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First Woman to Win Nobel Prize in Economics

5 years ago
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Nobel prizes are not supposed to be awarded based on gender.

Yet, it somehow feels right to acknowledge that a woman won the Nobel Prize in economics for the first time since the award was created in 1969. Her name is Elinor Ostrom and she is a professor of political science at Indiana University at Bloomington.

Ostrom, who shared the prize with Oliver Williamson, a professor in the Haas business school at the University of California at Berkeley, was cited for her substantial and influential body of research on the management of common resources. Going against the conventional wisdom that only governments can manage fisheries, forests, grazing lands or oilfields, Ostom showed that the users themselves can often come up with better plans.

Ostrom's contributions

The Nobel Prize committee praised Ostrom "for her analysis of economic governance, especially the commons." When users share a community resource, such as a lake or a pasture, a problem can arise when they have little personal incentive to maintain the commons. The common resource is over-used and eventually destroyed.

Ostrom's research focuses on how this outcome is not inevitable unless the government steps in. Communities have come up with ways to manage their shared resources that are superior to government-imposed rules and regulations.

"Bureaucrats sometimes do not have the correct information, while citizens and users of resources do," she said when explaining the significance of her work.

The Nobel-prize committee said that Ostrom's work "challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatized." Ostrom, 76, showed that in many cases, the private sector can reach a better, more sustainable outcome than the public sector can achieve. To reach this outcome, however, private individuals must have an incentive to promote the collective good. And, it is that incentive to promote the collective good that government action frequently takes away.

In one influential study called
Governing the Commons: The Evolution of Institutions for Collective Action, Ostrom showed how the users of a dam and canal irrigation system in Nepal overcame the problem of the commons by devising a set of rules regarding use of the water system. These rules essentially gave everyone who benefited from the system an incentive to contribute to the cost of maintaining the system. The arrangement worked as long as everyone had a stake in the dam's upkeep. Or, to put it in modern terms, the parties all had "skin in the game."

Unfortunately, the Nepalese government decided to build a modern dam that would require lower maintenance than the older dam. The idea sounded good to those who supported the project, but it was a disaster for the local communities.
Because the modern dam required less maintenance than the older dam, its users no longer had an incentive to share maintenance costs with the users of the canal. By building the new dam, the government broke the link the community had forged across the users of the irrigation system.

The Nobel committee used the Nepal dam case as an example where "Despite flawless engineering, many of these [government] projects have ended in failure." In commenting on the award to reporters at Indiana University, Ostrom said, "What we have ignored is what citizens can do and the importance of real involvement of the people involved -- versus just having somebody in Washington ... make a rule."

The Nobel committee cited Williamson for
economic governance as well, especially the way companies are structured and resolve conflicts.

Broader application
Ostrom's writing pre-dates the financial crisis that erupted last fall. But issues of governance, or the rules by which companies and economies exercise authority, were at the heart of the debacle, and Ostrom's analysis, as well as Williamson's, can be useful in shaping debate on how to prevent another such crisis that could lead to a global recession.

When the government decided that some companies were too big to fail and became the lender of last resort, the implicit government backing made companies less careful about avoiding risky business deals. They had no incentive to clean up their act.

Consider, for example, the case of credit default swaps, the financial products that Warren Buffett called "weapons of financial mass destruction," and the near collapse of AIG last fall. A credit default swap is an insurance-like product that protects against creditor default. To avoid what the U.S. government felt would be a collapse of global markets if AIG went bankrupt, it gave AIG an $85 billion loan so that it could meet its obligations. But how would the holders of AIG's swaps have acted if their swaps had not had the implicit backing of the government as the lender of last resort?

To apply Ostrom's ideas, had the government made clear that both the buyer and the seller of the credit default swaps had "skin in the game," it is possible that they would have worked out a system of rules that would have preserved their financial viability without the need for a government bailout that now stands at $165 billion.

Regardless, it is nice that a woman has finally won the Nobel Prize in economics, particularly since women have consistently accounted for around 30 percent of all PhD students in economics. It is even nicer that she has won for research that, had it been applied, just might have kept the world out of the mess we now find ourselves in.
Filed Under: Woman Up

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