Tuesday, October 13, 2009

The Economics Nobel explained, in a video

The win by Elinor Ostrom and Oliver Williamson helps take economics back to what it should actually be about, detailing the way things work.

David Hendersen writes in today's
Wall Street Journal:

"Many economists sit in their offices and derive proofs. Few go out and do the time-consuming work of examining the institutional structures that humans build to solve their own real-world problems. Among those few are Ms. Ostrom and Mr. Williamson...

Some have summarized their work by saying that institutions other than free markets often work well. But that statement can mislead you to conclude that government solutions are the answer. Free markets are only a subset of free institutions. A better way to sum up their work is that what Ms. Ostrom and Mr. Willamson really show is that
voluntary associations work.

Most economists are familiar with the late Garrett Hardin's classic article, "The Tragedy of the Commons." His idea was that when no one owns a resource, it is overused because no one can control its usage and each person has an incentive to use it before others do.

Not so fast, said Ms. Ostrom. Examining dozens of case studies, she found cases of communal ownership that worked — that is, that didn't lead to the tragic outcomes envisioned by Hardin — as well as ones that didn't. Were there systematic differences? Yes, and interestingly the ones that worked did have a kind of property rights system, just not private ownership.

Based on her work, Ms. Ostrom proposed several rules for managing common-pool resources, which the Nobel committee highlights. Among them are that rules should clearly define who gets what, good conflict resolution methods should be in place, people's duty to maintain the resource should be proportional to their benefits, monitoring and punishing is done by the users or someone accountable to the users, and users are allowed to participate in setting and modifying the rules."

So where's the video? It's here, it deals with the unwritten rules governing hors d'oeuvres consumption, and it lasts just 1'40":


J23 said...

The unwritten rules are called social norms. It's sociology 101.

It's interesting to reflect on how things have changed. When Garry Becker won he wrote that he had originally tried sociology but found it too hard so moved to economics. Then he applied economic ideas to everything, including love and marriage, in a fundamentalist way that really highlighted how thin neoclassical economic understandings of social relations are.

Now we have the opposite - economists drawing on sociological understandings of social processes and social structures, institutions, winning the prize.

When will the Nobel prize for sociology replace the prize for economics?

Peter Martin said...

Psychology, sociology, neuroscience, economics... they are getting close.

Interestingly, at the other end of the scale economics is getting close to physics.

Anonymous said...

However, none of these except sociology can explain the little example of the caviar.

The physics approach brought us the mathematical wizardry of sub-prime and CDS. It is utterly removed from society, as if economics was a natural system that carries on regardless of human involvement.

Psych shares the fundamental flaw of economics - methodological individualism. Empirical shows that actual economic activity, like all social action, is cultural.

Therefore the unit of analysis ought not to be the individual, but the social group.

This is what Ostrom's work shows - variability between groups - individuals cannot stray far from the norms in their culture.

The norms of eating at a party are different in America and China, as are the rules of economic action.

That alone is enough to say that there are not universal laws, as physics would need to be useful, nor that they these things are the aggregation of individual actions, as phsych, neuroscience and economics would need to be useful.

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