Monday, October 12, 2009

Congratulations on Nobel 

Speaking of Krugman, I liked his post on the Nobel Prize winners today.

There was an old tradition of economics that focused on the origins and nature of economic institutions. This tradition was very influential before World War II.

But it proved not at all helpful during the Great Depression. My caricature version is that when the Depression hit, institutional economics, asked for advice about what to do, replied that well, it�s all very complicated, and has deep historical roots, and � Meanwhile, Keynesian economists, using very simple mathematical models, basically said �Push this button � we need more G�.

And this had a somewhat perverse effect. The rise of Keynesian economics also meant the rise of the equations guys (Samuelson in particular), and in the end the equations crowded out institutional economics even as Keynes fell into disfavor.

But the questions didn�t go away. And institutional economics has been making a quiet comeback for the past several decades.
I note a comment on my Facebook page from Margaret Martin (the brains behind the David Strom Show) who says "Every liberal intention from the smallest to the most grandiose that doesn't make it into reality is due to tragedy of the commons." That is probably true for those who don't understand the transactions costs problem that Williamson researched. Bryan Caplan wrote that
Faced with externalities, modern analysts almost immediately inquire about transactions costs. For example, in the early 1950s, J. E. Meade advocated subsidizing apple orchards to correct for the positive externalities they provide to beekeepers. Inspired by Coase, however, Steven Cheung (1973) wrote a careful case study of the bee-apple nexus. In the real world, beekeepers and apple orchard owners do not wait for government to solve their problem. They can and do negotiate detailed contracts to deal with externalities.
So my answer to Margaret is simple -- hang around with economists more. We balance Ostrom, whose work nevertheless spawned the very useful field work that many development economists do today, as Alex Tabarrok notes. Since my comparative systems class has been reading Douglass North (whose work is also akin to Williamson's and Ostrom's) I will be working up a new lecture for tomorrow.

Humorously, MarketWatch notes the losers of this Nobel prize.

UPDATE: Scott Beaulier somewhat shares Margaret's worry:
In her case studies, Ostrom is ultimately saying that context matters and we must exercise humility when attempting to reform or improve the efficiency of the commons. She is saying "Do No Harm!" She is definitely not saying individual, private solutions fail. In the media's rush to simplify, however, it's easy to imagine them saying things like, "Ostrom tells us that individual, private solutions are inferior to community solutions..." Again, that's not the message to be taken from her work.
A new cry: Save Ostrom from the Ostromians!