Nobel Prize in...Political Economy?

Seems odd, but take a look:

American economists Elinor Ostrom and Oliver Williamson, who study the way economic decisions are made outside markets, were awarded the Nobel Prize in economics Monday.

Ms. Ostrom, who teaches at Indiana University in Bloomington, Ind., is the first woman to win the economics prize, which had been awarded to 62 men since its launch in 1969. The judges cited her analysis of what happens when natural resources are shared commonly.

Mr. Williamson, who teaches at the University of California, Berkeley, was cited for explaining why some decisions are made more efficiently inside corporations rather than at arm's length in markets.

Within the economics profession, neither was seen as a likely choice for the award, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Ms. Ostrom's doctorate is in political science, though she considers herself a political economist. Ms. Ostrom, 76 years old, said that when the phone rang at 6:30 a.m. Monday, she thought it might be a telemarketer. Mr. Williamson's work, meanwhile, has been highly influential on fields outside of economics. The 77-year-old has been described as the economist most cited by noneconomists.

Both have highlighted areas where standard approaches of economics are inadequate at explaining what actually occurs. "They both pay incredible attention to what happens in the real world," said Wharton School economist Witold Henisz, a former student of Mr. Williamson's.

Ms. Ostrom's work challenged the view that when people share a finite resource, they will end up destroying it -- what is known as the tragedy of the commons. That view argues that resources that are important for the common good need to be highly regulated or privatized.

As a graduate student in the early 1960s at the University of California, Los Angeles, Ms. Ostrom researched the way water was being managed in Southern California. Groundwater levels were falling, and saltwater was seeping into the system. But rather than collapsing into a tragedy of the commons, communities and water producers hashed out a solution. That led her to explore situations throughout the world where resources were commonly held, and she found that people often developed institutions, networks and other ways of interacting that solved problems.

Economists had largely ignored the importance of such networks, said Yale University environmental economist Matthew Kotchen, in part, because they couldn't come up with elegant models to describe them.

First Krugman, now this. Something very, very interesting is happening with the Sveriges Riksban.

Going on...

[Williamson] found that many economic decisions that standard theory said would be more efficiently left to the marketplace were actually better left within a firm. "Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent," the Nobel judges said. "But when market competition is limited, firms are better suited for conflict resolution than markets."

This is a more profound insight than you'd think. A firm is essentially a bureaucracy, just one in a condition of competition with other bureaucracies. The practical upshot here is that markets are not always the best mode of economic organization, which is an astounding idea to even consider.

But what's even more astounding is the fact that thse two people got the award in the first place. A political economist getting the Nobel Prize in economics? Only a few years ago, that would be seen as something like sacrilege. Yet here we are.

That point about a lack of elegant models is important, too. Nobel prizes in the past have been all about elegant models. In fact, your model was probably the fastest and most predictable way to earn a Nobel. Economic history and (until now) Political Economy were nonstarters compared to things like Econometrics and Economic modelling. Yet, again, here we are, where a model-resistant theory takes the prize.

I'm not sure why, exactly, attitudes seem to have shifted. But they have. And good on' em.