Ostrom Does What Economists Should Do

by Don Boudreaux on October 12, 2009

in Complexity & Emergence, Economics

Here’s Steve Levitt on today’s Nobel award in Economics:

What’s interesting is that in the ensuing 15 years, it seems to me that economists have talked less and less about [Oliver] Williamson’s research, at least in the circles in which I run. I suspect most assistant professors of economics have barely heard of him. Yet I suspect the older generation of economists will applaud this choice. The reaction of the economics community to Elinor Ostrom’s prize will likely be quite different. The reason? If you had done a poll of academic economists yesterday and asked who Elinor Ostrom was, or what she worked on, I doubt that more than one in five economists could have given you an answer. I personally would have failed the test. I had to look her up on Wikipedia, and even after reading the entry, I have no recollection of ever seeing or hearing her name mentioned by an economist. She is a political scientist, both by training and her career — one of the most decorated political scientists around. –Steven D. Levitt, University of Chicago

I believe that Levitt is correct about Williamson’s work: sadly, too many young economists are unfamiliar with it.

Levitt’s comment about Ostrom is also unsurprising — but nevertheless distressing given the reality that it reflects about the narrowness of the economics profession.  Many economists (including Levitt!) will insist that Ostrom isn’t an economist, and suggest that the Nobel prize in this discipline is now moving toward being awarded for social science and not, more narrowly, economics.

This attitude is regrettable.

As long ago as 1963, in his Presidential address to the Southern Economic Association — an address entitled “What Should Economist Do?” — 1986 Nobel economics laureate Jim Buchanan very clearly said that work of the sort that Lin Ostrom does is most emphatically part of what economists should do.  Here’s Buchanan:

The motivation for individuals to engage in trade, the source of the propensity [to "truck, barter and exchange" - Adam Smith (1776)], is surely that of “efficiency,” defined in the personal sense of moving from less preferred to more preferred positions, and doing so under mutually acceptable terms.  An “inefficient” institution, one that produces largely “inefficient” results, cannot, by the nature of man, survive until and unless coercion is introduced to prevent the emergence of alternative arrangements.

Let me illustrate this point and, at the same time, indicate the extension of the approach I am suggesting by referring to a familiar and simple example.  Suppose that the local swamp requires draining to eliminate or reduce mosquito breeding.  Let us postulate that no single citizen in the community has sufficient incentive to finance the full costs of this essentially indivisible operation.  Defined in the orthodox, narrow way, the “market” fails; bilateral behavior of buyers and sellers does not remove the nuisance.  “Inefficiency” presumably results.  This is, however, surely an overly restricted conception of market behavior.  If the market institutions, defined so narrowly, will not work, they will not meet individual objectives.  Individual citizens will be led, because of the same propensity, to search voluntarily for more inclusive trading or exchange arrangements.  A more complex institution may emerge to drain the swamp.  The task of the economist includes the study of all such cooperative trading arrangements which become merely extensions of markets more restrictively defined.

Here’s a longer blog-post, from a few months back, on this matter.

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{ 17 comments }

Anonymous October 12, 2009 at 5:54 pm

Don,

Is there something of a struggle in the economics profession over what its role should be, etc.? I mean a significant one (obviously any profession is going to have that some level). If so, is it recent or has it been ongoing? I am a layman on these matters; I just read the books economists write, I don’t know much about the internal workings of the profession.

Mathieu Bédard October 12, 2009 at 6:12 pm

Odd. I knew about Ostrom but not about Williamson.

sandre October 12, 2009 at 6:31 pm

Don’t forget that Hayek was no big fan of the “award”. Here are the few words he spoke in his acceptance.

http://nobelprize.org/nobel_prizes/economics/laureates/1974/hayek-speech.html

Seth October 12, 2009 at 7:06 pm

Nice link Sandre. Thanks. Hayek said it well.

While I like learn about the work of the economists who win, I’ve never put much faith in any prize. But, that’s a hard argument to win with the “politicians, journalists, civil servants and public,” who view Nobel prize winners like how Jedi Masters are viewed in the universe created by George Lucas.

Name October 12, 2009 at 8:54 pm

Chicago was a swamp. What does the market say about that? Who owns the swamp?

Anonymous October 12, 2009 at 10:44 pm

She got her PhD in the 1960s. Economics has since evolved and spread into realms typically reserved for other disciplines. Some “Political Scientists” would look almost the same an an “Economist” if you focused on the work they did rather than the degree they hold.

If she had gotten her PhD in Econ, but then did exactly the same kind of work she won the Nobel for, this argument would get no traction. The prize is for working on great ideas, not the title on some piece of paper.

coze October 12, 2009 at 10:58 pm

The real problem is methodological. Outsiders have no idea how mathematical the economists at the most prestigious universities have become. Lin’s style is too descriptive for economists and even Williamson’s work is considered too informal. Because Williamson inspired others to do technical work, he’s far more recognized. But a youngster writing like Ollie would never get hired at Berkeley or Yale anymore. Flick open an AER or JPE and pay attention to the theory articles by those under the age of 40. Only the famous are given permission to publish articles with no equations.

