I’m sure everyone who reads this blog has already seen the announcement of the 2009 Nobel Prize in Economics, but just in case: Oliver Williamson and Elinor Ostrom were awarded the prize this morning. Elinor Ostrom is the first woman to be awarded the prize and, notably to me, is a political scientist. The Nobel Prize Committee’s write-up of their contributions is here, and is part of what I’m basing my comments on.
Williamson was awarded the nod for his work on transaction costs and the boundary of the firm. Specifically, Williamson asked questions like, when does it make sense for a firm to own its suppliers? This is sometimes known as the “make or buy” decision – should a firm make a given part, or contract it out. Drawing on the groundbreaking but often ignored work of Ronald Coase (who noted that using the market had certain costs associated with it, and thus was not always more efficient than a long-term contract), Williamson coined and promoted some useful notions like asset specificity (the degree to which each party makes investments whose value is much greater if the relationship continues than if it doesn’t) to help analyze such situations in what is often called the “Markets vs. Hierarchies” approach. That is, Williamson, like Coase, asks and answers the question, if markets are so efficient, why have corporations at all? Williamson answers that hierarchical relationships (as opposed to markets) make sense when bargaining or search costs are high, and assets require specific investments (i.e. relationships matters).
My own encounter with Williamson came primarily during my socialization into the subfield of economic sociology. The seminal paper in our field is Granovetter (1985) Economic Action and Social Structure: The Problem of Embeddedness. Granovetter argues, drawing loosely on Karl Polanyi, that all economic action is embedded in social structures, and that approaches like that of Williamson miss how the market isn’t quite as market-y as you might think, and hierarchies aren’t so efficiently hierarchical. Granovetter argues for a more nuanced approach to understanding the immediate social structures surrounding economic action – often glossed as networks in later works. So, one result of today’s Nobel announcement is that we can now say that economics has caught up to what sociology was moving past 24 years ago!
Not having been forced to read it for my prelims, I’m less familiar with Elinor Ostrom’s work, but am pretty excited that her work is getting more prominent. Ostrom analyzed empirical situations in which the tragedy of the commons was not so tragic – that is, where common resources were protected by governance mechanisms that emerged without being imposed from above by some sort of state-like actor. One key finding of her work that drew my attention was that these governance mechanisms often worked best when they were enforced by those who were using the resource, and not by some impartial, external agent, even though that meant that the monitoring costs were born unequally. Here’s how the Nobel Committee glossed it, while listing off design principles learned from her research:
For instance, Ostrom proposes that (iv) monitoring and sanctioning should be carried out either by the users themselves or by someone who is accountable
to the users. This principle not only challenges conventional notions whereby enforcement should be left to impartial outsiders, but also raises a host of questions as to exactly why individuals are willing to undertake costly monitoring and sanctioning. The costs are usually private, but the benefits are distributed across the entire group, so a selfish materialist might hesitate to engage in monitoring and sanctioning unless the costs are low or there are direct benefits from sanctioning. Ostrom (1990, pp. 94–98) documents instances of low costs as well as extrinsic rewards for punishing. However, from Ostrom, Walker and Gardner (1992) onwards, she came to reject the idea that punishment is always carried out for extrinsic benefit; intrinsic reciprocity motives also play an important role.
The last part is especially key to me – people working inside the governance mechanism, people who were benefiting from the common resource, actively enforced the rule of the system for “intrinsic reciprocity motives”. A far cry from the selfish homo economicus of Mancur Olson! I wonder to what extent Ostrom’s location outside of the field of economics itself made such a move tenable – Williamson, for example, draws extensively on bounded rationality models, but never questions self-interest as the sole motivation of economic action. Ostrom, on the other hand, goes with the data which shows how under some circumstances, individuals act to maintain economically efficient institutions even though they costs they pay to do so are not shared. In other words, where people believe in the institution and act on those beliefs.
I’m looking forward to reading more about their work in the coming days, and I’m especially interested to see how the mainstream of economics reacts. Also, I wonder if Granovetter would have anything interesting to add about his old straw man taking home the gold.