Henderson, Smith on the Nobel and its implications for economics

Lynne Kiesling

Today David Henderson has penned the traditional Wall Street Journal commentary on yesterday’s Nobel award to Elinor Ostrom and Oliver Williamson. He provides an excellent summary of the importance of their work, and I recommend it to you highly. In fact, David’s theme reconciles what some commenters have observed as a political or ideological contradiction. For example, Cheryl Morgan notes that both Henry Farrell and I are thrilled at the prize, and that

Henry blogs for Crooked Timber which is a fairly left wing political blog, whereas Lynne has distinct Libertarian leanings. For both of them to be happy about the Nobel Prize seems quite remarkable.

[I would not capitalize libertarian, and would say classical liberal, but that’s a quibble.]

David nails precisely why both Henry and I can be thrilled: both Ostrom and Williamson do detailed, careful, empirical, real-world work to inform the theories they derive, and both show the value and efficacy of governance institutions that are organic, emergent, and voluntary. As David notes,

A better way to sum up their work is that what Ms. Ostrom and Mr. Willamson really show is that voluntary associations work.

Consider Mr. Williamson’s work. Drawing on 1991 Nobel laureate Ronald Coase’s work on why firms exist, Mr. Williamson showed that these voluntary institutions exist to solve problems that arms-length market transactions have trouble solving. …

In her work on development economics, Ms. Ostrom concludes that top-down solutions don’t help poor countries.

In his entire article David has captured much of the essence of why I think their work is so important and valuable for our understanding of human action.

In Forbes, Vernon Smith has a complementary (and complimentary) article on Ostrom’s work, which naturally dovetails with his. Vernon helpfully points out that Ostrom has “relentlessly pursued” the answers to two questions:

(1) Since “everybody’s property is nobody’s property,” how is it that there are so many cases where collectives of ordinary people with no education and with none of the economists’ knowledge of “the tragedy of the commons,” in fact discover ingenious rules (institutions) for taking the “tragedy” out of a productive resource they hold in common? …

(2) As a distinguished political-economic scientist she will be the first to tell you that there are also plenty of commons problems that represent institutional failures and fragilities; she has asked why, and what makes the difference between success and failure?

Vernon also highlights another reason I love her work and find it so useful, and a reason why I think many of my more theoretical colleagues are not as aware of her work as they should be:

… Ostrom brings a distinct style in applying her skill in different methodologies. She blends field and laboratory empirical methods, economic and game theory, the really important ingredient of scientific common sense, and she constantly challenges her own understanding by looking at new potentially contrary evidence and designing new experiments to challenge her understanding of the emergent historical rules and the theory used to explicate them.

Bluntly: Ostrom is not bound by what I see as the methodological hegemony that persists in economics, and that I believe is pernicious and leads to the undervaluation of methodologically diverse political economy. That’s why, as one of my close friends emailed me yesterday morning, the first woman to win an economics Nobel is in the political science department. Our methodological hegemony serves as blinders to other effective and important ways to analyze real-world political economy questions.

That’s why when economists like Steve Levitt admit to being embarrassed at not having heard of Elinor Ostrom’s work, my reaction is that they should be embarrassed. I give him great credit for being embarrassed, and I hope that he and others will now pay closer attention to her work, and to the work of other economists who use a variety of approaches to analyze political economy questions.


9 thoughts on “Henderson, Smith on the Nobel and its implications for economics

  1. Lynne,

    It seems that the Nobel comittee is not bound by the methodological hegemony you mention and see the value in outside the mainstream thinking. It seems that since the selection of Kahneman (a psychologist), there has been a string of selections that are focused on praising thinking that seeks new insights through new approaches.

    Even the selection of Paul Krugman, who in many respects is an embarassment to economists nowadays, was based on some very important theoretical insights back when he was actually working in the economics profession. Those insights were non-obvious unless you took a new and fresh approach to looking at them.

    While I have heard (and read) a little about these two scientists before now, I am very interested in reading much more.

    Please keep up the good work,

    Ivin

  2. The New York Times article is odd in some of its emphasis. For example:

    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.

    … 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.”

    The first sentence quoted, that neither argued against “regulation,” is true if regulation is conceived in the broader meaning of the term most common in, say, the private ordering literature in law and economics. This broader meaning is explained in the second sentence except it seems to distinguish between “forms of regulation” and “rules of behavior” when they are the same thing.

