Most economists think that they are building cranes that suspend important theoretical structures from a base that is firmly grounded in first principles. In fact, they almost always invoke a skyhook, some unexplained result without which the entire structure collapses. Elinor Ostrom won the Nobel Prize in Economics because she works from the ground up, building a crane that can support the full range of economic behavior.
When I started studying economics in graduate school, the standard operating procedure was to introduce both technology and rules as skyhooks. If we assumed a particular set of rules and technologies, as though they descended from the sky, then we economists could describe what people would do. Sometimes we compared different sets of rules that a “social planner” might impose but we never said anything about how actual rules were adopted. Crucially, we never even bothered to check that people would actually follow the rules we imposed.
A typical conclusion was that rules that assign property rights and rules that let people trade lead to good outcomes. What’s the skyhook? That people will follow the rules. Why would they respect the property rights of someone else? We had no idea. We might have had in mind something like this: police officers will arrest people who don’t follow the rules. But this is just another skyhook. Who are these police officers? Why do they follow rules? This is not an idle concern. Elinor showed that there are lots of important cases where people follow rules about ownership without police officers. One of the central challenges in understanding failures of economic development is that in many places, police officers don’t follow the rules they are meant to enforce.
Elinor’s fieldwork, followed up by her experimental work, pointed us in exactly the right direction. To understand BOTH why we don’t need police officers in some cases AND why police officers don’t follow the rules in other cases, we have to expand models of human preferences to include a contingent taste for punishing others. In reaching this conclusion, she arrived at a point similar to that reached by Avner Greif (whom the Nobel committee correctly cites.) They, more than anyone else in the profession, spelled out the program that economists should follow. To make the rules that people follow emerge as an equilibrium outcome instead of a skyhook, economists must extend our models of preferences and gather field and experimental evidence on the nature of these preferences.
Economists who have become addicted to skyhooks, who think that they are doing deep theory but are really just assuming their conclusions, find it hard to even understand what it would mean to make the rules that humans follow the object of scientific inquiry. If we fail to explore rules in greater depth, economists will have little to say about the most pressing issues facing humans today – how to improve the quality of bad rules that cause needless waste, harm, and suffering.
Cheers to the Nobel committee for recognizing work on one of the deepest issues in economics. Bravo to the political scientist who showed that she was a better economist than the economic imperialists who can’t tell the difference between assuming and understanding.
About
It is really refreshing to read that her winning the prize was in fact well deserved after reading a bit of what the anonymous commenters at the econjobrumors site had to say.
— AS · Oct 13, 08:34 PM · #
Absolutely excellent post Dr. Romer. Excellent.
— rbhui · Oct 13, 11:19 PM · #
Her work is so much more important for the people in emerging and developing countries than all that math puzzle-solving by economists building on ‘skyhooked’ assumptions. I am yet to meet someone out of the self-centered community of US econ PhDs who would question her being an excellent choice.
— Brum · Oct 13, 11:56 PM · #
looking forward to reading Professor Elinor Ostrom’s praise of your work in 2010!
keep it up Professor Romer!
— pat toche · Oct 14, 12:58 AM · #
I’m very happy to read this post, especially from a first-rank economist. I admire the approach of Adam Smith and Ronald Coase because they deal with facts in real life, not with blackboard economics. I believe that Prof. Romer must agree that institutions would play an essential role in the analysis of economic growth and development. The future of economics looks more promising after the announcement of this year’s Nobel Prize!
— De-Xing Guan · Oct 14, 05:54 AM · #
Very interesting, and the recognition that systems of thought must be grounded in fundamentals is important.
I would offer that while economists use the concept “preference,” preferences are a manifestation or expression of values. Therefore, to understand economics, you have to understand values, and you have to understand them as systems. That means delving into another field, philosophy, but it is unavoidable. I recommend Objectivism: The Philosophy of Ayn Rand to understand the axis of values on which Western nations are founded, and what the competing axis is.
If one has a more complete understanding of these concepts, one can better predict what will be regarded as virtues or values in what cultures. There might then be less inclination to try Keynesian stimuli on the Taliban.
— Wendy · Oct 14, 07:32 AM · #
Skyhooks/cranes contrast —- I like that, nice way to summarize Ostrom’s contributions. Indeed, I think Ostrom belongs to a school of economics (well, social science really) that builds theory bottom-up, highlighting emergent factors —- as, for example, Hayek did (though his approach, spontaneous order, was strikingly atomistic and did not meaningfully include the firm). Ostrom was a great choice for the prize, as was Williamson.
