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The fake Nobel

What’s at stake: After the brouhaha that accompanied Paul Krugman’s Nobel economics prize last year, not to mention the awarding of the peace prize to Obama last week, this year’s economics prize was awarded on Monday to Elinor Ostrom of Indiana University, the first woman to receive the prize, and to Oliver E. Williamson of […]

By: Date: October 15, 2009 Topic: Global economy and trade

What’s at stake: After the brouhaha that accompanied Paul Krugman’s Nobel economics prize last year, not to mention the awarding of the peace prize to Obama last week, this year’s economics prize was awarded on Monday to Elinor Ostrom of Indiana University, the first woman to receive the prize, and to Oliver E. Williamson of the University of California at Berkeley. They share the prize for their separate work on economic governance, organisation, cooperation, relationships and nonmarket institutions. Ostrom’s work focuses on the commons, such as how pools of users manage natural resources as common property. Williamson’s work focuses on the boundaries of the firm and the reasons for economic activity inside of firms.

The Royal Swedish Academy of Science summarizes Ostrom’s main contribution: 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.

The Royal Swedish Academy of Science summarizes Williamson’s main contribution: 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.

Michael Spence says that the common theme underlying the prize this year is that the duelling poles of market and government do not solve all problems of resource allocation and incentives well or even at all. That is not a new idea. What is important is that people and societies find ways through organizational structures and arrangements, political and other institutions, values, incentives and recognition, and the careful management of information, to solve these problems. Professors Ostrom and Williamson have led the development of this increasingly important part of economics. In reading their work, you are impressed that economics is not really fundamentally about markets, but about resource allocation and distribution problems. Markets appear because they operate effectively to handle a subset of these resource allocation challenges. Alternative creative institutional arrangements have been devised and refined over time to deal with those that markets handle imperfectly.

Vernon L. Smith says that nobody should now say “Elinor who?” Previous Nobel laureates have made significant contributions to investigating the big questions related to the tragedy of the commons, but Ostrom brings a distinct style in applying her skill in different methodologies. She blends field and laboratory empirical methods, economic and game theory. Paul Romer makes a similar point and says that she won the Nobel because she works from the ground up, building a crane that can support the full range of economic behaviour. Ostrom, the political scientist, showed that she was a better economist than the economic imperialists who can’t tell the difference between assuming and understanding.

Steven D. Levitt says that the economics profession is going to hate the prize going to Ostrom even more than Republicans hated the Peace Prize going to Obama. Economists want this to be an economists’ prize whereas Ostrom is a political scientist. This award demonstrates, in a way that no previous prize has, that the prize is moving toward a Nobel in Social Science, not a Nobel in economics. This is not necessarily a bad thing as economists certainly do not have a monopoly on talent within the social sciences, but it will for sure be unpopular among economists. In an echo of Levitt’s contention that this is more a social science prize than an economics one, Teppo Fellin calls Williamson’s Nobel a "huge win for the fields of organization theory, strategic management and organizational sociology", none of which can be found in economics departments.

Barry Ritholtz says that Ostrom and Williamson win “Ironic” Nobel. Why? Because the odds on favourite to win was the precise opposite of the behavioural economists — the father of the efficient market hypothesis (EMH), Eugene Fama. Users of his EMH have created various predictions markets. These markets had Fama the odds on 2 to 1 favourite to win the prize this year. There is no small degree of irony here, in that Fama’s Efficient Market Hypothesis, where markets reflect all information on a given event, had so much wildly misplaced optimism on this occasion.

The Hayek Center blog quotes Hayek saying that there shouldn’t be such a prize in economics as the Nobel Prize confers on an individual an authority which in economics no man ought to possess. This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence. But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally. There is no reason why a man who has made a distinctive contribution to economic science should be omnicompetent on all problems of society – as the press tends to treat him till in the end he may himself be persuaded to believe.

*Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.


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