Tag: nobel prize in economics

Elinor Ostrom, RIP

Elinor Ostrom, the first woman to receive the Nobel Prize in economics—though that is hardly the most significant aspect of her work—has died at 78. My old friend Mario Rizzo of New York University examined her scholarly accomplishment in 2009 when she won the Prize:

The work of Elinor Ostrom, the first woman to receive the Nobel Prize in economics, is not very well-known among economists. In fact, I would venture the guess than most economists had not heard of her before the prize was announced yesterday morning.

Two reasons for this are that her degree is in political science and she has written for publications outside of the mainstream economics journals. Additionally, her work, by and large, lacks the high degree of mathematical formalism now so characteristic of economics.

Yet the Nobel Prize Committee has done a great service to economics and the greater social-scientific community. When a well-known economist receives the prize little is gained apart from the recognition of a job well done and perhaps some wider public recognition. I do not think that great contributions are made in any discipline because of the incentive effects of an improbable prize. However, in this case the Nobel Committee has brought extraordinary work to the attention of an economics discipline that has become excessively specialized and, perhaps increasingly irrelevant to the real world, as Paul Krugman and others have recently suggested.

Professor Ostrom’s work is highly relevant to important issues in economic development, common-pool resources, the development of social norms, and the solution of various collective action problems. Her work is also methodologically diverse. She uses experimental methods, field research, and evolutionary game theory. She is not afraid to draw on various disciplines when appropriate: economics, political science, evolutionary psychology, cultural anthropology and so forth.

She is a very worthy intellectual descendant of Adam Smith who realized that the study of trade based on self-interest needed to be supplemented by a broader view of humankind – individuals capable of the so-called “moral sentiments” like honesty, benevolence, and loyalty, as well as the standard vices.

Much of Ostrom’s work centers on developing and applying a broader conception of rationality than economists usually employ. The standard conception of rationality is not the rationality of real human beings but the rationality of cognitively-unlimited lightning-fast calculators. This is a purely imaginary construct. On the other hand, Olstrom’s “thick rationality” is the result of trial and error, use of relatively simple heuristics, employment of rules, and the embodiment of cultural norms. To reject standard, improbable rationality is notto reject rationality. It is rather to develop more sophisticated, and yet more realistic, models of rationality.

“Thick rationality” is a bottom-up phenomenon. It recognizes the importance of local knowledge and diverse approaches in the management of resources. For example, many top-down irrigation projects in developing countries have failed because they have concentrated on the physical aspects of water delivery. Ostrom believes that the institutional aspects are more important. Irrigation systems built by farmers themselves are often more efficient. They deliver more water, are better repaired, and result in higher farm productivity than those built by international agencies. Often these agencies take no notice of local customs, knowledge and incentive structures; the knowledge of the bureaucrat is inferior to the knowledge of the individuals on the ground.

The central problem on which her employment of the notion of “thick rationality” can shed light is what she calls “social dilemmas.” These are circumstances in which interacting individuals can easily succumb to maximizing their short-term interests to the detriment of their long term interests. To return to our irrigation example, suppose farmers share the use of a creek for irrigation. They face a collective problem of organizing to clear out the fallen trees and brush from the previous winter. Each farmer would like to have the others do it. There are incentives to free-ride on the “public spiritedness” of others – however, everyone may think this way and nothing will get done. Ostrom finds that cooperation will often take place while the “thin” theory of rationality predicts that it will not. She finds that factors such as face-to-face contact (likely when there are small numbers), the equality of each farmer’s stake in the benefits of irrigation, and the ease of monitoring the farmer’s contribution to brush removal all make the likelihood of cooperation greater.

Elinor Ostrom has and continues to expand the power of a broader conception of rationality – one that Adam Smith would have recognized and been comfortable with – to explain the multifarious forms of human cooperation that conventional economists have been unable to explain. This is a major contribution.

Paul Dragos Aligica and Peter Boettke of George Mason University showed excellent prescience in publishing a book in the summer of 2009, just a few months before the Nobel Prize was awarded, on the work of Ostrom, her husband Vincent, and their colleagues at Indiana University, Challenging Institutional Analysis and Development: The Bloomington School.

