Monday, October 12, 2009

nobel in economics -- a surprise but deserved

Elinor Ostrom (her bio) and Oliver Williamson (his bio) shared the 2009 Nobel Prize in Economics. This is a bit of a surprise since both were 50-1 long shots. Actually I was not at all surprised at Williamson getting it but I never really thought of Ostrom as being in the running. Her sharing the prize with Williamson really was a bit of a shocker since I never really saw their work as being connected.

Elinor and her husband Vincent, both political scientists, were early leaders in the development of Public Choice, an interdisciplinary field that looks at non-market decision making. It basically takes the methods of economics and applies them to the topics of political science. (BTW, I studied at Public Choice Center, then at Virginia Tech. Two of the founders of Public Choice, James Buchanan and Gordon Tullock, were on my dissertation committee. Buchanan won the 1986 Nobel Prize for pioneering Public Choice.)

What is probably my best publication, an article on the Maasai, was built upon a number of Elinor Ostrom's works from the late 1980's and early 1990's concerning the tragedy of the commons.

From this morning's

Ostrom, Williamson Win Nobel Prize for Economics

Two American economists, Elinor Ostrom and Oliver Williamson, who study the way decisions are made outside the markets on which many other economists focus, were awarded the Nobel Prize in economics Monday.

Ms. Ostrom, who teaches at Indiana University in Bloomington, Ill., is the first woman to win the prize, which, before Monday, had been awarded to 62 men since it was launched in 1969 to celebrate the 300th anniversary of the Swedish bank. The judges cited "her analysis of economic governance, especially the commons," the way in which natural resources are managed as shared resources. It is an area of research that she said was relevant to questions surrounding global warming, and suggests that decisions by individuals can help solve the problem even as governments work to reach an international agreement.

Ms. Ostrom "challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized," the Nobel judges said. "Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, [Ms.] Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories. She observes that resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest, and she characterizes the rules that promote successful outcomes."

Ms. Ostrom, who was interviewed by phone during the announcement press conference in Stockholm, described the prize as "an immense surprise," and said, "I'm still a little bit in shock."

Her Ph.D. is in political science, but she said she considers herself a political economist.

Mr. Williamson, who is at the University of California at Berkeley, was cited for "for his analysis of economic governance, especially the boundaries of the firm" -- the reason some economic decisions are made at arm's length in markets and others are made inside a corporation.

"The drawback of markets is that they often entail haggling and disagreement," the judges said. "The drawback of firms is that authority, which mitigates contention, can be abused. Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets. A key prediction of [Mr.] Williamson's theory, which has also been supported empirically, is therefore that the propensity of economic agents to conduct their transactions inside the boundaries of a firm increases along with the relationship-specific features of their assets."

The economics prize is the only one of the six Nobel prizes not created in Swedish industrialist Alfred Nobel's 1896 will, and is officially known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

The two economists will share a 10 million kronor prize (about $1.4 million). Ms. Ostrom said she hopes to devote the proceeds to supporting research and graduate students.

OCTOBER 12, 2009, 8:20 A.M. ET

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