Economics Nobel Prize

From Greg Mankiw's blog, link on right
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First-Year Grad Student Wins Nobel Prize in Economics! From the Associated Press (with some light editing):

Pfuffnick's Nobel Economics Prize triumph hailed by many

LONDON — The surprise choice of first-year graduate student Quintus Pfuffnick for the Nobel Prize in Economics drew praise from much of the world Friday even as many pointed out the youthful economist has not yet published anything in scholarly journals.

The new PhD candidate was hailed for his willingness to tackle difficult problems, his commitment to improving the economic system, and his goal of bringing efficiency and equality into harmony.

Professor Paul Krugman of Princeton, who won the prize in 2008, said Pfuffnick's award shows great things are expected from him in the coming years.

"In a way, it's an award coming near the beginning of the first year in grad school of a relatively young economist that anticipates an even greater contribution towards making our economy a better place for all," he said. "It is an award that speaks to the promise of Mr Pfuffnick's message of hope."

He said the prize is a "wonderful recognition of Pfuffnick's essay in his grad school application."
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I thought that was too appropriate and funny to pass up on in light of certain other committee choices. The actual Nobel in economics goes to two pioneers in the field of economic governance. Their problems and answers are related to political governance, but in a way show how to govern society when markets fail without resorting to government.

The first woman to win the Economics Nobel, Elinor Ostrom (Indiana University, Bloomington) found a solution to an old problem, the "Problem of the Commons." The problem is that when no one owns a thing (ie: common property), no one has the responsibility for its upkeep and proper management. This means common property natural resources tend to be overused to the detriment of all. It's not in anyone's individual interest to reduce their use, even though everyone would be better off if they could all agree to do so. The top two answers to that problem are privatization and nationalization (for two points, guess which political parties favor which policies). Ostram demonstrates, however, that real people often recognize and resolve the problem of the commons while develop social organizations that preserve the communal nature of the resources. "She observes that resource users frequently develop sophisticated mechanisms for decision-making and rule enforcement to handle conflicts of interest, and she characterizes the rules that promote successful outcomes." I have written about this in Per's and my food policy book.

Update: One example of this mentioned by Nobel laureate Vernon Smith, as posted on Marginal Revolution, from Switzerland: "One rule, still enforced, dating back to 1517 states that "no citizen could send more cows to the [common property] alp than he could feed during the winter." Wintering a cow is costly, and this rule rations access to the commons by tying it to private property rights."

Oliver Williamson (UC Berkley) asked which problems are better solved by market settings and which are best solved within a firm. "Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets." Within-firm dispute resolution is also more likely to be chosen the more important establishing relationships of trust is.