Anonymous October 13, 2009 at 1:40 am

Perhaps we should ask Herber Simon to give his back? Or, not stretching the point to far, both Doug North or Bob Fogel. The Nobel committee has shown a real penchant for reaching outside the narrowest center of the fairway of the high church. Look at Ladbrooke’s odds tables and it was the center of the tenure track. One could keep on, e.g. Nash. Look back over the awards for the last several years/decades and see what lies outside the boundaries of the rough and what lies in the middle of the fairway.
Williamson’s work btw, while in the tradition of Coase, is still under-developed territory imho. There’s a whole new theory of the firm waiting for development and it would link to the way those of us in the real world actually think about how to run a business.

Anonymous October 13, 2009 at 2:58 am

Wow – what a perfectly fitting quote from Buchanan – particularly for Ostrom but also Williamson. So prescient it somewhat steals Ostrom’s thunder after reading it!

The first formal definition of economics I heard was that it is the study of human decision making under conditions of scarcity. I’ve heard others since, but I still think that’s the best – limiting it to “how markets work” ignores two important questions: (1.) what happens when they don’t work (which is where Ostrom and others step in), and (2.) taking one step back, why are markets there in the first place.

I think more recently they’ve been awarding prizes to people who think critically about these two questions: Stiglitz, Akerloff, Ostrom, Williamson, Krugman, Schelling, Kahneman, Smith, etc. If you compare this list to the list of monumental names that won in the 70s and 80s I think you definitely see a trend towards people that think about Buchanan’s more inclusive understanding of what economics is – and that’s a good thing I think. If we worry too much about disciplinary imperialism we’re not going to get a complete answer to the most important questions at hand.

Anonymous October 13, 2009 at 4:14 am

dk,
can you explain where buchanan/ostorm considers the case of ‘where markets dont work’ ? a co-operative is also a market solution.
a complex institution created voluntarily is also a market phenomenon.

the market phenomenon is about freedom primarily.all solutions dont exist at the individual level.people influence each other and voluntarily come together WITHOUT govt force. thats what i learn from ostorm et al.

Anonymous October 13, 2009 at 4:34 am

I think of a market solution as a solution where a good is traded for another good or a good is traded for money (really just a subset of the first). Ostrom did work with common property regimes, as opposed to private property regimes (which optimize the use of resources with market exchange). Common property regimes are neither a government solution nor a market solution – but they are an emergent institutional solution.

You seem to be defining markets as anything that has to do with free decision making. If I were to accept that definition, then I suppose I’d agree with you that Ostrom doesn’t deal with where “markets don’t work”. But (1.) that seems like a really odd definition that I’ve personally never heard before, and (2.) I thought the whole point of Ostrom’s research was to highlight these areas where markets and government fail but other institutions have emerged… your definition of market seems to scuttle the insight and value of Ostrom’s work by defining it into the long history of work that has already identified the efficiency of markets.

Anonymous October 13, 2009 at 5:54 pm

my understanding of the market (which is essentially something arising out of freedom) comes from mises’ human action. it is neither odd nor uncommon. read on http://mises.org/humanaction/chap15sec1.asp

Anonymous October 13, 2009 at 6:01 pm

I pretty much agree with that understanding of the market too (at least the first several paragraphs… I didn’t keep reading). But I’m still not sure how that applies to Ostrom. Mises writes: “The state of the market at any instant is the price structure, i.e., the totality of the exchange ratios as established by the interaction of those eager to buy and those eager to sell.”

Ostrom looks at situations where the state isn’t involved and buying and selling in the framework of a “price structure” isn’t involved either.

Anonymous October 13, 2009 at 4:41 am

And I should note – the same could be said of Williamson, who looked at governance by hierarchy, specifically within corporations. Of course in Williamson these governance issues are shaped by the markets the corporation is involved with, but the subject of his research was neither market behavior nor government behavior. I’m personally more familiar with Williamson than Ostrom – I’ve read more of him, but I touched on them both in an institutional economics seminar I took.

Anonymous October 13, 2009 at 11:03 am

“Suppose that the local swamp requires draining to eliminate or reduce mosquito breeding. Let us postulate that no single citizen in the community has sufficient incentive to finance the full costs of this essentially indivisible operation. Defined in the orthodox, narrow way, the “market” fails; bilateral behavior of buyers and sellers does not remove the nuisance.”

Sorry but I just don’t see a market in that example or analogy. No market, no market failure, and no buyers and sellers.

Charles N. Steele October 13, 2009 at 1:38 pm

Both Ostrom and Williamson are squarely within the New Institutional Economics camp. This is a very satisfying award for those of us who think transaction costs, property rights, & institutions matter.

Greg_Ransom October 13, 2009 at 3:58 pm

I’ve long argued that Steven Levitt isn’t an economist — and what the guy does is the social science equivalent of “natureology”. Imagine of natural scientists randomly attempted to understand the world without underlying causal processes or laws, but simply aimed a statistical construct at the world and tried to make sense of it. NO science has succeeded using that strategy.

Levitt a statistician with particular obsessive interests. And often he produced very bad causal inferences from his misuse of statistics.

He doesn’t provide an explanatory strategy for explaining global economic order or the coordination of plans beyond what individual minds can observe — i.e. he doesn’t engage the explanatory problem of economic science.

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