US duo wins Nobel for economics

Two economists who specialise in understanding behaviour and transactions which are not covered by detailed contracts or law shared the 2009 Nobel Prize for economics on Monday.

Elinor Ostrom, a professor from Indiana University, was honoured for her work on the management of common resources such as fish stocks.

Professor Oliver Williamson of the University of California also became a Nobel laureate, sharing the SKr10m ($1.4m, €1m, £909,000) prize, for his complementary, but separate, work on co-operation and conflict within companies.

The economics prize has been awarded every year since 1969 in memory of Alfred Nobel and is not one of the traditional five prizes. This year is the first time this “new Nobel” has been awarded to a woman.

Professor Ostrom said her first reaction was “great surprise and appreciation”. She added: “There are many, many people who have struggled mightily and to be chosen for this prize is a great honour and I’m still a little bit in shock.”

In a year when many people might think economists did not deserve recognition at all, the Nobel has gone to a branch of economics unrelated to the financial crisis and is unlikely to stir the same controversy as last year’s award to Paul Krugman of Princeton University, a macroeconomist who has commented on the world economic crisis from a Keynesian perspective.

The two economists won their prize for the study of how to enforce rules where detailed contracts or legal frameworks do not exist. Their work has helped to foster understanding on why natural resources are not always degraded, contrary to more simple theories, and why large companies exist, but also outsource some operations.

Prof Ostrom has challenged the conventional “tragedy of the commons” theory, arguing that societies and groups regularly devise rules and enforcement mechanisms which stop the degradation of nature. The traditional theory holds that pollution and depletion of resources would occur because individuals did not recognise their effect on others.

However, she argued that people could manage resources tolerably well without rules imposed by the authorities if rules evolved over time, entitlements were clear, conflict resolution measures were available and an individual’s duty to maintain the common resource was in proportion to the benefits from exploiting it.

Active participation in setting and enforcing rules was the most important feature of such success stories, she found. Prof Williamson also studied economic governance, but within companies. Since much of economic life happens within organisations, he examined how decisions were made, rather than just the decision that was taken.

That helped him develop a theory of why companies exist – they can be efficient at resolving conflict, via the use of hierarchy.

He also found that where transactions were complex or depended on shared knowledge, companies were more efficient than individual contracts would be.

The theory helps to explain the shifting boundaries of companies; why they often abuse their power; and why large companies evolve in certain industries.

Source: The Financial Times Limited. http://ft.com