STOCKHOLM – “Ships that pass in the night should berth at Stockholm for the weekend more often.” John Moore, of the London School of Economics, pronounced that benediction that on a Nobel symposium in August 1990, at which 24 leading economists met quietly for three days in a city suburb to discuss contract economics.
Such symposia are one way which Nobel committees sort out swift or confusing developments in the fields that they cover. And things certainly were happening quickly in those days, not just in the fields that the meeting was called to examine, but all over the wider world. Journalist Bryan Burroughs published Barbarians at the Gate in 1990, his story of the buyout boom of the 1980s. Ivan Boesky got out of prison in 1990, and Michael Milken copped a plea. That was also the year that the Soviet Union began to come apart.
Sure enough, the symposium produced a Nobel Prize the next year – to Ronald Coase, of the University of Chicago, “for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy.” The 81-year-old Englishman was then celebrated around the world, chiefly as the intellectual father of deregulation. (His hundredth birthday is coming up next year).
Then in 1992 the proceedings of the conference appeared as Contract Economics, with an introduction by organizers Lars Werin and Hans Wijkander. They described the dawning recognition over the previous ten or fifteen years that economics, if it were to be relevant, would have to trade its traditional discussion of decisions about prices and quantities arrayed against a budget for a much more sophisticated study of economics institutions, specifically contracts underlying markets of all kinds – capital, labor, products.
“We even found that the phenomenon called ‘the firm’ seemed to be nothing more than a structure of particular contracts. An enormous black box thus revealed itself at the very center of economic theory, waiting to be opened.”
Now here’s the thing. That was the last time anyone heard of contract theory or organizations or institutional economics from the Swedes until last October, when they cited Oliver Williamson and Elinor Ostrom for “major contributions to our understanding of economic governance” (if you don’t count Douglass North for his work in history to explain institutional and economic change, that is).
Why the long silence?
It is entirely possible the Swedes didn’t want to authorize further high jinks in those markets in the real world. It’s worth remembering that developments in economics were routinely being cited in those years, often in brassy triumphalist tones, to justify the wholesale restructuring of ownership, management, compensation, and employment practices around the world.
For instance, one of the topics considered was principal-agent theory, then a highly-popular body of doctrine addressed to assuring that agents (managers, employees) would do the job that principals (shareholders, managers) had hired them to do. Principal-agent theory had laid the foundation for the widespread use of stock options as executive compensation tools, and pointed the way to the massive corporate restructuring movement. Another development discussed was contract theory, a much more comprehensive investigation of bargaining power as it exists between buyers and suppliers, employers and employees, lenders and borrowers, shareholders and managers, which seemed to promise insight into the types of organizations that arise, including the state itself. And in the background was the efficient markets hypothesis, with its implication that shareholder value was the only really dependable gauge of economic efficiency.
Aside from a 1993 symposium on developments in game theory, though, which produced the famous award to John Nash, the Nobel Committee held two more symposia in the 1990s, neither of which led to a prize. The first, in 1995, on “Law and Finance,” published as Corporate Governance and Financial Contracting, edited by Bertil Näslund and Bengt Holmström. The second, in 1999, was on “The Economics of Transition,” whose proceedings were not published. Neither Michael Jensen, of Harvard Business School (emeritus), who is identified more than any other thinker with principal-agent theory, nor Eugene Fama, of the University of Chicago, associated with the efficient markets idea, has been cited.
The prizes this year were at once cautious and bold. Williamson, a solid contributor to the field since a seminal paper in 1971, and author of a widely-read subsequent book, Markets and Hierarchies, was a full participant in the 1990 proceedings. The committee emphasized that his theories could be tested by measuring the complexity and relationship-specificity of tasks. Big firms are indicated when transactions are complex, markets when they are not. Ostrom, on the other hand, was no part of the proceedings in 1990, though a whole section of the meetings was devoted to concerns that she quickly came to dominate when Governing the Commons: The Evolution of Institutions for Collective Action appeared that same year. Then, the committee barely knew her name; last week, she was much the stronger choice.
Her emphasis on self-structured repeated games of trust doesn’t give confidence that game theorists know what they’re doing: the evolution of cooperation among patient people was studied, when it was studied at all, only in situations where outsiders imposed the rules. And the management of what she calls common pool resources may be only the tip of an iceberg. As committee member Tore Ellingsen, of the Stockholm School of Economics, said in presenting the prize, “One deep insight is that rational usage rules [for common pool resources] are only part of the solution. People are more respectful of rules that they themselves have taken part in creating, monitoring, and enforcing. The process for creating and implementing the rules can be as decisive as the rule themselves.”
It’s worth remembering, therefore, that economics is a very young science, and that it still has got a long way to go. If the Swedes have been cautious, it is because the larger framework of the economics of organizations remains, for the most part, an enormous black box.
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Paul A. Samuelson, of the Massachusetts Institute of Technology, died peacefully this morning of congestive heart failure. He was 94.
John Maynard Keynes may have had more influence on policy makers, Milton Friedman on citizens, Kenneth Arrow on economic theory, but Samuelson had more influence on the way economics is done today, and the purposes to which it is put, than any other economist of the twentieth century.