Elinor Ostrom and Oliver Williamson shared the 2009 Nobel prize for economics (and the accompanying $1.4m) on Monday for their work on how economic transactions operate outside markets in common spaces and within companies.
Ostrom’s work focuses on how the traditional Tragedy of the Commons which we teach as a market failure is not necessarily the inevitable outcome. Traditionally the self-interest motive and considering only one’s private costs and benefits encourages a free-rider problem which leads to a suboptimal over-consumption of a resource. Ostrom on the other hand highlights how humans have created diverse institutional arrangements over natural resources for thousands of years that have prevented the collapse of the resources and actually provide long run sustainable yields. The key is that, instead of explicit external regulation, these rules and procedures to govern the use of resources incorporate the ideas of social capital and the value of social networks.
Williamson’s work also focuses on economic governance but more specifically within the internal decision-making process of companies, rather than societies. “The theory helps to explain the shifting boundaries of companies, why outsourcing is much more popular now than it was, why companies often abuse their power, and why large companies evolve in certain industries but other sectors are far more atomised.”
On a more interesting note perhaps though, here’s an article that debates whether economists deserved a Nobel prize at all this year…
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