Nobel for Institutional Economics
By Arnold Kling
When I was in Bloomington, Indiana last week, Justin Ross and I talked about the “Bloomington school of public choice,” meaning Elinor Ostrom. (see Aligica and Boettke.) Little did I know that she was about to be awarded a Nobel Prize, along with Oliver Williamson. She is known for looking at ways that private individuals cooperate to manage what we think of as “pubilc goods,” or “common pool resources.”
For example, to prevent overfishing, mainstream economics says that government must regulate. Nobel Laureate Ronald Coase says that an alternative is to define property rights carefully. Ostrom studied cases in which private individuals established rules that worked. Meanwhile, government regulations (including assignment of property rights) often failed, particularly when individuals did not buy in to the purpose of the regulation.
With the advent of the Internet, the issue of private provision of public goods has emerged once again. Think of Wikipedia, or perhaps Twitter, or the various task forces that monitor security issues and define software standards.
Williamson is known for looking at the issue of the boundaries of the firm. This is another issue that interested Coase. I think of Williamson as looking at the issue in terms of central planning vs. markets.
For example, in health care delivery, I think we need more central planning. Not by government, but by corporations competing to offer better quality and efficiency. The problem is that the corporate model threatens the status of doctors. However, as Michael Cannon and I argued here, when a patient has a complex set of problems, the model of doctor autonomy can work very poorly. In Williamson’s terms, the corporate model can resolve the conflicts that arise between different doctors more effectively than our existing model. For example, when my father was moved to eight different hospital units in fourteen days, a new doctor was in charge of him at each unit. The priorities and treatment plan changed each time. In my opinion, these autonomous hospital units should have been replaced by a hierarchy, in which care is directed by a project manager accountable to the patient.
I prefer a more Hayekian take on industrial organization. That is, I think that industrial organization ought to be aligned with knowledge. Decentralization of power makes sense when information is decentralized. When information can be usefully concentrated, then concentration of power can be efficient. In my forthcoming Unchecked and Unbalanced, I argue that knowledge is becoming more specialized and decentralized, and that this conflicts with the trend for political power to become more concentrated.
Read the Nobel committee’s summary of Ostrom and Williamson here.