    And while, certainly, neither scholar was a Milton Friedman-like advocate publicly challenging the growth of government regulation, to say that they didn’t argue against regulation does seem somewhat contradicted by the quote from the Nobel award announcement, which notes that their views identify positions “in stark contrast to the common view” about the role of government as regulator.

    I guess it could also be pointed out that their views identify positions “in stark contrast to the common view” about the role of simple market exchanges, too, since the focus of both of their work has been to explore complex economic organizational forms that exist between simple market exchange and government-imposed regulation.

  3. This missive of mine from a few weeks ago may be of some relevance here:

    “Tempered by Government”

    Tibor R. Machan

    There must be some enormous carrot stimulating the proponents of a closely monitored and extensively regulated American economy. I reach this conclusion because day after day I run into essays, columns, commentaries on TV and radio, in which there is a constantly repeated and concerted effort to discredit free market capitalism.

    The latest of these I have run across is a review in The New York Times Sunday Book Review, April 19, 2009, where one Louis Uchitelle states that the authors of the book he is reviewing, titled Animal Sprits, How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (Princeton University Press, 2009) and written by George A. Akerlot and Robert J. Shiller, “challenge the reigning free-market ideology of the past 30 years or so….” He concludes the review–a gushing one for sure–by urging the authors of the book to “push hard” in the direction of “revamping economic theory to deal with a market system that, quite irrationally, failed to govern itself.”

    Neither the reviewer nor the authors give any proof that we have all been under the spell of laissez-faire capitalism. They just assert this as taking even a miniscule peak around the country could easily confirm their idea. Yet, it’s just the opposite they could confirm.

    As a rather quick refutation of this idea, that we have all been in the grips of free market fundamentalism–a claim made the famous Princeton Conomist, Paul Krugman in one of his columns for The New York Times–let us recall a point made by the late Milton Friedman at the 2002 Mt. Pelerin Society meetings in Chattanooga, Tennessee. In that talk Friedman reported that “In 1946, there were 9,000 pages in the federal register [which lists all the federal government regulations]. Today there are over 80,000 pages. The situation is the same in most western countries….” So why then go on repeating this myth of a supposed orthodoxy of a fully free market place in America, one that was in full force as the 2008-2009 economic fiasco transpired?

    It’s not very difficult to ascertain that no free market system has been in place in America, ever, and that whatever elements of it did manage to find themselves part of the American system have by now been squashed good and hard. Oh, the legacy of FDR’s New Deal!

    These authors and reviewers must be counting on their readers’ total ignorance of economic history. I suspect that promulgating the myth that it was a free marketplace that brought about the economic mess serve the purpose of disguising the real culprit, namely, the extensive forcible government intervention in peoples’ economic affairs in America and elsewhere. Among other things, if one can persuade people that it was “a market system that, quite irrationally, failed to govern itself,” whatever minor traces of capitalism can be found in the American economy will come under extensive government regimentation–or at least state nudging (a term used by New Deal enthusiast, Cass Sunstein, who used to be President Obama’s colleague at the University of Chicago School of Law and just recently moved to Harvard where he was picked to help President Obama to re-regulate the country).

    For the umpteenth time, the free market didn’t do it. Moreover, it couldn’t have done it. That’s because there hasn’t ever been one in the country. And what elements of such a system could be found over the last 40 years, they have been pretty much abolished.

    In plain terms, then, since there hasn’t been a free market in America over its entire history, it cannot be the case that such a market failed to “govern itself.” What America has been all during its economic history is a mixed system, with admittedly significant elements of capitalism, socialism, fascism and the like being tried by the statists in our capitols and promoted by their academic and journalistic cheerleaders, the likes of Paul Krugman, Louis Uchitelle and many, many others who probably sit and wait so as to get the nice government job of running other people’s economic lives!

    In any case, book reviewer Uchitelle doesn’t by any means fail to disclose his agenda. He says outright that what we needs is to temper the market by the government. The fact that his involves coercing citizens all over the place, deploying prior restraint on all the agents in the marketplace under the benign-sounding rallying cry of “precaution,” does not make even a dent in the faith of these people in government’s purity of motives and their incredible conceit that they, instead of the millions of those in the market, can run things just fine!

    Also, there’s no evidence that critics of laissez-faire have read public choice theorists who have shown that government regulators are every bit as tempted to misbehave as are those they are supposed to regulate–indeed more so.

    We should heed the counsel of Oliver Cromwell, who wrote that “It will be found an unjust and unwise jealousy to deny a man the liberty he hath by nature upon a supposition that he may abuse it.”

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