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Nobel for Institutional Economics

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When I was in Bloomington, Indiana last week, Justin Ross and I talked about the "Bloomington school of public choice," meaning Elinor Ostrom. (see Aligica and Boettke.) Little did I know that she was about to be awarded a Nobel Prize, along with Oliver Williamson. She is known for looking at ways that private individuals cooperate to manage what we think of as "pubilc goods," or "common pool resources."

For example, to prevent overfishing, mainstream economics says that government must regulate. Nobel Laureate Ronald Coase says that an alternative is to define property rights carefully. Ostrom studied cases in which private individuals established rules that worked. Meanwhile, government regulations (including assignment of property rights) often failed, particularly when individuals did not buy in to the purpose of the regulation.

With the advent of the Internet, the issue of private provision of public goods has emerged once again. Think of Wikipedia, or perhaps Twitter, or the various task forces that monitor security issues and define software standards.

Williamson is known for looking at the issue of the boundaries of the firm. This is another issue that interested Coase. I think of Williamson as looking at the issue in terms of central planning vs. markets.

For example, in health care delivery, I think we need more central planning. Not by government, but by corporations competing to offer better quality and efficiency. The problem is that the corporate model threatens the status of doctors. However, as Michael Cannon and I argued here, when a patient has a complex set of problems, the model of doctor autonomy can work very poorly. In Williamson's terms, the corporate model can resolve the conflicts that arise between different doctors more effectively than our existing model. For example, when my father was moved to eight different hospital units in fourteen days, a new doctor was in charge of him at each unit. The priorities and treatment plan changed each time. In my opinion, these autonomous hospital units should have been replaced by a hierarchy, in which care is directed by a project manager accountable to the patient.

I prefer a more Hayekian take on industrial organization. That is, I think that industrial organization ought to be aligned with knowledge. Decentralization of power makes sense when information is decentralized. When information can be usefully concentrated, then concentration of power can be efficient. In my forthcoming Unchecked and Unbalanced, I argue that knowledge is becoming more specialized and decentralized, and that this conflicts with the trend for political power to become more concentrated.

Read the Nobel committee's summary of Ostrom and Williamson here.

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david writes:

Once you discard the classical orthodoxy on individual behavior, it becomes true that creative individuals can reach an equilibrium more desirable than what Coasean rights assignment or central planning can achieve.

Unfortunately, as this is tantamount to saying that individuals in a Coasean rights assignment won't or can't bargain their way to the optimum, there's now no a priori reason to assert general market optimality either.

Plausibly, where markets are classically implied to be very bad, creative individuals can find ways around the problem. Where markets are very effective, creative individuals also find ways towards rent or profit. A libertarian might say the latter only ever occurs through government capture, I guess

tom writes:

I see everything in terms of general contractors and subcontractors/suppliers because that's what I work with. And maybe the greatest innovation of the modern world is the development of GCs who can bring together subs & suppliers to perform a project, and also do it at the same time they are running several other projects with a slightly different mix of subs & suppliers. Boeing, the guy adding on to my house, and many different partners within law firms are all gcs.

The problem is that medical GCs would have to know a lot about many fields in order to have complicated care work well, and they have to know how to manage and bully other doctors, so GCs in hospitals would have to be some of the best doctors instead of just bureaucrats who are moved there because they weren't good enough at a specialty or had no specialty. (I think that's a big part of hospital management today.)

I know that many hospitals do a version of this by picking one of the specialists to be the one running the patient's overall care. But I think it is a very difficult job for specialists to do while remaining specialists. And I'm not sure how would create a class of medical general contractors. Would we pay them more than kidney guys, liver guys, pediatric heart surgeons, oncologists? How do you develop that new kind of field using the kind of people who become good doctors?

david writes:

Having read the paper on health care might I just say that the form recommended in it is the type of organisation used in at least some of the EU countries. The ones with the so called 'death panels'. Not that I would dream of sayings its perfect - far from it. Its just the US way of doing things is so dysfunctional no one else seems to want to try it.

CJ Smith writes:

Insofar as as you advocate for using centralized hierarchy and regulation to encourage information sharing and dissemination, you make an excellent point. This system helps make markets more efficient, and addresses one of the crucial "assumption errors" underlying competitive free market theory - that the information market collateral to the supply and demand market is efficient and and cost free.

Consider Florida's Amendment 7, Patients' Right To Know, which is an excellent example of this proposition, and was recently upheld by the Florida Supreme Court. Fla. Hospital Waterman, Inc. v. Buster, No. SC06-688; and Notami Hospital of Fla., Inc. v. Bowen, No. SC06-912 (Fla. 3-6-2008).

However, when central planning acts to concentrate economic power to create oligarchy, you have a problem, in that the excise of the oligarchical power generally acts to stifle competition, create deadweight loss and reduce the total economic benefits. In this respect, I must disagree with your call for greater centralization.

noahpoah writes:

I'm not an economist, but I would like to read some of Ostrom's work. Are there any reasonably layman friendly articles or books of hers that would be good to start with?

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