In a top year for economics, the Nobel goes to …  

John Quiggin has an article in Crikey on this year's Nobel prize winners for economics (which seems to have been granted for some tangible research, as opposed to the thus far empty rhetoric Obama coasted to the Nobel peace prize on), looking at Elinior Ostrom's rejection of the thesis of the "Tragedy of the Commons" - In a top year for economics, the Nobel goes to ….

The award of the Economics Nobel Prize (for pedants, The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) to Elinor Ostrom and Oliver E. Williamson came as a surprise to most economists, but a welcome one for most of the commentators I’ve seen.

As regards the surprise, the global financial crisis had (for me, at least, but not for some betting markets) ruled out the early favorite, Eugene Fama, famous for developing the efficient financial markets hypothesis, not to mention the majority of macroeconomists whose models failed to warn of the impending crisis or provide useful responses. Still, there were plenty of contenders who seemed more likely.

Of the two winners, Williamson was on most lists of people (actually, men) who were bound to win sooner or later. His fundamental work on transactions costs and economic organisation, largely done in the 1970s and 1980s changed the way economists think about these things. That said, it raised more questions than answers. Economists still tend to use “transactions costs” as a kind of black box, in which to put anything that prevents markets working as they should.

My view is that the ultimate answer will be found by dropping the assumption that market participants are perfectly rational agents, capable of considering all possible outcomes of the transactions into which they enter. But I would say that  — most of my theoretical work these days is about bounded rationality in one form or another.

Elinor Ostrom is a far more interesting choice. She’s the first woman to win the prize and (much more controversial for some) a political scientist. The best way to understand the impact of Ostrom’s work is to look at what it displaced. In 1968, Garrett Hardin wrote a highly influential article in Science called “The Tragedy of the Commons”.

Hardin started with the story of how the medieval commons in England had collapsed under the pressure of overgrazing, and used this as a metaphor for modern environmental problems. The solution he argued was “enclosure”, that is, the conversion of the commons into private property. Hardin’s work was influenced by, and encouraged the further development of, the “property rights” school of economic thought, which saw the expansion of private property rights as the central engine of economic progress.

Hardin took his analysis to its logical conclusion in his Lifeboat Ethics: the Case Against Helping the Poor, which suggested that having seized enough property rights to support themselves, the rich should (metaphorically) throw the poor overboard.

Decades of careful empirical work on actual common property institutions, in which Ostrom has played the leading role has shown that Hardin’s description of the commons was totally inaccurate, and that the policy prescriptions he derived were likely to be counterproductive. That said, Ostrom is not romantic about common property institutions, and observes that they need not be egalitarian and may be rendered ineffective by changing circumstances.

The message from Williamson and Ostrom that a mixed economy can involve not just private and public ownership but a range of other possible institutional structures, interacting through markets, contracts, regulations and direct collective management. Ostrom shows how the historical example common property in resource management may be applied modern problems involving externalities, local public goods and pollution.