By most measures, Kottapalle is a nondescript village in Andhra Pradesh. It certainly bears no resemblance to a testing ground for one of 20th century’s controversial economic ideas. Yet, that is what it became—after the announcement of the economics Nobel Prize for Elinor Ostrom.
The award of the Nobel Prize in economics to Elinor Ostrom and Oliver Williamson is unusual: The work of the two laureates lies in very different domains of economics. Williamson carried forward the theories of another Nobelist, Ronald Coase. His work centres on the nature of firms; how the reduction of transaction costs is a motivating force in their creation and in understanding their choices and strategies. It is, however, Ostrom’s prize that marks a break with established theory.
Illustration: Jayachandran / Mint
Economic rationality, as every economics undergraduate knows, dictates some form of utility or profit maximization. As a result, cooperation between persons is possible only to the extent that it results in mutual benefit. Behaviour driven by emotions such as fairness, joy, anger, kindness and a host of other motivating factors has been driven away from the realm of economics.
What this does is to reduce reasoning to a caricature: Human beings are reduced to calculating machines and little else. Cooperation, in a family, in village councils, at workplaces, in neighbourhoods and in much of daily life, becomes irrational. The argument is that even if cooperation is secured, some (usually very few) of the participants bear a much heavier burden for this compared with the mass of persons who reap its benefits. The bible of such arguments is
The Logic of Collective Action: Public Goods and the Theory of Groups written by the late Harvard economist Mancur Olson.
Ostrom’s theories have chipped away at the foundation of this tradition of work. Empirical evidence from locations such as Kottapalle (the site of one of the most detailed studies based on Ostrom’s ideas) shows that individuals cooperate and that the burden does not fall on the few. All the participants reap benefits and share the burden and costs. There are no “free riders” as Olson and others have argued. In Kottapalle, a canal-irrigated village that lies at the tail end of the canal, maximization of individual benefit would have led to a free-for-all or would have required government intervention for order. In fact, the villagers regulate themselves without any external intervention.
Here, a word of caution is in order. Given the climate in which the prize has been given (a global economic crisis and interventionist governments becoming fashionable again), it would be wrong to say that Ostrom’s prize provides ballast for those favouring governments in the “state vs market” debate. Ostrom’s work celebrates human possibilities and not ideology.
The 2009 Nobel Prize for economics and the global economic crisis: is there a link? Tell us at views@livemint.com