- The Washington Times - Tuesday, October 13, 2009

Two American professors, Elinor Ostrom and Oliver Williamson, shared the 2009 Nobel Prize in economics for their pioneering work in explaining how economic decisions are made outside of markets, which are the focus of most economic research.

Ms. Ostrom’s research in the field of natural-resource management may be particularly relevant as world leaders prepare to address the controversial issue of global warming.

Mr. Williamson’s focus on the size of hierarchical business firms might shed light on the recent worldwide financial crisis, when very large banking and investment firms overleveraged themselves in search of large profits by taking huge risks.

Ms. Ostrom, who teaches at Indiana University in Bloomington, Ind., became the first woman to win the economics prize. It was first awarded in 1969 to commemorate the 300th anniversary of the Swedish Central Bank and had previously been given to 62 men. She and Mr. Williamson will split this year’s $1.4 million prize, the Royal Swedish Academy of Sciences said Monday.

“I’m excited about this prize,” said Dino Falaschetti, a scholar at the Hoover Institution whose recent book, “Democratic Governance and Economic Performance,” examines some of the same issues. “Both winners are very innovative, and neither got the respect they deserved, until now.”

Ms. Ostrom’s research has focused on “common pool resources,” such as fisheries, oil fields, pastures, forests and water for drinking or irrigation. “On a grander scale,” the Nobel committee noted, “air and the oceans are common pools.”

By their nature, more than one individual has access to these common pool resources, whose availability to others is reduced by each person’s consumption. As a result, strong private incentives can encourage individuals to act in ways that are detrimental to the group.

In his 1968 book, “The Tragedy of the Commons,” biologist Garrett Hardin highlighted the problems caused by the overexploitation of common pools. Economists have generally offered two solutions - privatization or regulation by a central government.

In her 1990 book, “Governing the Commons: The Evolution of Institutions for Collective Action,” Ms. Ostrom, 76, “objects to the presumption that common-property governance necessarily implies a tragedy,” the Nobel judges said.

Based on her research, which revealed that common property is often surprisingly well managed, she proposed a third option: Retain the resource as common property and let the users create their own system of governance.

“Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated,” the Nobel judges explained.

Ms. Ostrom’s “principles are in stark contrast to the common view that monitoring and sanctioning are the responsibility of the state and should be conducted by public employees.” Her work “teaches us novel lessons about the deep mechanisms that sustain cooperation in human societies,” the judges concluded.

Mr. Williamson, 77, a professor at the University of California at Berkeley, has focused his research on “the boundaries of firms.” Today, a large fraction of economic activity takes place within firms. Mr. Williamson has endeavored to answer the question: Why are there large, hierarchical firms?

Markets and hierarchical firms represent different ways to resolve conflicts, Mr. Williamson says. The problem with markets is that they often involve haggling and disagreement that can take much time to resolve.

The benefit of a hierarchical firm is that it has an authority mechanism that can quickly resolve conflicts, but that authority can be abused. Mr. Williamson expects hierarchical organizations to emerge when transactions are complex or nonstandard.

“According to Mr. Williamson’s theory, large private corporations exist primarily because they are efficient. They are established because they make owners, workers, suppliers and customers better off than they would be under alternative institutional arrangements,” the Nobel committee explained. “When corporations fail to deliver these efficiency gains, their existence will be called into question.”

Ms. Ostrom and Mr. Williamson were recognized for work that “advanced economic governance research from the fringe to the forefront of scientific attention,” the Royal Swedish Academy of Sciences said.

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