The New Nobels: Small steps toward integrated social science
*Originally posted October 19, 2009 I got a kick out of learning that Eleanor Ostrom and Berkeley’s Oliver Williamson won the Nobel in Economics. I had a similar response when the Psychologist, Dan…
*Originally posted October 19, 2009I got a kick out of learning that Eleanor Ostrom and Berkeley’s Oliver Williamson won theNobel in Economics. I had a similar response when the Psychologist, Dan Kahneman, wonthe prize. These are important steps in the expansion of economics and establishing anintegrated social science based on rigorous logical thinking and empiricism. Thisintegrated new social science will provide insight on how people think and interact andhow to improve the human condition. It is useful to contrast the evolution of economics and biology. Research in the biologicalsciences first identifies and documents various organisms and only later develops ageneral theory, Darwinian evolution theory, that explains how species interact and evolve. In economics, Adam Smith developed a theory first. For years, economists considered onlytwo institutions: the firm and the government. But, we know that not all firms are alikeand that there are many other organizations that are neither government nor firms. Political scientists and sociologists are very good in identifying different types oforganizations and Williamson and Ostrom marry the organizational complexity with basicbehavioral principles that are emphasized in economics. Williamson’s work is based on the realization that different firms have different types ofphysiology (structure) and transactions occur in many ways outside of the market. Theseorganizational structures are reflective of diverse product characteristics, marketsituations, technologies, and consumer preference, etc. His work suggests that economicresearch shouldn’t strive only to explain choices of prices, quantity, and product quality,but more than that. It should aim to explain institutional design and evolution of differenttypes of organizations. Furthermore, good policymaking and effective legal structuresrequire balancing the desire for simplicity with capacity to address the multitude ofconsiderations that lead to the diverse institutional outcomes that we see in everyday life. Ostrom’s work made the notion of governance operational. It doesn’t only apply to states,but also to communities, which are creative in their design of institutions to manage andsustainably utilize community assets. So, traditional organizations that have beensustained over time, managing water resources or forests, are not arbitrary, but reflectsocial optimization that has to be comprehended and any institutional reform has to bebased on the understanding of why things are the way they are in the first place. Ostrom’sresearch suggests that reforms based on good intentions, but with ignorance ofinstitutional setup may push things backwards. Policy makers need to understand not onlynatural forces, but also social processes in order to make changes that would be for thebetter. Many of Williamson’s insights came from his understanding and appreciation of legalinstitutions. Ostrom is first and foremost a political scientist. But they established a twowayroad, exporting economics to legal studies and political science. Coming back toKahneman, his work started bridging economics and psychology, explaining somebehavioral patterns that perplexed economists by developing behavioral rules that aremore appropriate to bumbling human beings than to the uber-rational economic man andushering in the new field of behavioral economics. Economics, as a result of theseinfluences, has become richer and sometimes overwhelming, but more realistic. We realizethat in spite of our scientific progress we are in the beginning and have a long way to gobefore we are able to explain effectively social systems. At the same time, we areencouraged that the vantage points of different disciplines start to converge and we may,one day, reach an integrated narrative that will allow us to make better sense of societyand people. Best wishes to Williamson and Ostrom. This selection of the Nobel committee was welldeserved and by making this bold choice, the committee enriches economics and makes itmore exciting and relevant.