This year’s Nobel prize has rewarded the use of economics to answer wider questions

The bigger picture

The Nobel prize for economics - The bigger picture | Finance & economics | The Economist

gv_safe

gb_safe

gb_safe_from_high

gb_safe_from_high_med

pos_israel-hamas_war

gs_busfin

fow_barclays

gs_economy

cigna_puttingfamilyfirst

america_department_commerce

cigna_healthyhybridworkplace

future_of_work_test

gs_politics

neg_goldmansachs_brandsafety

test_mba

america_nanny_state

neg_fidelity_gmo

neg_3166_vca_brand-safety3

neg_3166_vca_brand-safety

gs_busfin_business

gs_economy_misc

chanel_neg

neg_omd_exclusion

ibm_blacklist

gt_mixed

legal_law

bhp_environment-sustainability

neg_nested3_fidelity_gmo

gs_science

bayer_investment

neg_facebook

gs_politics_misc

gs_politics_issues_policy

neg_dit

google_negative_keywords

custom_vanguard

fidelity_investment

investment_banking_personal_finance

finance_investmentbanking

america_department_justice

america_white_house

ssga_bullish_markets

If Vanke collapses, so might confidence in the state’s management of the economy

The property firm that could break China’s back

Without improvements, it risks wasting trillions of rupees

Narendra Modi’s flagship growth scheme is off to a sluggish start

Recent years ought to have reduced the importance of a skilful feint. They have not

Diego Maradona offers central bankers enduring lessons

The president has turned volatility into profit

Joe Biden, master oil trader

The “quant king” pioneered an approach that has become a pillar of finance

How Jim Simons revolutionised investing

Finance & economics

 (opens in a new window) 

NEITHER Oliver Williamson of the University of California at Berkeley nor Elinor Ostrom of Indiana University at Bloomington was widely tipped to win this year's Nobel prize for economics. This may be because their work sits at the boundary of economics, law and political science, and tackles different questions to the ones that economists have traditionally studied. Ms Ostrom is also notable as the first woman to win the economics prize in its 40-year history. 

NEITHER <a href="http://groups.haas.berkeley.edu/bpp/oew/">Oliver Williamson</a> of the University of California at Berkeley nor <a href="http://www.cogs.indiana.edu/people/homepages/ostrom.html">Elinor Ostrom</a> of Indiana University at Bloomington was widely tipped to win this year's <a href="http://nobelprize.org/nobel_prizes/economics/laureates/2009/">Nobel prize for economics</a>. This may be because their work sits at the boundary of economics, law and political science, and tackles different questions to the ones that economists have traditionally studied. Ms Ostrom is also notable as the first woman to win the economics prize in its 40-year history.

Mr Williamson and Ms Ostrom work independently of each other but both have contributed plenty to economists' understanding of which institutions—firms, markets, governments, or informal systems of social norms, for example—are best suited for conducting different types of economic transactions. Why, for example, do some transactions take place within firms, while others are carried out in competitive markets?

Ronald Coase, a British economist who won the Nobel prize in 1991, argued that in some situations, and for some kinds of transactions, administrative decision-making within a single legal entity (ie, a company) is more efficient than a straightforward market transaction. Mr Coase's arguments were influential and convinced economists that the internal workings of organisations were worth paying attention to explicitly. But it was left to Mr Williamson to refine Mr Coase's theory and clarify what features of certain transactions made carrying them out more efficient within a firm rather than in the market. 

Mr Williamson showed that complex transactions involving investment decisions that are much more valuable within a relationship than to a third party are best done within a firm. Part of the problem, he argued, was that some economic transactions are so complicated, and involve so many things which could go wrong, that writing a legally enforceable contract that takes all possibilities into account is impossible. Simpler transactions are completed easily in markets; more complicated ones may demand firms. But in later work he also showed that organising matters within companies had costs: in particular, it relied on internal authority to get things done, and this could be abused. 

Ms Ostrom has concentrated on a different aspect of economic governance. She has spent her life studying how human societies manage common resources such as forests, rivers, pastures or wildlife. Just as with public goods, it is difficult to prevent people from using the commons. But unlike public goods, and like private ones, what one person takes leaves less for others. Economic theory then predicts that rational individuals will overuse these resources. 

