Ostrom, Williamson Win Economics Nobel Prize

Political economist Elinor Ostrom and economist Oliver Williamson have won the 2009 Nobel Prize in Economics. Both were recognized for their work in using economic analysis to understand the differences between market and nonmarket decision making, and how private individuals can solve problems that are “collective” in nature. In other words, their work is in the tradition of economic governance.

Here is the press release from the Royal Swedish Academy of Sciences announcing the prize:

Elinor Ostrom has demonstrated how common property can be successfully managed by user associations. Oliver Williamson has developed a theory where business firms serve as structures for conflict resolution. Over the last three decades these seminal contributions have advanced economic governance research from the fringe to the forefront of scientific attention.

Economic transactions take place not only in markets, but also within firms, associations, households, and agencies. Whereas economic theory has comprehensively illuminated the virtues and limitations of markets, it has traditionally paid less attention to other institutional arrangements. The research of Elinor Ostrom and Oliver Williamson demonstrates that economic analysis can shed light on most forms of social organization.

Elinor Ostrom has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, 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.

Oliver Williamson has argued that markets and hierarchical organizations, such as firms, represent alternative governance structures which differ in their approaches to resolving conflicts of interest. The drawback of markets is that they often entail haggling and disagreement. 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 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.

What might make this prize different in today’s climate is that both winners’ research has shown that markets and individuals can solve collective choice problems through private means. For Williamson, the firm is seen as an efficient way to solve collective choise problems. Ostrom’s work has shown that private individuals, working collectively and not through government, can solve common resource problems (and she has extended this to global warming).

In short, awarding these two the nobel prize has given a little boost to markets and private solutions to public problems.

Ostrom in the first woman to win the prize. Interestingly, most of Ostrom’s academic work has been in public choice and political economy. Her Ph.D. is in political science and she teaches public administratin at Indiana University at Bloomington.