The Rethinking of Neoclassical Economics

Elinor Ostrom

Two Americans, Elinor Ostrom and Oliver E. Williamson, have won the Nobel Prize in Economics for their work in the field of economic governance. Of particular interest to Neuroworld readers, I think, is Ostrom’s work, which, as Alex Tabarrok puts it over at Marginal Revolution, “has explored how between the atomized individual and the heavy-hand of government there is a range of voluntary, collective associations that over time can evolve efficient and equitable rules for the use of common resources.”

In particular, Ostrom, a political scientist by trade (the economists are thrilled!), has looked at issues such as water associations in Los Angeles, police departments in Indiana, and irrigation systems in Nepal. Her work purports to show that contrary to traditional neoclassical models of economic behavior, common resources are often managed quite well — not by governments or individual firms, but by cooperative associations. Part of the reason that this is the case, according to Ostrom’s work, is that humans are (surprise!) not the cold, rational utility maximizers of standard economic models. Instead, they’re… humans.

Take this paper (abstract with link to PDF) of Ostrom’s on game theory and the management of the commons. She finds that when people have no knowledge of each other and don’t interact, lab experiments largely match up with the predictions of game theory — people overharvest, everyone suffers, etc. But, she found, when people do talk face-to-face, they quickly learn to be more cooperative — to everyone’s benefit.

This paper, in a similar vein, explores how people are more likely to cooperate with decisions governing their use of resources when they feel they’ve had input into the decisions that have been made. This paper (abstract with link to PDF) looks at the importance of social norms and trust building.

Important stuff, especially at a time when so much trust seems to have broken down and when so much about neoclassical economics appears to have failed us.

Other economics Nobel coverage:

Steven Levitt says: “This award demonstrates, in a way that no previous prize has, that the prize is moving toward a Nobel in Social Science, not a Nobel in economics.”

Paul Krugman on the Nobel and institutional economics here.

Alex Tabarrok explains more about Williamson’s work here.

Meanwhile, Virginia Postrel has an excellent column on some of Williamson’s work here.