In 2009 NOBEL Prize Economics went to two Americans who distinguished themselves by thinking outside the box and articulating their work through a qualitative methodology.
The economics profession did not expect the prizes to go to individuals who were not rigorous in a mathematical sense, as economics schools have been captured for a very long time by individuals who are obsessed in presenting economics ideas, thoughts and theories in elegant mathematical terms.
One of the prize winners is not even a practicing economist. Elinor Ostrom is a political scientist by training and as she is from Indiana University, is not of Ivy League pedigree. The other co-winner is Oliver Williamson from the University of California, Berkeley.
Well-known blogger and Harvard University professor Gregory Mankiw gave Williamson a one-in-50 chance of winning the prize. Mankiw’s favorite was Eugene Fama, who developed the efficient-market hypothesis (EMH) which, according to Lawrence
Summers (the current Director of National Economic Policy to President Barack Obama and a former Harvard President), does not add up to much because a successful test of the EMH does not necessarily mean that the market is efficient.
Williamson was a favorite to win the prize for a long time but this time, he was not just a name to make the list complete. He worked on the theory of the firm — on why the firm existed — following the lead of a previous Nobel laureate, Ronald Coase.
I found his work extremely useful in conceptualizing governance in the telecommunications industry, especially his definition of governance. According to Williamson, governance comprises two elements — hierarchy and control. In the telecommunications industry, there is both networking and governance. There is networking because firms in the industry are technologically interdependent and have to work out interconnection rates. However, with developments in free internet conference calls, the telecommunications industry faces a new challenge.
However, the activities of the firms are coordinated and controlled by a regulatory commission that is organized in a hierarchy in relation to the firms. The regulatory authority has hierarchical control over the networking activities of the competing firms in the industry.
Hierarchy and control are key elements in governance and hence the term ‘network governance’ to provide an abstraction of how production and distribution is organized and regulated in the networked telecommunications industry.
In fact, Williamson has argued that economic activities can no longer be conceptualized as markets or hierarchies but as networks. So he not only defined governance as being hierarchy plus control, but also highlighted the emergence of network type of firms.
The significance of Williamson’s work is far-reaching because he belongs to a group of so-called institutional economists who did not ignore the question as to why a firm exists. Many neo-classical economists, who are the dominant folks in economics departments, only look at inputs and outputs and ignore the firm which they describe as a ‘black box’ that they do not want to bother about or discuss, although the black box is what converts inputs into outputs.
The institutional economists argue that the firm or black box exists because there are activities that can be easily organized and in a least-cost manner within the firm or the black box. It is only activities that the firm cannot produce at a low or competitive cost that are subcontracted to other firms.
Williamson changed the way courts looked at vertical integration. In the past, all forms of monopolies were considered undesirable and should be eliminated or dismantled. For example, the American Telephone & Telegraph Company (AT&T). In fact, Columbia University economist and Nobel laureate Joseph Stiglitz argued in a recent book on Fair Trade For All that monopolists should be shot dead on sight in the developing countries.
Today, Microsoft survives as a monopoly because of the work of people like Williamson who argued that if the monopolist arose because it was the fittest, then the courts should subscribe to the Darwinian concept of ‘survival of the fittest’.
Williamson has justified the vertical integration of firms by arguing that it might promote efficiencies. For example, if a miner has to transport coal but the railroad charges too much, then it might be in the interest of the coal-mine to buy the railroad or invest in a new railroad. This is not collusion but vertical integration to derive scale economies and drive down costs.
Ostrom’s work deals with alternatives to government organization, intervention and privatization. She highlights the importance of community as a sustainable form of organization to solve the problem of who gets what, when, and how. While neo-classical economists argued that people acted in their own self-interest, Ostrom postulated that people are motivated to cooperate to find solutions to common problems of resource use.
I remember being referred by a Harvard economics professor to a book by Ostrom on water organization by communities. Its relevance comes to light in many rural areas of Africa where there is no government or private sector to solve the problem of generating and distributing clean affordable water. How communities solve these types of problems is the driver of most of Ostrom’s work, which spans a few decades.
The starting point is the common conception of the “tragedy of the commons”, which simply states that if common property usage is not regulated by prices (read privatization) or government (regulation), then it will not be appreciated by people and the commons will be destroyed.
Ostrom argues that the “tragedy of the commons” need not occur because it is in the self-interest of individuals and the community to preserve the common property resource. If the tragedy of the commons were a common occurrence, then all fishery resources would be depleted and all forests destroyed.
The work of Raymond Firth on The Malay Fishermen, for example, clearly shows that there is concern for both the maintenance and sustainable development of human life and fishery resources. Similarly, Clifford Geertz’s work on Agricultural Involution shows that even when population increases and farm size remains constant, there is shared poverty but the padi fields are not destroyed.
There is concern within communities over survival into the future. For example, when we had the currency crisis in 1997, there was talk among the common men and women that regardless of what the politicians did, the people would not let the economy slide. They would collectively take a solution that would be in their self-interest to keep the economy moving again so that they could keep their jobs and see that more jobs were created for their children and relatives.
This was what the International Monetary Fund (IMF) could not see as it expected the people to revolt against what they conceptualized as crony capitalism. The IMF could not understand that Malaysians were not interested in toppling the government in order to introduce a new type of economy along the lines suggested by the Anglo-American model that was peddled by the IMF all around the world.
Some have even suggested that the outcome of the last general election was not the work of political parties or governments or the private sector, but the community that communicated through the media, the blogs, the Internet and word-of-mouth.
Governments cannot afford to be out of touch with emerging community views of equity, justice, governance and fairness, especially among the western-educated, whose education it has sponsored for decades because they will decide the outcome of future elections.
So, Ostrom says there is an alternative to the government which is not necessarily privatization, but community action. She has given a signal to academics that there is a lot of scope for home-grown solutions to the problem of political and economic development.