An institutional economics prize

O Prof. Paul Krugman, prêmio Nobel de Economia do ano passado, comenta os premiados deste ano no seu blog (http://krugman.blogs.nytimes.com/).

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October 12, 2009, 8:12 am

<!– — Updated: 8:27 am –>An institutional economics prize

Congratulations to Elinor Ostrom and Oliver Williamson. What a day for them!

The way to think about this prize is that it’s an award for institutional economics, or maybe more specifically New Institutional Economics.

Neoclassical economics basically assumes that the units of economic decision-making are a given, and focuses on how they interact in markets. It’s not much good at explaining the creation of these units — at explaining, in particular, why some activities are carried out by large corporations, while others aren’t. That’s obviously an interesting question, and in many cases an important one. For example, in my own home field of international trade, the basic models don’t assign any particular role to multinational corporations; how do we get them into the story, and what difference do they make?

There was an old tradition of economics that focused on the origins and nature of economic institutions. This tradition was very influential before World War II.

But it proved not at all helpful during the Great Depression. My caricature version is that when the Depression hit, institutional economics, asked for advice about what to do, replied that well, it’s all very complicated, and has deep historical roots, and … Meanwhile, Keynesian economists, using very simple mathematical models, basically said “Push this button — we need more G”.

And this had a somewhat perverse effect. The rise of Keynesian economics also meant the rise of the equations guys (Samuelson in particular), and in the end the equations crowded out institutional economics even as Keynes fell into disfavor.

But the questions didn’t go away. And institutional economics has been making a quiet comeback for the past several decades.

Oliver Williamson’s work underlies a tremendous amount of modern economic thinking; I know it because of the attempts to model multinational corporations, almost all of which rely to some degree on his ideas. I wasn’t familiar with Ostrom’s work, but even a quick scan shows why she shared the prize: if the goal is to understand the creation of economic institutions, it’s crucial to be aware that there is more variety in institutions, a wider range of strategies that work, than simply the binary divide between individuals and firms.

The prize is also, of course, a happy reminder that most of the profession is not caught up in the macro wars!

Add: Don’t tell Senator Coburn, but the NSF Political Science program has supported a lot of Elinor Ostrom’s research.

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