While Obama’s win might have stolen their thunder, Americans Elinor Ostrom and Oliver E. Williamson split the 2009 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel last week for their work in economic governance. While technically not a Nobel Prize, the Sveriges Riksbank Prize is the closest equivalent in economics, and Ostrom’s win is the first time the prize has been awarded to a woman.
The prize was split among two individuals dedicated to critiquing whether economic truisms are indeed true. Both studied and described the various ways that human interaction affects market behaviour, but their work was conducted independently from one another.
As a political scientist rather than an economist, Ostrom’s win signals that the study of economics is returning from an era of pure math, once more emerging as a multidisciplinary study. On the other hand, Williamson holds true to the discipline, as he 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.
Considered one of the most influential scholars of the last 30 years, Williamson’s research has been instrumental in what is now the theory of the firm. His research is based on the interactions of firms and corporations, and more specifically, why they exist as a means of interaction instead of individuals in the market. He argues that businesses dominate markets because they serve as a more efficient way to deal with conflicts. Having management helps resolve these conflicts, and involves intensive negotiations. Normally, economics doesn’t even look at a field of interactions that aren’t governed by contracts or laws. Williamson believes that a way to limit abuses of power in massive businesses is to regulate against them, rather than limit a business’s size.
To understand Ostrom’s brilliance, we first need to understand a classic problem in economics. Imagine, if you will, that you’re at a party. At this party you’re told to bring some liquor, but everyone is going to pool their liquor so that you can drink as much as you can. Inevitably, people bring less booze than they normally would and try to drink more than they should because they think the liquor is free. You lose when the more aggressive people at this party over-drink and leave you and everyone else without liquor. This situation, where everyone is out for themselves leaving everyone else worse off, is known as the Tragedy of the Commons. Now imagine this party has instead been declared BYOB. You will of course bring as much booze as you want to get optimally hammered, and so does everyone else. Received economic wisdom would determine that this is because, in the latter example, we have clearly defined property rights.
Ostrom evaluated the Tragedy of the Commons and found that property rights aren’t so black and white. Situations don’t always fit precisely into free use versus open access, and assuming they do is simplistic. In established communities, where there is a long-term need for common resources, people recognize survival is more important than the small benefits that could be reaped from overuse. Back to our alcohol example: imagine instead of going to a party, you are drinking with your roommates. Everyone buys beer and everyone shares. Instead of worrying about who owns what, you all agree to take turns buying two-fours. No one monitors who is drinking what, and no one owns the beer, but no one takes advantage. The small benefit gained from over-drinking is lost when there’s knowledge that this would ruin the system, and that the fridge would cease to be stocked with beer, making you and your roommates rather upset. In cultures all over the world, we have situations where common property is better managed when common users create and enforce rules that prevent over-exploitation without having to resort to private ownership or government involvement. Ostrom told the New York Times that she ultimately hoped her work would guide climate change policy.
Critics say Ostrom’s and Williamson’s findings are hard to apply without mathematical theory. The same criticism, however, is also used to praise the discoveries as a refreshing departure from economic thinking based on pure math. Either way, it’s nice to hear some uplifting economic news, especially when the rising Canadian dollar is set to wreak havoc on the economy yet again.
