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Real-World Research Wins Nobel Prize in Economics

By Neil Irwin
Washington Post Staff Writer
Tuesday, October 13, 2009

The Nobel Prize in economics was awarded Monday to two scholars whose research shed new light on how groups of people cooperate, honoring work that is grounded in the real world over more abstract mathematical models.

Elinor Ostrom, a political economist at Indiana University, and Oliver Williamson, an economist at the University of California at Berkeley, will split the $1.4 million prize, formally known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Ostrom is the first woman to win the prize since it was created four decades ago.

With the selection, the prize committee passed over researchers whose work comes to bear on the current financial crisis and global recession. Instead of honoring scholars who had done theoretical work in finance or macroeconomics, it chose Ostrom, whose studies have deep practical implications for how to manage environmental constraints and help poor countries develop, and Williamson, whose explanations of how corporations work informs antitrust law.

Ostrom has studied the "tragedy of the commons," the notion that if a town has a common pasture on which everyone can graze sheep, the land will be overgrazed, making it less useful for everyone. Ostrom found that in a wide range of such settings -- such as shared fisheries, forests and water supplies -- people form voluntary arrangements to govern use and prevent overharvesting. That applies, she has found, even in the absence of a powerful centralized authority.

That has deep implications for how to help poor countries develop. If an aid agency were to build an irrigation system in a distant location that must be shared by different communities, it may need to establish whether those communities have a history of cooperating to share scarce resources, rather than expecting such restrictions to be enacted by fiat.

"She challenges the top-down approach, the centralized approach to development," said Paul Dragos Aligica, a former student of Ostrom's who is now a senior research fellow at the Mercatus Center at George Mason University.

Ostrom, who has collaborated frequently with her husband, Vincent, is in many ways a departure for the selection committee. She has done extensive fieldwork, analyzing situations all over the world, rather than building theoretical mathematical models. And her training was as a political scientist, not as an economist. She said at a news conference Monday that her work shows the importance of combining ideas from economics, political science, sociology and other fields.

"One of the most important factors is whether local people monitor each other," Ostrom said. "Not officials, locals. I'm not denigrating that officials can do something very positive. But what we have ignored is what citizens can do, and the importance of real involvement of the people involved as opposed to just having someone in Washington or at a far, far distance make a rule."

Williamson has studied why businesses organize the way they do. He has explored questions of when and why economic interactions are more efficient within a firm as opposed to between two companies, and when firms might have a long-term business relationship rather than engage in one-off transactions. He worked for the Justice Department on antitrust matters in the 1960s, and his work has made a deep imprint on that area of law.

"The most concrete and earliest problem he tackled is why do we see the organizational forms we do," said Scott Masten, an economist at the University of Michigan. Why, for example, do some firms buy supplies on the open market, others buy them through long-term contractual relationships, and still others have their suppliers of raw materials under the same corporate umbrella?

In 1967, the U.S. government accused the Schwinn bicycle company of anti-competitive behavior for refusing to sell to discount retailers and restricting its sales to independent franchisees that charged higher prices.

Williamson argued that contrary to the government's reasoning, there was an economic rationale to the behavior: Schwinn could ensure that those selling its products offered high-quality service, protecting the company's reputation. And that signing contracts with franchisees could be more efficient than operating stores itself.

"If potential customers are told, 'I bought a Schwinn bike and it was a lemon,' but are not advised that the bicycle was bought from a discount house and misassembled . . . customer confidence in Schwinn is easily impaired," Williamson wrote in his 1998 book "The Economic Institutions of Capitalism."

In time, antitrust authorities came to appreciate Williamson's logic, and a wide range of businesses now place restrictions on who can sell their products and how.

"One thing that's underappreciated is that he was one of the primary contributors to transforming antitrust law and competition policy in the United States," said Barak Richman, a Duke Law professor who studied under Williamson.

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