The award of the Nobel Prize in economics to Elinor Ostrom and Oliver Williamson may have come as a surprise to many. While both these eminent academicians have been mentioned as candidates in recent years, they were hardly betting favourites, particularly Prof. Ostrom, who is actually on the faculty of a political science department. Likewise, though he was in an economics department, Prof. Williamson could just as well have been in a business or law school. Other “non-economists”— Herbert Simon (1978) and John Nash (1994), to name two— have won the prize before. However, this year’s selections assume significance in the context of critical global debates. Both winners are cited for their work on governance, the failure of which is now being seen as a prime reason for the recent financial crisis as well as a number of worldwide problems, actual and potential. The award recognises the importance of looking at mechanisms that go beyond the conventional “market vs state” dichotomy in resolving conflict and aligning individual incentives with collective goals.
Prof. Ostrom, who is the first woman to be awarded the economics prize, has worked extensively on the management of so-called common-pool resources, also referred to as “commons”. Her extensive analysis of experiences of dealing with these collective resources across the globe resulted in the identification of a set of conditions that differentiates between successes and failures in managing these resources by stakeholder groups, as opposed to either commercial or state interests. These rules cover incentives, monitoring, and penalties for violators. As it happens, the issue of commons is at the heart of a key global debate today, the one on climate change. As governments struggle to balance their domestic interests with the collective objective of arresting global warming, some lessons from the successful management of common-pool resources may be useful.
Prof. Williamson, through his exploration of the boundaries of the common organisational form referred to as “companies” or “firms”, laid down some principles that determine the size, internal structure and scope of activities of companies. His main insight was that companies “internalise” transactions that are costly to conduct through markets because they involve search, have high potential for conflict and, most importantly, involve assets whose productivity is dependent on a specific mode of utilisation. Empirical research on these dimensions of firms within and across industries has provided strong validation for these principles. These insights will be useful in shaping the ongoing debate about imposing regulatory constraints on financial companies as a way to prevent future crises. They suggest that, wrongly conceived and administered, the cure might be worse than the illness.
Ultimately, the award is a welcome recognition that meaningful economic analysis must recognise that reality is far more complex than simple dichotomies suggest. Understanding this complexity requires transcending disciplinary boundaries, which the two laureates have done so successfully. Economics, it would seem, is too important a subject to be left to economists alone!
