Surprising Nobel in Economics

Posted by: Michael Mandel on October 12

I have an admission to make—I had never heard of Elinor Ostrom before this morning’s Nobel prizes in Economics were announced. Ostrom, the 2009 winner along with Oliver Williamson of the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2009”, was honored “for her analysis of economic governance, especially the commons.” Williamson—whose work I had read extensively in graduate school—received his Nobel “for his analysis of economic governance, especially the boundaries of the firm.”

So I’ve spent the past few hours reading up on Ostrom and Williamson’s work. The two of them share a common thread: They have both spent their careers studying alternatives to markets and government. Williamson focused on a simple question: If markets are so good, why is so much economic activity organized within businesses, which are run as hierarchies?

Ostrom focused on a more subtle question—if you have a shared “common-pool resource” like a forest or the ocean, what is the right way to manage it? Typical answers have focused on either collective management (i.e. government control) or effective privatization (i.e. fishing permits). But Ostrom has argued that all sorts of other institutions can grow up over time that give good results.

Her principles for good management of collective resources include:

(i) rules should clearly define who has what entitlement,
(ii) adequate conflict resolution mechanisms should be in place
(iii) an individual’s duty to maintain the resource should stand in reasonable proportion to the benefits.
iv) monitoring and sanctioning should be carried out either by the users themselves or by someone who is accountable to the users.
vi) governance is more successful when decision processes are democratic in the sense that a majority of users are allowed to participate in the modification of the rules
(vii) the right of users to self-organize is clearly recognized by outside authorities

The political implications of this year’s Nobel prize are clear. In the aftermath of the financial crisis, people are experiencing a revulsion against markets. However, turning the economy over to the government is not palatable either, since no one really believes the politicians and bureaucrats will do a better job. The same two-sided distrust of markets and government is shaping the healthcare reform and climate change debates.

From that perspective, the Ostrom/Williamson prize may come at exactly the right time, since it shows that there are credible alternatives to the dueling poles of market and government.

Added: The Ostrom prize was a surprise to many, if not most, economists. The Economics Prize Pool at Harvard tabbed Williamson as one of the favorites, but did not mention Ostrom.

I’m going to find out if she was on the reading list for environmental economics courses. If not, there’s a problem.

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Reader Comments

Bill

October 12, 2009 12:35 PM

Given the state of the world and the people that caused most of it (clue they all attended college and took economics courses) The Nobel Committee should have announced there would be no winner this year or in fact until the world economy was once again stable. (could argue the same thing about the peace prize but hey what would they give to Democratic US presidents)

david samuels

October 12, 2009 12:40 PM

Just Google scholar her name- any academic would kill for those cite counts. More importantly, she's a rare case of someone with true multidisciplinary impact, across the social sciences and into the policy realm. I'm a political scientist, so we're all happy to point Tom Coburn to her research as relevant (no scare quotes) - I lost count of the NSF and other government-funded research awards on her CV...

Babatunde Egunjobi

October 12, 2009 12:49 PM

I think this award, by sidestepping adherents of the main schools of thought (regarding markets and government) will help to reinforce the fact that economics is a science of observation and deduction and not some branch of philosophy.

John in NC

October 12, 2009 01:11 PM

We need to finally stop thinking of "government" in terms of secret negotiations conducted in smoke-filled (and lobbyist-filled) rooms. Dr. Ostrom seems to be indicating that the best outcomes derive from open and participatory governance. US political establishments are slowly heading in that direction, but corporations continue to point in the opposite direction (i.e., toward secrecy and limited participation). We need a new glasnost for CEOs and politicians alike.

Jesse Dame

October 12, 2009 01:14 PM

I understand your point about this award being a political reaction to a general distrust of markets and governments. I also understand the distinction between hiearchies inside private organizations and markets. It appears that both of these scholars provide and interesting analysis of both private and public mechanisms to allocate resources, and some of their findings may challenge conventional wisdom. However, I don't see how either provides a third alternative. Even if resources are managed by the internal heirarchy of a private organization, don't the customers/users ultimately vote with their wallets in a private market for or against such an organization? If the heiarchy is working poorly, users are supposed to be able to vote them out of business by switching to an alternative organization (when the market mechanism is working properly).

Chris Mitchell

October 12, 2009 01:33 PM

If you are familiar with "the tragedy of the commons", this theory deals with the same set of issues. One well-known example of a shared-resource management entity is the homeowners association.

The PDF that Mr Mandel links also mentions underground oil fields that have many owners, waterways, and other examples.

Cooperative businesses often have a similar structure. They are private entities but are operated collectively by worker-owners (or consumer-owners), typically with a relatively flat hierarchy and broad participation.

Of course, if you replace the word "user" with "citizen" in these principles it makes a rather nice handbook for good governance, at least at the local level. Perhaps it's best seen as a set of foundational principles for how communitarian governance is best implemented.

Jesse

October 12, 2009 01:38 PM

If you study the history of a sufficient volume of periods in human history (you can go back at least 3,000 years before Christ) you will recognize with little doubt that there are no perfect systems for allocating resources. Many systems have existed, they are all fallible because humans are inherently fallible, and every system is only as good as the humans that use it. This does not mean that we cannot advance our knowledge and build progressively more sophisticated systems with greater capacity to handle the increasing complexity of human life. However, we will always encounter failure. This failure occurred not because the system was completely broken, but because our confidence in our system and ourselves was inflated drastically. I remember numerous conversations with “wise business leaders” about the immunity of the U.S. economy to a modern day financial collapse as I was leaving college and beginning a career in financial services from 2004 through 2006. Our very belief in the impossibility of another financial collapse is what inevitably caused our financial collapse. And guess what, this kind of a belief is what usually causes a financial collapse. Be careful about throwing the baby out with the bathwater as we rightfully re-examine our systems, and spend some more time re-examining our beliefs.