— tf · Oct 14, 04:11 PM · #
A Elinor’s selection for the Noble Prize is a great lesson to the economists who have been spending their time just doing maths instead of solving the real life problesm for the past several decades particularly since 1970s. Time to rethink the way economics is being taught. Instead of converting economics into maths, let it remain pure economics.
— Gunakar Bhatta · Oct 14, 06:48 PM · #
I was pleasantly surprised with this article. I am working on a political-economy related dissertation at IU (not under Ostrom) and I focus on developing countries: connecting transaction costs to regime change in agrarian societies. I know several of her students, one of whom studied under North, who suggested him coming to IU under Ostrom (if I remember correctly).
I am not a math genius, I simply do some basic formal models, and can (reasonably) consume rational choice material. The real problem with these elegant economic models are that, as you point out, they depend on ‘unrealistic’ assumptions. Or, as some of us think, that they are inapplicable to pressing non-market oriented issues.
Yet, the problem has been that economics has become a certain ‘thing’, which has driven the whole lot of us out. So, even if we contribute, the economists claim we are people from another field, doing research irrelevant for economics, or, patronizingly, derived from economics. Both Ostrom and Williamson do not indicate a new direction as much as a harkening back to a more social science, inductive, oriented process.
Anyway, great article,
V. Banerjee
— Vasabjit Banerjee · Oct 14, 11:37 PM · #
You have made a brilliant analysis of the work of Elenor.Those who think market fundamentalism is the panacea to all disparities and view the same as a dimension of global economic growth-they have been proved wrong. The age-old wisdom to properity is not capitalising and monopolising the resources but to manage the same collectively for the common good. Elenor’s work looks like a new sunshine in our dusky horizon.
Sailendra Dwivedi
Current Affairs Columnist,The Sambad,India
— sailendra dwivedi · Oct 15, 09:54 AM · #
The prize for Ostrom is a positive sign for the chances of bringing economics and more importantly economies into line with what people believe, want, and think is important, not to mention the actions they take. But if Ostrom deserves the prize perhaps the next should go to Bruno Latour whose work helped to end the “supernatural” view of science and its pronouncements. That would certainly include the science of economics. In other words her views and work are not totally new, even among economists. But what is new is that the prize committee chose to point to and name exemplar what she has said and done.
— Ken Zimmerman · Oct 15, 01:30 PM · #
Kaushik Basu’s book “Prelude to Political Economy: A Study of the Social and Political Foundations of Economics” talks about the skyhooks in a much more theoretical and general way, as is one of the papers by Stephen Morris, who offers a model of the endogenous emergence of rules. why are they not given the Nobel?
— equilibrium rules · Oct 15, 06:46 PM · #
For an interesting 100 year-old (water related) self government case study that does not require foreign travel take a look at ‘acequias’ in New Mexico and Colorado (www.lasacequias.org).
I’m not an economist but I’m delighted by Dr. Ostrom’s award. Perhaps our example of do-it-yourself water governance will attract some attention from your smart guys.
— Mike Byrnes · Oct 16, 06:50 AM · #
Bravo to Paul Romer for having the courage to criticize “the economic imperialists who can’t tell the difference between assuming and understanding”. I must say that many years, actually decades, ago the absurdity of neoclassical theory was utterly criticized by Piero Sraffa and J. M. Keynes, who not only showed its lack of realism but also its danger when used as a premise for policy-making. Now, after 30 years or so of boom and bust cycles and massive unemployment all over the world, it just is fair that the Nobel Prize goes to Dr. Ostrom. However, whether this means that the Nobel committee has finally come to its senses is yet to be seen. I would not be surprised if next year’s award goes back, again, to another skyhook, “freshwater” economist.
— Ignacio Perrotini · Oct 18, 11:11 AM · #
The problem is not math per se—math is just logical equivalence. “If people are fully rational, this happens” is true—in the same way “if aliens landed in Seattle, they have visited earth” is true. The problem is, people aren’t completely rational, and aliens haven’t landed in Seattle.
The freshwater models assumed unrealistic things. From there, they used blameless math to reach unrealistic conclusions.
A realistic model of human behavior would incorporate insights from evolutionary psychology, ect. However, this approach would be much MORE mathematical than anything currently used. Example: If people irrationally panic once a critical mass have done so, we have a problem for non-linear dynamics.
— Sam Viavant · Oct 18, 06:43 PM · #