, dismissed by some economists as, well, not even an economist, received the Nobel in the wake of the Asian financial crisis), or even another Stiglitz. And though Krugman is being awarded the prize for work in "New Trade Theory," which he did more than twenty years ago, you can be sure that the committee didn't want to look silly in light of the crisis: a major and welcome reversal of their usual academic superiority-complex.From Tim Harford, the "Undercover Economist" at the Financial Times October 13, 2008 Nobel memorial prize in economics goes to Paul Krugman The Nobel memorial prize in economics has been awarded to Paul Krugman, a professor at Princeton University and a prominent columnist for the New York Times. Mr Krugman is one of the great popularisers of economic ideas and a trenchant critic of the Bush administration, but his prize was awarded for work done almost three decades ago in developing what is known as "new trade theory" and "new economic geography". Earlier trade theories suggested that a country would trade with trading partners that were very different--rich would trade with poor, and capital-intensive would trade with labour-intensive. In practice, rich countries tend to trade with other rich countries. Mr Krugman's analysis showed why this was to be expected: many products were most efficiently produced by very large companies, but consumers wanted variety and would thus buy products from foreign giants as well as the dominant domestic corporations. Mr Krugman's ideas on the importance of economies of scale could be traced all the way back to Adam Smith, but the new ingredient was a usable mathematical description of what was going on. Economic geography uses much the same mathematics to explain the location of jobs and businesses. Mr Krugman showed that the forces of globalisation, far from creating a "flat world", could enhance the power of global cities such as New York and London, because those cities could increasingly do business with a global market. Mr Krugman has long been seen as a future Nobel laureate. He won the John Bates Clark medal for young economists in 1991, an award which is often a precursor to a Nobel. Yet if the choice is not surprising, the timing--just before the US Presidential election--might be. Mr Krugman is an influential and partisan political commentator. His columns, first in Slate and then the New York Times, were at first clever refutations of popular misconceptions about trade protection or the "new economy", but they have become far more notable for their stinging attacks on the Bush administration. He has recently criticised Hank Paulson, the US treasury secretary, for mishandling the credit crisis, while praising the British government for being "willing to think clearly about the financial crisis, and act quickly on its conclusions." He also warned of the US housing bubble in the summer of 2005. This is, however, not the first time that the Nobel prize committee has recognised an economist with a public profile and an appetite for political debate. Joseph Stiglitz shared the prize in 2001, after a combative stint as chief economist of the World Bank; Milton Friedman was an early laureate in 1976. Among professional economists, Mr Krugman is admired for his work on currency crises as well as the work on trade that won the prize. A Princeton colleague, Avinash Dixit, once described Krugman's methods: "He spots an important economic issues coming down the pike months or years before anyone else. Then he constructs a little model of it, which offers some new and unexpected insight. Soon the issue reaches general attention, and Krugman's model is waiting for other economists to catch up." Mr Krugman's trade model showed that there were circumstances in which trade protection could be in a nation's economic interest. This idea was joyfully embraced by protectionists, and Mr Krugman spent much of the 1990s vigorously defending free trade and arguing that trade protection in practice was almost always harmful. The experience may have fuelled his enthusiasm for economic popularisation, although even his early writing betrayed a wit and clarity not common amongst economists: he wrote, in 1978, "A theory of interstellar trade", commenting that it was "a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics." The economics prize was not one of the original Nobel prizes. It was established in 1968 by the Swedish central bank and is officially called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The prize money is 10 million Swedish Kronor (810,000 pounds; $1.4m; euro 1m) Labels: Amartya Sen, Joseph Stiglitz, New Trade Theory, Nobel Prize in economics, Paul Krugman, Tim Harford Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Dull Compulsion of the Economic (#10)A series of blog entries by D&S collective member Larry Peterson.The Nobel Prize in economics was awarded Monday to three Americans (one Russian-born) for their work on "Mechanism-Design Theory." The three, Leonid Hurwicz, Eric Maskin and Roger Myerson, developed sophisticated mathematical models derived from game theory in an attempt to reveal rules and conditions under which scarce resources can be optimally put to use or divided when each person bidding for a share has an incentive to conceal how much s/he is actually willing to pay for that share, (by concealing this price, other bidders will be misled about the actual demand, and tend to make their own bids lower in turn, resulting in lower sale prices). Accordingly, the actual costs of employing the resource will have to fall on others. Mechanism-Design theory is, then, an attempt to articulate what types of rules will rectify this mismatch. Although set in the context of an auction, many claim the theory’s insights can be used to design econmic policies and even innovations: for example, it can suggest ways liberalization of labor markets may be countered by re-distributive tax policies favoring the less-well off to get those benefiting from either exclusively to negotiate and compromise; and eBay seems to be a business innovation, with its clever bargaining checks and balances, that looks a lot like Mechanism-Design theory. Democratic elections themselves, according to proponents of the theory, may sometimes fall within the theory’s explanatory power. What are we on the left to think of all this? Personally, I had never heard of any of the three (and I follow these things as much as any layman can) before the announcement, and I have no doubt that the mathematics involved are way, way beyond my capacity to remotely understand, never mind evaluate. Still, I think there are three points for non-specialists to ponder. First and foremost, the theory doesn’t seem to offer room for any capacity for participants to change their own preferences, or even process of preference-formation as their participation in the decision-making process deepens (and they learn more about the other participants, and what their common interests might be). All the participants seem forever bound by the incentive to conceal their estimates of worth in attempts to get a bargain; no other motivations matter, or emerge from the nature of the interaction itself. This may be the case when we’re talking about auctions; but it tells us little—in most cases, one hopes—when we try to construct a democratic workplace, say. On a more positive note, the eldest of the three, Hurwicz, was influenced by the socialist-calculation debate of the mid-twentieth century, and, influenced by Friedrich von Hayek and Ludwig von Mises, provided criticisms of Oskar Lange and others on the socialist side. What’s important here is for us to recall that socialism in its "actually-existing" form all too readily pursued the abolition of scarcity by wastefully and even dangerously employing limited resources, especially of the natural and environmental, but also of the human variety. Within this context, maybe we could revisit the debate in attempts to reimagine how socialist production could--and must—become environmentally sustainable, and what the most pressing problems in this quest might turn out to be. Finally, it is interesting to juxtapose the work of the three with Naomi Klein’s new book The Shock Doctrine: The Rise of Disaster Capitalism (which I haven’t read yet, but I have read several reviews, and I saw Klein speak recently). Klein states that neoliberal reforms championed by another Nobel laureate, Milton Friedman (1976), have often been adopted under circumstances in which visible—often overwhelming—opposition to them is rendered ineffective by some sort of catastrophe: a war, a military coup, an economic panic, even a natural disaster. Only with the opposition shocked into silence will elites be able to impose such unpopular reforms, whose costs tend to be borne overwhelmingly by the less-well-off majority. The three laureates, as we have seen, tend to finesse this issue somewhat: they claim that they want to reveal ways whereby optimal solutions emerge from markets and democratic elections, not after the latter have failed; they want to keep all sides negotiating, rather than simply forcing the will of one faction on the other(s). But it’s hard to see how a theory that is so complicated that, as one practitioner (Hans-Peter Gruener of the German weekly Der Spiegel, whose interview provided me with most of the background for this blog entry) put it, it requires two full lectures for economics students to begin to understand it, can allay the fears of the sort of actual hard-hitting impositions of neoliberal policies that have actually come to pass, as Klein documents. Labels: Disaster Capitalism, Eric Maskin, Leonid Hurwicz, Mechanism-Design Theory, Naomi Klein, Nobel Prize in economics, Roger Myerson, Shock Doctrine Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
