The Nobel Prize for Economics is, of course, primarily about honouring outstanding researchers and their contribution to the discipline. But very often circumstances of the real world?embedded in economics?influence the decision of who wins at what point in time. Paul Krugman?s win last year was in equal measure recognition of his original research in trade theory as well as his general scepticism of the efficiency of free markets?the prize was handed out when free markets were going through their roughest patch in decades. Similarly, George Akerlof, Michael Spence and Joseph Stiglitz who worked on market failure because of asymmetric information shared the prize in 2001, the year after the spectacular burst of the dotcom bubble. Amartya Sen had earlier won in 1998 for welfare economics (he is also a known free market sceptic), the year after the East Asian crisis and in the aftermath of the crises in Russia and Brazil.
It was quite a trend?every time free market capitalism went through a crisis anywhere, the Nobel Committee chose to award economists who had made their academic reputations questioning the efficacy of the free market.
If past trends were an indicator?and to those involved in the game of prediction they are?the winners for the 2009 award would most likely have been drawn from the fast-growing domain of behavioural economics, which more often than not, using tools from psychological sciences, reduces the outer bounds of rational behaviour by humans and by transitivity of markets. Or perhaps the winner would have come from the domain of finance, but from the sceptic, not enthusiast, wing?someone like Robert Shiller who has done much work on asset price bubbles and the collapse of supposedly efficient free markets.
In the end, it was none of these. The winners for 2009 are Elinor Ostrom?the first woman to win a Nobel in economics is ironically a professor of political science?and Oliver Williamson ?a student and long time collaborator of Ronald Coase, a previous winner of the Prize (in 1991). They were cited for their work on economic governance: Ostrom for her study of the management of common resources and Williamson for his study of the firm as an institution for conflict resolution.
At a time when the world is still obsessively debating the merits of free markets and the appropriate balance between the state and markets, this year?s prize recognises the work of researchers who have highlighted the importance of using economics to understand and analyse institutions beyond the market (and the state). This is of critical importance because we (economists in particular) often forget that important economic activity often takes place outside the strict boundaries of the market and state. The firm is one such institution. Also, many transactions can actually be efficiently completed without the involvement of either the market or the state.
In fact, Ostrom?s empirical research on the common use of resources like lakes, woods and fish stocks shows that outcomes are often better when users manage these common resources as they exist when compared with a situation when the same resources are privatised or regulated by the state. In that sense her empirical work challenges mainstream disposition in favour of privatising resources (including common resources) for their efficient use. Her work could have interesting relevance in India as we continue to grapple with how best to manage and indeed use depleting natural resources?forests, fish stocks and minerals, for example?which groups of people (particularly tribals) view as commonly owned. Private acquisition of these resources has met with much resistance just as state regulation hasn?t worked as an alternative, without provoking conflict. Perhaps it?s time we considered alternate ways outside the rather strictly demarcated and strongly contested ?private control? or ?state control? conceptions about the use of common resources.
The work of Oliver Williamson is in the tradition of Ronald Coase?s work on the theory of the firm. Willamson?s work emphasises the point that when competition is limited, as it often is in the real world (as opposed to the conventional perfect competition assumption), firms with hierarchical structures are better institutions of conflict resolution than markets are.
At first observation, the work of both Olstrom and Williamson suggests instinctive scepticism of free markets. That may have something to do with the empirical nature of their work?it is easier to build efficient markets on the drawing board than to find them operating in the real world. Market imperfections are a fact of life, and it is good to see the normally theory-leaning Nobel Committee rewarding empirical research in economics.
But what differentiates Olstrom and Williamson from other market sceptics is that they don?t, by default, fall to the state as the best alternative institution. Perhaps, amidst all the furious, but completely binary state vs market debate surrounding the economics/economic policy debate over the last one year, the Nobel Committee just sent a gentle reminder that economics is a much bigger, broader and more credible discipline than recent public perception has unfortunately come to view it as.
?dhiraj.nayyar@expressindia.com