Obama Snubbed for Nobel Prize in Economics

Despite his vast potential and hopeful changiness on economic policy, Barack Obama did not receive the Nobel Prize in Economics from the Royal Swedish Academy of Sciences this morning. Instead, it went to two people you and I had probably never heard of before, Elinor Ostrom and Oliver E. Williamson.

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.

Cafe Hayek has some great coverage of the newest Nobel Laureates.

Apart from issuing my now-annual October lament that Armen Alchian and Gordon Tullock still do not have Nobel Prizes, I applaud this year’s selection of Elinor Ostrom and Oliver Williamson. Williamson’s 1985 book The Economic Institutions of Capitalism remains a classic that repays careful study, even in 2009. And Ostrom’s work on how people often solve public-goods problems voluntarily is too often overlooked — until today, that is!