Surprising Nobel in Economics

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

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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