THE NOBEL prize for economics has been awarded to Elinor Ostrom, a political scientist who specialises in studying how common goods are governed, and to Oliver Williamson who has applied organisational analysis to the internal behaviour of firms. Both are conspicuously removed from the market fundamentalism and mathematical deduction hitherto dominating the discipline. Such methodological hegemonies have been toppled by the worldwide economic crisis.
The welcome recognition of non-market, sociological and behavioural factors in the discipline of economics can reduce its isolation from other social sciences and enlighten political decisions about how best to manage market failures. Prof Olstrom’s work has concentrated on understanding how and why resources such as fish stocks, forests, water, pastures and wildernesses have been governed in common rather than privately and in such a way as to preserve and sustain them.
Disputing conventional wisdom that this is tragically not possible she shows it can be done by self-governing communities of users if their rules evolve over time, entitlements are well defined, conflicts can be resolved and there is a balance for each user between preserving the resource and availing of it. Her studies in Nepal, Pakistan and India, bear this out. As the world faces an ecological crisis because of climate change, this research has several valuable lessons for policy makers.
One conclusion is that self-regulation offers a way out of the false dichotomy between isolated, selfish individuals and a strong state in governing markets. It is highly topical when political choices often starkly counterpose them, overlooking feasible co-operative alternatives.
Prof Williamson’s study of governance within companies led him to conclude they can resolve conflicts efficiently by using internal hierarchies rather than outside markets. This can explain why firm size varies, how their boundaries shift and the power they enjoy. His work is especially relevant in analysing multinational companies and how they trade within themselves across borders - including many which have invested in Ireland and profit handsomely from our tax laws.
Both of these scholars depart from assumptions that markets are invariably efficient to examine different non-profit-maximising ways of running economic affairs. They draw on other disciplines like politics, history, psychology and sociology to explain economic behaviour. And they understand that trust, reciprocity and social capital also determine economic success.