Topics:

Why Congressional Budget Office Estimates and Policy Options Are Taken Much Too Seriously

Coercive redistribution and diversity in the interests of its constituent groups are essential features of the modern welfare state.  Disagreement over perceived consequences of social policy creates the demand for publicly justified “objective” evaluations. If there were no coercion, redistribution and intervention would be voluntary activities and there would be no need for public justification for voluntary trades.

James J. Heckman (winner of the 2000 Nobel Prize in Economics), “Accounting for Heterogeneity, Diversity and General Equilibrium in Evaluating Social Programs,” National Bureau of Economic Research Working Paper No. 7230, July 1999.

What Do Peter Diamond and Paul Pate Have in Common?

You might have heard of Peter Diamond, he recently won the Nobel Prize in Economics and earlier this week withdrew his nomination to the Federal Reserve Board. But maybe you have not heard of Paul Pate.

Mr. Pate, former Republican mayor of Cedar Rapids, Iowa was nominated by President Bush in 2003 to fill a seat on the board of the National Institute of Building Sciences. I remember it well, as I handled that nomination as staff for the Senate Banking Committee.

So what exactly do Mr. Diamond and Mr. Pate have in common? They were both nominated for positions they could not legally hold. I’ve written elsewhere about Mr. Diamond’s situation. Mr. Pate was barred from serving on the NIBS board due to an ownership interest he had in an asphalt company.

Bush’s Office of Presidential Personnel didn’t catch that problem because they, like Obama’s same Office, don’t appear to actually read the statutory qualifications for nominations. I will admit, I didn’t catch this problem either. It was brought to my attention by the staff of former senator Paul Sarbanes (D-MD). When I verified Sarbanes’s objection, we immediately told Mr. Pate and the Bush White House that then Committee Chair Richard Shelby would not move Mr. Pate’s nomination (despite Mr. Pate’s personal friendship with Sen. Grassley (R-IA)).

Both Mr. Diamond and Mr. Pate were, in part, the victim of circumstances beyond their control. They had done nothing wrong. Yet the law was the law. While I don’t equate NIBS with the Fed, that shouldn’t matter. We should respect the law regardless of the viewed relative importance of the position. In fact, I believe the more important the position, the greater need for respecting the law.

Unfortunately there is a lot Mr. Diamond and Mr. Pate do not have in common. Rather than accept his bad luck, Mr. Diamond offers in the New York Times the rant of a spoiled brat. Mr. Pate, in contrast, accepted his bad luck with integrity and grace.

Diamond Not Qualified for Fed Board

Tuesday the Senate Banking Committee meets for the second time to consider the nomination of Peter Diamond to a seat on the Federal Reserve’s Board of Governors. Since Professor Diamond was first nominated, he has been awarded the Nobel prize in economics.

Putting aside his academic qualifications, and his misguided views on Social Security, Professor Diamond is not qualified to be a Fed governor for one very simple reason: he is from a Federal Reserve district that already has representation on the Fed.  Paragraph 10-1 of the Federal Reserve Act requires that:

In selecting the members of the Board, not more than one of whom shall be selected from any one Federal Reserve district, the President shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country.

Mr. Diamond’s Senate paperwork states he is from Massachusetts, which is also the case for sitting Fed governor Dan Tarullo.  In fairness this provision of the law has been ignored and violated in the past.  In fact, both current Fed Governors Duke and Raskin are both from the Richmond district.  As Duke was there first, it would seem clear from a reading of the law and Raskin’s bio that Raskin is serving in violation of the statute.  But then given the actions of the Fed over the last few years, the Fed has certainly shown that it doesn’t feel constrained by statutes.

Bloomberg reports that despite what Diamond’s paperwork says, the White House claims he’s from Chicago.  Not that he’s ever lived there, but because he once gave a lecture at Northwestern.  Next I suspect the White House will claim an extended lay-over at O’Hare is sufficient for residency.

For perhaps the first time in history, all the Federal Reserve governors are from coastal states.  Also every single Fed governor is from a state that Obama won.  Only one governor is from west of the Mississippi river.  How anyone can believe the current make-up of the Board is a “fair representation” is beyond me.  Perhaps this is one explanation for the currently low public opinion of the Fed; it has become more a Cambridge-Wall Street-Washington echo chamber than anything else.