This year's Nobel prize

An unusual duo are this year’s winners of the “Nobel” prize in economics (from the Bank of Sweden).

Oliver Williamson has been “future Nobel Prize-winner” since I entered grad school in 1994, for his work on transaction cost economics, i.e. the choice of markets or administrative hierarchies to solve problems. EconLog summarizes his most famous idea while both the Hayek and Mises blogs claim him as a disciple of the Austrian school. (That’s certainly more feasible than the same claim about last year’s winner.)

The less expected choice was Elinor Ostrom, a political scientist who uses economic rationality to examine questions of public choice. I know her from her book (and papers) on the tragedy of the commons. When considering open source and other examples of social production, Ostrom (and subsequent authors) give ideas on how to mitigate (or reduce) free-rider effects that would otherwise cause these communities to collapse.

Libertarian blogger Virginia Postrel notes an important common thread between the two. Along with prior winners Ronald Coase and Douglass North, both are key contributors to the New Institutional Economics. I agree with Postrel that a major implication of NIE is that free market economies are governed in part by non-governmental economic institutions, and that getting such institutions right are crucial to economic growth.

So in a year when conventional wisdom is rejecting free markets — and the power of economics as an explanatory social science — this year’s economics selections (at least) validate key pillars of the field as have been recognized for decades.