Economists (including Mr Coase) have tended to emphasise property rights as a solution to the problem of managing common resources. Typically that involves either privatisation or putting the resource in government hands. But Ms Ostrom, who is a political scientist by training, spent much of her early career studying how communities managed such common resources. She found that groups of people tended to have complex sets of rules, norms and penalties to ensure that such resources were used sustainably. Such self-governance often worked well. 

Successful informal institutions, she found, have certain features in common, which sets them apart from institutions that fail. The principles of game theory, particularly the theory of repeated interactions, proved remarkably useful in formulating general principles of how common resources ought to be managed without necessarily resorting to private or state ownership.

Mr Williamson launched an entire branch of economic theorising which looks more deeply into firms than economists had tended to do previously. His theories have also helped with understanding the choice between equity and debt, and corporate finance more generally. Ms Ostrom's research has spawned many experiments about how people interact strategically. Some of these have influenced game theory, which originally provided Ms Ostrom with her analytical tools. 

The Nobel committee's decision, like earlier awards to Amartya Sen and Daniel Kahneman, is a welcome shot in the arm for research that crosses disciplinary boundaries in the social sciences.

The Nobel prize for economics

Finance and economics

Get to grips with a region where capital, climate and geopolitics collide

Go deeper with our Middle East newsletter. Every week our correspondents delve into the political, social and economic stories of a region that is rarely out of the news.

Sign up to our Middle East newsletter

Middle East Dispatch

Follow the action in Latin America, from the depths of the Brazilian Amazon to the Mexican-American border

Every week our correspondents share insights on politics, economics and business from an increasingly complex region

Stay informed with our weekly Latin America newsletter

El Boletín

A sharp round-up of the most important US political news

Sign up for updates from our correspondents and data journalists, poll tracker and election-forecast model as the 2024 race unfolds

The US in brief

Inside Europe, from the front lines in Ukraine to the corridors of power in Brussels

Stay informed with our weekly Europe newsletter

Café Europa

Understand a vast and complicated country that will increasingly shape the future

Stay informed with our weekly India newsletter

Essential India

The best of The Economist’s defence coverage, in one place

The War Room

A weekly conversation about culture. Because culture is a serious business

Exploring trends and connections across entertainment, the arts and politics

Broaden your perspective with our weekly culture newsletter

Plot Twist

Analysing the challenges facing Britain and what needs to be done to overcome them

Stay informed with our weekly Britain newsletter

Blighty

Understand what the world makes of China—and what China makes of the world

Stay informed with our weekly China newsletter

Drum Tower

Your essential guide to global business and technology

From supply chains to semiconductors, The Bottom Line newsletter has you covered

Need to track the megatrends shaping business and technology?

The Bottom Line

Catch up quickly on the global stories that matter

Sign up to enjoy a mind-expanding mix of stories, delivered six days a week

Catch up quickly on the stories that matter

The World in Brief

A behind-the-scenes look at how we chose and designed this week’s cover

How we chose this week’s cover image

Cover Story

Exclusive insight from our correspondents in America

Exclusive insight and reading recommendations from our correspondents in America

Checks and Balance

A weekly fix of our mind-expanding science coverage

Curious about the world? Enjoy a weekly fix of our mind-expanding science coverage

Simply Science

Climate-change analysis that you won’t read elsewhere in The Economist

The Climate Issue

Expert analysis of the biggest stories in economics and markets

Money Talks

Taking you behind the scenes of our data journalism

Off the Charts

Long reads and life from 1843 magazine

The Extraordinary Story

The very best of our journalism, handpicked for you each weekday

A daily newsletter with the best of our journalism

Handpicked stories, in your inbox

The Economist today

Highlights from the latest weekly issue, introduced by our editor

The bigger picture

This year’s Nobel prize has rewarded the use of economics to answer wider questions

More from Finance and economics

The property firm that could break China’s back

Narendra Modi’s flagship growth scheme is off to a sluggish start

Diego Maradona offers central bankers enduring lessons