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Tuesday, October 13, 2009

"Skyhooks versus Cranes: The Nobel Prize for Elinor Ostrom"

Paul Romer wants to make sure that we understand the importance of Elinor Ostrom's "work on one of the deepest issues in economics":

Skyhooks versus Cranes: The Nobel Prize for Elinor Ostrom. by Paul Romer: 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,... then we economists could describe what people would do. Sometimes we compared different sets of rules that a “social planner” might impose... 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 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? ... 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 ... spelled out the program that economists should follow. To make the rules ... 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 ... think that they are doing deep theory but are really just assuming their conclusions... 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.

Regulators attempting, and failing to impose the correct rules and how that helped to cause the financial crisis comes to mind. Seems like more focus on work like this might have helped.

    Posted by on Tuesday, October 13, 2009 at 12:42 AM in Economics, Methodology | Permalink  Comments (36)


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