Monday, October 12, 2009

The Sveriges Riksbank Prize in Economic Sciences 2009 (amv)

goes to New Institutional Economics, that is, it goes by one-half to:

Elinor Ostrom "for her analysis of economic governance, especially the commons" (BTW, the first woman to receive the Nobel Economics Prize. Note that - in contrast to many of her male forerunners - she contributes all the 500.000 Dollar to graduate programs and her institution). UPDATE: I read through the blogsphere and a bit through Ostrom's work. I am impressed and hate myself for not knowing her and her work before. According to Marginal Revolution's Alex Tabarrok,

her work has explored how between the atomized individual and the heavy-hand of government there is a range of voluntary, collective associations that over time can evolve efficient and equitable rules for the use of common resources.

Olstrom established with her husband, Vincent, the Workshop in Political Theory and Policy Analysis in 1973 at Indiana University. There, you can find following description of the research program:

The betterment of humankind depends on the ability of fallible human beings to make decisions, manage resources, and govern themselves. This is the basis of democracy, and of civilization itself. It is also the basis for more than 30 years of research and inquiry at the Workshop in Political Theory and Policy Analysis at Indiana University in Bloomington.

The Workshop’s teaching and research probes the inner workings of human institutions—structures of rules used to govern people and resources, in this usage—in order to better understand what works and what does not. Institutions affect every facet of life, from public services to family and community structures to natural resources and beyond, and the Workshop’s research helps people design and adapt their institutions so that they generate better outcomes.

This is Political Economy in the tradition of Adam Smith and Friedrich A. Hayek. Again, Tabarrok:

For Ostrom it's not the tragedy of the commons but the opportunity of the commons. Not only can a commons be well-governed but the rules which help to provide efficiency in resource use are also those that foster community and engagement. A formally government protected forest, for example, will fail to protect if the local users do not regard the rules as legitimate. In Hayekian terms legislation is not the same as law. Ostrom's work is about understanding how the laws of common resource governance evolve and how we may better conserve resources by making legislation that does not conflict with law.

May I add that mathematical economics provides important negative results in equilibrium analysis, suggesting that Olstrom's research (the bridge between the atomistic individuals and the operation of the system) is vital for our understanding of economic allocation. In this respect, I claim that Werner Hildenbrand could have shared the Prize with Olstrom and Williamson. Hurwicz's mechanism design and concepts like 'incentive compatibility' and 'informational efficiency' are also related. But Hurwicz and Co. won two years ago. UPDATE III: This relation is also pointed out by the 2002 Nobel laureate Vernon Smith in his nice comment on Olstrom winning this years Prize. (HT Peter Boettke) UPDATE IV: I just cannot get enough of Elenor. Here is an extract from an interview she gave in 2007 to the Frankfurter Allgemeine Zeitung (FAZ):

Wenn es dazu kommt [dass der Staat die Dinge, die er den Bürgern mit deren Steuergeldern zur Verfügung stellt, auch kurzerhand gleich selbst produziert], dann bleibt der Gesellschaft nicht mehr genügend Raum dafür, innovative Lösungen auszuprobieren und Neues zu erlernen. Das gilt übrigens ganz generell: Alles, was die Vielfalt fördert, schafft Sozialkapital und dient so der Gesellschaft. Zentrale Regelsysteme und Einheitslösungen sind nie hilfreich. Das ist mir wirklich wichtig: Die Vielfalt der gesellschaftlichen Optionen ist von überragender Bedeutung. Nur da gibt es ein Benchmarking, nur da gibt es Konkurrenz. Wenn ein Ansatz schiefgeht, dann haben wir bei Vielfalt die Wahl, dann können wir voneinander lernen, unsere Kreativität einsetzen und uns Neuem zuwenden. Darin liegt ja auch der Charme des Föderalismus.

Damn Right!

The other half goes to:

Oliver E. Williamson "for his analysis of economic governance, especially the boundaries of the firm". UPDATE: Well, Williamson I knew before. I read his Economic Institutions of Capitalism. He is the most cited economist alive. A glimpse at a subset of his writings shows why. Read again Tabarrok on Williamson. He provides a neat summary:

In Adam Smith there is the pin factory and the market and from that beginning we trace the long literature in economics focused on the win questions, What price to set? How much to produce? Following Coase, Williamson asks different questions, Why a pin factory? Why are the 18 steps to make a pin performed by a single firm rather than two or more? Why are there many firms instead of one large firm? Why does the pin factory not vertically integrate upwards to buy the steel factory and downwards to buy the retail hardware shop?

Williamson's answer rest on the notions of bounded rationality, contract incompleteness, asset specificity and opportunism. Start at the end, asset specificity and opportunism. When a deal has been sealed the parties typically move from having many potential partners to being locked in. That's bad because it raises the possibility of opportunism--one party can exploit the other. But it's also good because when the lock-in is credible each party may be more willing to invest in assets which are extra-productive but specific to the relationship.

[...] Transaction cost economics is all about applying these ideas in different settings to figure out the best governance structures (marriage, vertical integration etc.) in different circumstances. How does one deal with expensive investments (such as highly individual dies or plant construction) that are specific to a given trade and put the investor at risk yet which increase productivity? Williamson analyzes how firms come to rely on long term contracts or vertical integration or other seemingly non-competitive solutions to enhance market productivity. Early generations of antitrust enforcers often saw these as monopolistic dealings, but scholars such as Williamson helped us understand how these are essential to the workings of the invisible hand.

All in all, I am really happy with this years Laureates. Congratulations! More details here. All previous predictions again proved to be wrong (UPDATE: wrong, Harvard had Williamson on the list). For comments see Krugman, Boettke, Tabarrok and Kling. UPDATE II: Real Time Economics provides a list of the profession's reaction (though incomplete). There you find some conspiracy theory by The New Republic:

It seems more or less beyond dispute that the Nobel committee was trying to send a political message by giving Barack Obama the Peace Prize. Now it looks like the Nobel brass has decided to send a similar, if slightly more subtle, message in awarding the economics prize to Elinor Ostrom of Indiana and Oliver Williamson of Berkeley. (It’s worth mentioning that the two prizes are awarded by different committees, as many readers probably know…) Both spent their careers thinking about non-market interactions and Ostrom is actually a political scientist (not to mention her suspiciously Scandinavian-sounding name). –Noam Scheiber