Elizabeth

October 12, 2009 01:41 PM

Maybe there is a message in this award and our historic failure to acknowledge the insightful work of many diverse and non-traditional thinkers. "Unbound economics" and media coverage might want to include more creative thinkers such as Dr. Ostrom. Perhaps this magazine, among others, might now re-consider how inclusive is their intellectual coverage and how they might be missing out on 51% of the educated resources of this great nation.

Ivan Kitov

October 12, 2009 03:20 PM

Congrats to Drs. Ostrom and Williamson.

Interesting is that Ostrom's statistics of downloads at major economics archive RePEc ( http://ideas.repec.org/e/pos55.html )was closed today. seems nobody read her papers before and to hide this sad for the economic community fact somebody just closed the access.

Pete

October 12, 2009 03:42 PM

Actually, she is not among the 1000 most cited authors in economics: http://ideas.repec.org/top/top.person.anbcites.html
Surely the Nobel committee could have found someone better?

Thurston

October 12, 2009 04:25 PM

Ostrom's focus on a shared “common-pool resource” and her principles for good management of collective resources make great reading and musing.

Too bad theories have been so fully marginalized. Any attempt at implementation (have you noticed?) is quickly neutralized by those who own and benefit from the system as it is.

It's fun to think we have such options, though, isn't it?

Thurston

October 12, 2009 05:34 PM

Fascinating, too, that so many commenters want to evaluate Ostrom based on citation numbers and other self-perpetuating criteria that reinforce established canon, rather than on the merit of her ideas.

Has the discipline of economics really stood us in such good stead that those at the head table and their myrmidones should be empowered to exclude everyone but like-thinkers?

How well did economists fare in foreseeing the current crisis, let alone staving it off? Seems like the perfect time for minds to open to an Ostrom, doesn't it?

Kenneth

October 12, 2009 06:24 PM

The problem with this sort of thinking is that someone will immediately say it smacks of socialism. Inclusive management and pools and notions of common good are to be avoided at all costs. Capitalism and markets are good. They solve all problems if just left alone. And if it doesn't actually work out that way, well, better to pick amongst the rubble of destruction than to ever admit something other than pure capitalism might be better.

glenn beck

October 12, 2009 08:22 PM

The source of the current global meltdown is
"Deregulation and globalization of financial and
labour markets". It became the genesis of
vampire locust species which caused the global
scourge financially and economically.

US Congress is largely responsible
for the current global problems.

It's time to study the sickening symptoms of
"Deregulation and globalization of financial and
labour markets"!

Ivan Kitov

October 13, 2009 02:59 AM

Pete,

May be I found a different person, but Elinor Ostrom (http://ideas.repec.org/e/pos55.html) as of 2009-10-12 is not in any 5% ranking in RePEc, i.e. outside any top 1000.
Surely, she is not not among 1000 top cites per author as well.

Her download statistics is not available yet.

Ivan Kitov

October 13, 2009 03:04 AM

Pete,

I have misread your statement. Please disregard previous comment.

Bala

October 13, 2009 10:16 AM

Folks, including the author of this article!!

Just focus on the material that has been provided by Elinor Ostrom. Judge on such material being nobel quality or not. Leave your research about whether she has background or big butt etc.,,

If some stranger without the damn so called academic background come-up with an globally astute idea or theme, would you say it shouldn't be considered at all?

The brand image seeking tendency of you so called intellects is one of the bottom line reasons for most of our perils. Its high time people of this sort get some pragmatic education on their judgments.

Michele

October 13, 2009 01:59 PM

I literally burst aloud an "AAHH" as I read a Nobel prize in economics related to a third alternative from market and government. No surprise here over a third alternative; government and private markets together have hit the economic ceiling of their making. As I read on I perceived a 3rd alternative to markets and government in the same way opportunity broadens for a 3rd political party in America. It is a matter of choice. Similar principles were followed in the colonial era of this country. Back then it was called "water rights". Few among us realize the foundation for our economic system was poured in the colonial period by privately owned water powered mills which were built and developed an industrial infrastructure. Similar principles were followed when a new economy emerged from the suppression of another economy once the homeland economy transformed into a "foreign" economy in the minds of colonials. I find the analysis that won this Nobel prize in economics timely and very much in touch with current events. Afterall economies are built always from the bottom up, never from the top down.

marcos

October 14, 2009 06:34 AM

it is really surprising... it tells you in modern times, where publish (in top academic journals!) or perish is the rule, you can win a nobel prize in economics without ever publishing in "Econometrica", nor in the "American Economic Review", the "Journal of Political Economy", the "Quarterly Journal of Economics", the "Interntional Economic Review", the "Journal of Economic Theory", the "Journal of monetary economics", and so on!

candide

October 14, 2009 06:27 PM

While it is questionable whether economics should ever get a Nobel Prize, given that it is largely hocus pocus, it is still interesting that the latest prize winners are all on the side of government and regulation, rather than on the side of the free market. This tells us a lot about the trend of the next period of time among economists. But still remember, not one of them has a clue about anything.

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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