SHARED RESOURCE such as water for irrigation can be managed by users without a central authority or privatization.
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Two Americans won the 2009 economics prize in memory of Alfred Nobel: Elinor Ostrom of Indiana University "for her analysis of economic governance, especially the commons," the prize committee announced today, and Oliver E. Williamson of the University of California, Berkeley, "for his analysis of economic governance, especially the boundaries of the firm." Ostrom becomes the first woman ever to win this economics prize.
Both researchers went beyond traditional economics thinking, which relies on analyses of market prices. Instead, they examined the relationships among interdependent people and other entities to draw conclusions about economic governance.
Ostrom's honored work focused on shared resources, such as fish stocks, water for irrigation and grazing land. Conventional economics suggests that, to prevent overuse and degradation of these common resources, central government control or privatization is necessary. Otherwise, the "tragedy of the commons" can occur, in which self-interested parties act selfishly and end up destroying a limited resource—a typical example is that of shepherds taking their flocks to a single public grassland, quickly denuding that land to the detriment of all.
But such tragedies do not always happen; in many empirical studies starting in the 1960s, Ostrom found that common property can be surprisingly well-managed, because users often establish rules to mitigate damage.
One example is the grasslands that extend into Russia, China and Mongolia. For centuries, nomads have used the land for their herds, moving them on a seasonal basis, and in Mongolia, the area has remained suitable for grazing. Meanwhile, in Russia and China, collectivization led to permanent settlements that degraded the land. In an attempt to reverse the damage, China reversed gears and let households own the land, to no avail.
Ostrom found several similar examples around the world, including the use of groundwater in some parts of California.
Williamson's work examined helps to explain why large firms exist at all, instead of individual buyers and sellers. In particular, he studied economic activity within a firm in the context of conflict resolution.
He found that large hierarchies form when contracts between buyers and sellers are complex or nonstandard and when the parties are mutually dependent. If a coal-burning power plant has several choices in buying coal from many nearby mines, it can easily avoid contract disputes with its nearest coal supplier by reaching out to alternative mines.
Things change if the distance, and hence the costs, of the alternatives grows. Then, the mutual dependence of the plant and the nearest mine increases. Williamson discovered that in such cases, the terms of the contracts become more complex and longer, and that it becomes likely that both the plant and the mine become vertically integrated within a single entity. One study concluded that a coal-burning plant located next to coal mine is about six times as likely to be fully integrated than any other coal plant.
Williamson's theory works in other industries, too, and economists have found it useful in analyzing many kinds of incomplete contracts, ranging from unspoken agreements between family members to financial terms between entrepreneurs and investors.
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9 Comments
Add CommentNo nobel prize for Peter Schiff? He's the only economist I know who foresaw the housing bubble and he predicted the current economic situation. If Obama gets the peace prize, Schiff is more than
Reply | Report Abuse | Link to this(premature submission there)... Schiff is more than qualified to win the noble in economics. Great clip here ->http://www.youtube.com/watch?v=wU9BaAGENpo
Reply | Report Abuse | Link to thisI welcome the coordination of cognitive science, evolutionary psychology, and political science with economics. For too long we've been in thrall to the overgeneralization and reductionism of economists who seem to understand mathematical calculus, but aren't able to comprehend the combinatorial explosion that makes it inapplicable to human interactions.
Reply | Report Abuse | Link to thisI am an illiterate about the nuances in Economic theory that won a Nobel for Eleanor. But at least the way the short report presented here makes me wonder when the centuries nomadic tradition was referred to. Those nomads were working in a bounty of resource situation and the methods evolved by them solve only resolution of "conflict of interest."
Reply | Report Abuse | Link to thisIn situations where there is a resource crunch, as in developing countries, when the bearing capacity of the resource is far exceeded (whether it is a road for traffic or schools for education or grain for food etc.), there is a high "competition for resource." This does not get solved by the people themselves. External authority (state (?)) is required!
The same Peter Schiff who said that people should pull all their money out of the market and put it into gold because by Oct. 2009 the Dow would be below 7k? Is that who you want to win the Nobel prize? If Peter Schiff gets a Nobel for economics than Kent Hovind should get a Nobel for evolutionary biology.
Reply | Report Abuse | Link to thisThe same Peter Schiff who six months ago was telling people to pull their money from the market and put it in gold? The same Peter Schiff who said that we weren't going to reach a bottom in the market for over a year, and that the Dow would be below 7k by Oct 2009? If Peter Schiff deserves a Nobel in economics than Kent Hovind deserves a Nobel for his outstanding work in evolutionary biology.
Reply | Report Abuse | Link to thisMaybe the more interesting aspect of the Mongolian nomad's tale is to examine why, when there would have been obvious short-term benefits available to herdsmen through the over-exploitation of grazing resources, with larger herds yielding greater profits, etc..., their society instead chose to ignore this immediate advantage in exchange for a longer-term, sustainable, approach to land use. Maybe there are lessons to be learnt from such strategies and we should be encouraging our future Nobel economists to examine human society, past and present, for further such insights.
Reply | Report Abuse | Link to thisPERFECT
Reply | Report Abuse | Link to this"Ostrom found that common property can be surprisingly well-managed, because users often establish rules to mitigate damage."
Reply | Report Abuse | Link to thisIn other words, they form a mini-government to cover the protection of the resource. I think that's the point they overlooked. "Government" is thrown around so often today as a negative thing, but most democracies and republics follow the principle expressed in the Gettysburg Address: that they are "of the people, by the people and for the people" meaning they represent the collective will of the people. They are the rules and values that the society has agreed to live by. So, what they've really proven is that a properly implemented and regulated government is needed to protect resources....it's just very difficult to do on a large scale. :)