Two Americans Are Awarded Nobel in Economics

Two Americans Are Awarded Nobel in Economics
By LOUIS UCHITELLE
Copyright by The New York Times
Published: October 12, 2009
http://www.nytimes.com/2009/10/13/business/economy/13nobel.html?scp=1&sq=nobel%20in%20economics&st=cse


The Nobel Memorial Prize in Economic Sciences was awarded on Monday to two American social scientists for their work in describing the numerous relationships within a company or among companies and individuals that shape market behavior.

The prize committee cited Elinor Ostrom, 76, at Indiana University, and Oliver E. Williamson, 77, at the University of California, Berkeley, for work done over long careers. Ms. Ostrom is the first woman to receive the economics prize in the 41-year history of the award. She is a political scientist, not an economist, and in honoring her, the judges seemed to suggest that economics should be thought of as an interdisciplinary field rather than a pure science governed by mathematics.

“This award is part of the merging of the social sciences,” said Robert Shiller, a Yale University economist. “Economics has been too isolated and too stuck on the view that markets are efficient and self-regulating. It has derailed our thinking.”

The Nobel judges in Stockholm notified the winners when it was 6:30 a.m. in Bloomington, Ind., where Ms. Ostrom lives, and 3:30 a.m. in California. Mr. Williamson’s grown son, home on a visit, answered the ringing telephone and passed the call to his father, awakening him. Ms. Ostrom said she, too, was awakened by the call and afterward made herself a cup of coffee in the kitchen. Both expressed surprise that the award had come their way. They will split $1.4 million in prize money.

Neither Ms. Ostrom nor Mr. Williamson has argued against regulation. Quite the contrary, their work found that people in business adopt for themselves numerous forms of regulation and rules of behavior — called “governance” in economic jargon — doing so independently of government or without being told to do so by corporate bosses.

The Nobel judges, in their description of Mr. Williamson’s and Ms. Ostrom’s achievement, said that “economic science” should extend beyond market theory and into actual behavior, and the two award winners, in their empirical work, had achieved this. Summarizing their findings, the award announcement said: “Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated. Likewise, monitoring and enforcement work better when conducted by insiders than by outsiders. These principles are in stark contrast to the common view that monitoring and sanctions are the responsibility of the state and should be conducted by public employees.”

Ms. Ostrom’s work deals in the concept of “commons” shared by a number of people who earn their living from a common resource and have a stake, therefore, in preserving it. Her most recent research has focused on relatively small forests in undeveloped countries. Groups of people share the right to harvest lumber from a particular forest, and so they have a stake in making sure the forest survives.

“When local users of a forest have a long-term perspective, they are more likely to monitor each other’s use of the land, developing rules for behavior,” Ms. Ostrom said in an interview. “It is an area that standard market theory does not touch.”

Often working with her husband, Vincent, 90, who is a professor emeritus at Indiana, Ms. Ostrom concluded in her research that the “tragedy of the commons” was an inaccurate concept. Particularly in 17th- and 18th-century England and Scotland, the concept described villagers’ overgrazing of their herds on the village commons, thereby destroying it as pasture.

The solution often invoked was to convert the commons to private property, on the ground that self-interested owners would protect their pasture land.

“Conservatives used the tragedy of the commons to argue for property rights, and efficiency was achieved as people were thrown off the commons,” said Joseph E. Stiglitz of Columbia University, a Nobel laureate in economics himself. “But the effects of throwing a lot of people out of their livelihood were enormous. What Ostrom has demonstrated is the existence of social control mechanisms that regulate the use of commons without having to resort to property rights.”

Mr. Williamson is a professor emeritus of business, economics and law who retired five years ago from the Graduate School of Business at the University of California, Berkeley. The award recognized, in particular, his studies of corporate organization, and his finding that large corporations exist because, under the right conditions, they are an efficient way to do business.

“Large corporations may, of course, abuse their power,” the citation said. “They may, for instance, participate in undesirable political lobbying and exhibit anticompetitive behavior.”

If a coal-burning electric power plant is near the only coal mine in the region, then integrating the two is sensible. On the other hand, if several coal mines are nearby, then integrating with just one of them could undermine the advantages of allowing the coal companies to compete for the utility’s business.

“If you believe that markets operate in Alan Greenspan fashion, then you don’t inquire into the details,” Mr. Williamson said in an interview. One assumes, as Mr. Greenspan does, that the outcome is optimal, but that assumption cannot be made, he said. “If you choose to integrate activities that are well served by the market, you are taking on disadvantages,” he said. “There is a place for each mode of organization” and this is not well understood in economics.