On Saturday I was in beautiful Sante Fe, NM and was having a discussion with my good friend David Henderson. We were discussing the upcoming Nobel Prize in Economics. David tends to get the nod from the WSJ to write up the summary piece on the who won the prize and why we should care. David couldn't do it one year, so I did, 2 years ago when the winning idea of mechanism design theory. But last year it reverted to David --- it was not a Wally Pip moment! Anyway, we bounced around a bunch of potential winners, including our personal favorites: Alchian/Demsetz, Baumol/Kirzner, and of course Krueger/Tullock. At the end of our conversation, I said well David if Lin Ostrom wins you can call me and I can tell you about her because I just published a book (co-authored with Dragos Aligica) about her and Vincent Ostrom's work, Challenging Institutional Analysis and Development (Routledge, 2009). Also see the paper by Chris and I published in JEBO, which provides an overview of the research program of the Workshop in Political Theory and Policy at Indiana.
I told David that she is amazing and well deserving of the Nobel award for her pioneering work on rational choice theory (as if the choosers were human) and institutional analysis. I then bent his ear about her work on governing the commons, institutional diversity, and learning. I also emphasized Vincent's outstanding work -- my favorite book of his is The Meaning of Democracy and the Vulnerability of Democracies (Michigan, 1997). The cliffnote version --- democracy is about self-governance and cultivating a self-governing citizenry who embrace the 'troubles of thinking and the cares of living' and form civic association, but democracies are about the machinations of politics, interest groups, vote motive, etc. What institutional mechanism cultivates democracy, but avoids the pitfalls of democracies? Think about that --- pretty radical stuff actually when you dig into it. Alas, I actually didn't put a high probability on her winning, though I was of the conviction that she should --- I should have bet, the odds were something like 50/1, perhaps I could be as generous as her (she is giving a portion of the prize money to support research and graduate education).
Many blog posts already up, especially Alex's at Marginal Revolution, are fantastic in summary. Other announcements are wrong, but fit the concern that Scott raised earlier today at The Economic Way of Thinking. What Lin's work demonstrates (and Williamson's as well but I will leave that to others such as Peter Klein to explain) is how individuals can in a variety of settings work to find (or stumble upon) institutional solutions that promote social cooperation and human betterment. It is about voluntary civic association, a subset of which is commercial life, that her works highlights; not the absence of individual choice. She her wonderful essay "A Behavioral Approach to the Rational Choice Theory of Collective Action" --- which I have summarized as a model of rational choice as if the choosers were human. My blurb on the back of her book, Understanding Institutional Diversity reads as follows: "What emerges from Elinor Ostrom's book is precisely what the title suggests -- an understanding of the diverse nature of institutions that exist in human societies to promote human cooperation or to hinder it. This is a significant work by one of the most thoughtful social scientists in the world and it will attract a large number of readers and enlighten them."
We can talk in more depth in the comments on Lin's great range of work from the analysis of local public economies to the idea of polycentricity, but I want to emphasize something that relates to her methodological stance and the research focus that should be of particular interest to readers of this blog. She is both a methodological individualist (rightly understood) and a spontaneous order theorists. In this regard, Lin Ostrom (and Vincent) have represented one manifestation of the research program in the sciences of man (praxeology) by Mises and Hayek in the 1940s. Actors of limited cognitive capabilities are studied for how the shape and our shaped by the social structures that emerge in a variety of situations to provide voluntary solutions to complex and difficult problems, and they do so in a way that promotes social cooperation under the division of labor. Read Human Action, chapter VIII, and Individualism: True and False, pp. 11-14 (in Individualism and Economic Order), and then look at Lin's work in Governing the Commons; Understanding Institutional Diversity; and the 3 volume McGinnis, edited volumes, Readings from the Workshop in Political Theory and Policy Analysis and I think you will see what I am talking about. She has done fundamental research on the central idea of Ricardo's Law of Association as Mises termed it. Humanly rational choice and institutional analysis combine to address the most pressing question in the social world --- why do some institutional patterns produce societies of peace and prosperity, while others produce societies that suffer under violence and poverty?
Now to make my methodological point come home -- consider what Steven Levitt wrote today about the prize to Ostrom:
The reaction of the economics community to Elinor Ostrom’s prize will likely be quite different. The reason? If you had done a poll of academic economists yesterday and asked who Elinor Ostrom was, or what she worked on, I doubt that more than one in five economists could have given you an answer. I personally would have failed the test. I had to look her up on Wikipedia, and even after reading the entry, I have no recollection of ever seeing or hearing her name mentioned by an economist. She is a political scientist, both by training and her career — one of the most decorated political scientists around. So the fact I have never heard of her reflects badly on me, and it also highlights just how substantial the boundaries between social science disciplines remain.
So the short answer is that the economics profession is going to hate the prize going to Ostrom even more than Republicans hated the Peace prize going to Obama. Economists want this to be an economists’ prize (after all, economists are self-interested). This award demonstrates, in a way that no previous prize has, that the prize is moving toward a Nobel in Social Science, not a Nobel in economics.I don’t mean to imply this is necessarily a bad thing — economists certainly do not have a monopoly on talent within the social sciences — just that it will be unpopular among my peers.
But Lin Ostrom is firmly seated in the mainline tradition of economic scholarship from Adam Smith and David Hume to F. A. Hayek and James Buchanan --- As Lord Acton put it: “But it is not the popular movement, but the traveling of the minds of men [and women] who sit in the seat of Adam Smith that is really serious and worthy of all attention.” So in what sense is she not an "economist" in the proper sense of the word (remember her early work was on local public economics and her more recent work was on development economics)? It is because her methods were chosen to be appropriate to the task she was pursuing. Humanly rational choice, institutional analysis, field work, and experimental design were her tools for social understanding. She did not limit her work to that of Max U notions of "choice" nor instituitonally antiseptic models of 'markets' nor one size fits all models of economic development. Instead, she has been a major contributor to public choice economics, new institutional economics, and to our understanding of polycentricity and political economy.
Congratulations to Elinor Ostrom and I hope that your award may force the economics profession to realize the scientific importance of the mainline contributors to political economy that the Nobel Prize has seen fit to recognize: Hayek (1974), Buchanan (1986), Coase (1991), North (1993), V. Smith (2002) and now Lin Ostrom (2009). I cannot wait to read your address and to assign it to my students.