Exit, crisis. Enter, surprise: it's the most unexpected economic Nobel, bar none. Oliver Williamson and Elinor Ostrom are both scholars first and foremost of instutions — and as Paul Krugman has noted, this is an "institutional" Nobel.
The crux of both Williamson's and Ostrom's work is that institutions are what make economics happen. Different institutional arrangements give rise to tremendously different modes of production and consumption, that, turn, differ in terms of efficiency, productivity, and growth.
Williamson was a refreshing choice. His work suggested that the costs of interacting and transacting influence the choice between different modes of organization: markets, hierarchies, and networks.
The crux of both Williamson's and Ostrom's work is that institutions are what make economics happen. Different institutional arrangements give rise to tremendously different modes of production and consumption, that, turn, differ in terms of efficiency, productivity, and growth.
Williamson was a refreshing choice. His work suggested that the costs of interacting and transacting influence the choice between different modes of organization: markets, hierarchies, and networks.
But Ostrom is a radical — and awesome — choice. Not just because of the "what" of her work, but, more deeply, because of the "how" of it. Ostrom's work is concerned, fundamentally, with challenging Garret Hardin's famous Tragedy of the Commons, itself a living expression of neoclassical thinking. Ostrom suggests that far from a tragedy, the commons can be managed from the bottom-up for a shared prosperity — given the right institutions. That conclusion challenges orthodox economics from both left and right leaning perspectives; it suggests that, yes, markets can organize production and consumption efficiently — but only when supported and nurtured by networks and communities.
Sound familiar? It should. Both are tremendous influences on me — and perhaps you can now see the deeper roots of my older work on markets, networks, and communities.
But there is more than that to this Nobel, I think. Underlying it, perhaps, is the suggestion that economics as a discipline can evolve very differently than it has evolved thus far. Ostrom's work is different because her working methods were very different. And there, is, just maybe, a lesson for organizations in general. Because the working methods of economics have become the working methods of strategists and boardrooms alike: abstract calculation, at a distance from real-world consequences. So here's what made Ostrom's work so different:
Fieldwork. The great Ronald Coase once said: "existing economics is a theoretical system which floats in the air and which bears little relation to what happens in the real world." Perhaps the single most accurate criticism leveled at most econ today is that it's detached from reality. It's a curious science, one where fieldwork and experimentation is actively discouraged (as many a PhD student has found out the hard way). Ostrom went out into the field to see what people and communities were doing differently — and then thought about how it worked. Her logic challenged math. Imagine that.
Quality. The great Milton Friedman once said: "economics has become increasingly an arcane branch of mathematics rather than dealing with real economic problems." Ostrom's work isn't mega quantitative because her goal wasn't to add another error term to an already convoluted, overquantized model. Rather, it is mega qualitative, packed with rich, sharply unexpected new insights about how models should be built. It is focused like a laser-beam on real world-problems — and that is why we model in the first place.
Architecture. A second failing of econ is that much of it extends yesterday's assumptions with only slight, marginal refinements. Yet, many of those foundational assumptions — rationality, perfect information, etc — are visibly challenged. By seeking new assumptions that were a better fit with the real world, Ostrom ultimately proposed a new architecture of governance entirely — what she called polycentric governance. In contrast, orthodox econ has been offering roughly the same architecture, built on the same assumptions, for decades. Yeah, you know the one — unfettered markets, global "competition", and top-down, light-touch regulation. Just as behavioral economists have questioned its fundamentals, so did Ostrom.
Prescription. A third failing of econ is that because it seeks to describe an ideal world, much of it has little relevance in terms of helping build a better one. People are hyperrational, perfectly informed optimizers living in a world of zero enforcement costs for perfectly defined property rights? Awesome — we're already living in the best of all possible worlds. In contrast, Ostrom sought out new institutional arrangements that could be used by people, communities, and societies facing real-world problems.
The takeaway: what we do is often a function of how we do it. That's what institutional economics is really about. It's awesomely fitting that a Nobel for studying it went to someone who did it: someone who challenged not just the "what" but also the "how." It's often easy to challenge the what. Yet, challenging the how is where deep change begins.
Are you challenging the "how" in your organization, market, category, or industry — or merely the "what"?
Fire away in the comments with questions, thoughts — or links to your favorite papers, books, or quotes from Williamson or Ostrom.
Umair Haque
Umair Haque