This year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel went to two distinguished scholars with long careers. Elinor Ostrom became the first woman to win the prize, “for her analysis of economic governance, especially the commons". Oliver Williamson was also recognized for his analysis of governance, but especially with respect to the “boundaries of the firm". Both scholars have examined how non-market alternatives can work where markets run into problems.

Ostrom has contributed to our practical and conceptual knowledge of how user associations can successfully manage common property resources. Markets may fail in such cases because individual actions can have impacts on others that the market cannot properly price. Collective decision making can work through rules and enforcement that shape incentives. User associations might be characterized as primarily horizontal organizations. Williamson has looked at more vertical organizations, namely business firms. Firms exist to produce goods and services to sell in the marketplace, but many of their internal resource allocation decisions could conceivably be made through arm’s-length market-mediated transactions. Williamson explores the many reasons why this is so. An important example is of situations where relationship-specific investments would limit or distort ex post market competition.

The prize announcement spoke of economic governance and the organization of cooperation. It highlighted the fundamental contributions of Ostrom and Williamson. Subsequent comments tried to draw some lessons for our current world. Princeton macroeconomist Per Krusell, a member of the prize committee, stated: “There has been a huge discussion how the big banks—the big investment banks—have acted badly, with bosses who have misused their power, misused their shareholders’ confidence, and that is in line with (Williamson’s) theories." Other academics, no doubt prodded by journalists, tried to connect the prize-winning research to questions of the size of financial institutions, and the nature and quality of regulatory institutions.

Ostrom and Williamson offered their own takes on what their research has to offer for us now. The scholar of grassroots involvement said: “What we have ignored is what citizens can do and the importance of real involvement of the people involved—as opposed to just having somebody in Washington...make a rule." Williamson stressed the need for studying what would constitute “good organizational practices" at the US Federal Reserve (Fed), the treasury and the Securities and Exchange Commission (SEC).

Here is a contrarian view: The financial crisis was not about the things that Ostrom and Williamson study. Governance failed. Financial institutions did not self-regulate effectively: They were not a successful user association. Financial firms failed to make good decisions: They were not an effective alternative to markets. So the non-market mechanisms did not work either. But if markets also failed (toxic financial assets were freely bought and sold), what were the problems and where are the solutions to be found?

One problem was politics and ideology. A major reason for the failure of financial regulation was an anti-regulatory ideology at the Fed, SEC and the treasury under the previous US administration. No amount of organizational design can overcome decisions made at the top that effectively emasculate existing regulations. In some cases, the distortions of ideology were made worse by examples of crony capitalism. The prize committee noted this latter problem, but it is not Williamson’s contribution: The problems of lobbying and rent-seeking have been analysed by others.

The other problem was the organization of market institutions. This might seem like a paradox—aren’t markets and organizations alternative modes of resource allocation? In fact, many markets need, or benefit from, institutions that allow efficient exchange to occur. Flea markets have long been a common institution for trading used goods, ranging from collectibles and antiques to junk (with the classification depending on the individual’s viewpoint). Ten years ago, eBay provided a much more efficient market institution for trading these types of goods, with better rules, greater transparency and more competition. Wall Street, on the other hand, has preferred to trade complex new financial instruments as if it were a flea market, while restricting competition. This allowed financial institutions to fool outsiders for a few years, until the crash came. The solution, therefore, lies in designing better institutions for these particular markets. This is why the financial crisis was about the organization of markets, rather than organizations vs markets.

Saying that understanding of the roots of the financial crisis cannot be mainly found in the work of this year’s Nobel Prize winners does not diminish their achievement or their relevance. Ostrom’s work can inform global efforts to manage carbon emissions and climate change. Williamson’s work has implications for trends in outsourcing and offshoring as globalization takes hold. These are enormous issues that will occupy politicians for some time. Meanwhile, the Nobel Prize for understanding the microeconomics of market institutions has yet to be awarded.

Nirvikar Singh is professor of economics at the University of California, Santa Cruz. Your comments are welcome at