Streetwise Professor

Louis Uchitelle of the International Herald Tribune, for heaving up this:

The prize committee, in making the awards, seemed to be influenced by the credit crisis and the severe recession that in the minds of man mainstream economists have highlighted the shortcomings of an unregulated marketplace, in which “economic actors” [nice scare quotes there, Louie], left to their own devices will act in their own self-interest.  Classical free-market theory holds that in doing so they enhance everyone’s well being.

The committee, in effect, said that theory was too simplistic and ignored the unstated relationships and behaviors that develop within companies that compete.  “both scholars have greatly enhance our understanding of nonmarket institutions,” the committee said.

Clue telegram for Mr. Uchitelle (a telegram because it’s pretty clear that his clue phone has been disconnected due to nonpayment): Williamson and Ostrom both analyze the private behavior of economic actors acting in their self-interest to enhance wealth and well-being.  Williamson, for instance, shows how economic agents design and choose various forms of organization and governance to mitigate transactions costs and thereby enhance wealth.  Similarly, Ostrom shows how groups of individuals can craft mechanisms to mitigate wasteful exploitation of common pool resources; these individuals are again acting in their self-interest to achieve results that enhance wealth and welfare.

Although Uchitelle seems to be reaching desperately to argue that the Nobel committee was making a ringing dirigiste statement, in fact Williamson’s and Ostrom’s work is actually quite supportive of the view that maximizing agents left to their own devices can craft mechanisms that address many contracting and transactions costs problems conventionally thought to require government action to redress.  Although Williamson argued that transactions costs considerations can make some kinds of regulation beneficial (e.g., the avoidance of auction mechanisms for cable TV franchises), he was also extremely influential in demonstrating that much regulation of vertical relations (e.g., anti-trust actions against vertical integration) was completely wrongheaded because it failed to understand the fundamental economic purpose (transactions cost mitigation) of these arrangements.

Uchitelle’s choice of words reveals his desperation quite clearly.  The committee “seemed to be influenced.”  Translation: They didn’t come out and say it, so I put my words in their mouths.  “The committee, in effect, said.”  Again, the committee didn’t say so explicitly so Uchitelle had to divine its hidden meaning and share it with the world. Also, the “unregulated marketplace” is the flimsiest of straw men.  In effect, Mr. Uchitelle, you are a liar.

Uchitelle’s understanding of economics is laughable.  “Classical free-market theory”? WTF is that?  He presents the most reductive caricature of neo-classical economics, and tries to pass that off as “classical free-market theory.”  Sophisticated economists who are broadly supportive of letting individuals craft their own contractual arrangements, and suspicious of government interference in such individual efforts, do not rely on textbook Walrasian markets to make their arguments.

Indeed, given the ways in which neo-classical economics (since Pigou) has been hijacked to justify heavy-handed government intervention, it is my distinct impression that most New Institutional Economists (including Coase, as well as Williamson and Ostrom) who think about institutions, contracting, and organization more broadly have a greater appreciation of the virtues of private arrangements, and the vices of public ones, than “mainstream” purely neo-classically trained ones.  They take their cue from Coase, who long ago noted that economists operating from a purely neo-classical framework saw every non-standard contracting relationship as a manifestation of market power and monopoly because they had only “pure competition” and “monopoly” hammers in their toolkit.  New Institutionalists understand that “markets” should be interpreted broadly to include all private contracting relationships, not just price allocation mechanisms, and that they are efficient, economizing, wealth maximizing responses to a variety of economic challenges.

Interestingly, the above quote from Uchitelle comes from the International Herald Tribune on Dead Tree that I picked up this morning in the Casa Pairsal in Collioure, France.  When I went online to find the electronic version, Mr. Uchitelle’s deathless prose quoted above was not to be found.  Instead, his online article acknowledged:

Neither Ms. Ostrom nor Mr. Williamson has argued against regulation. Quite the contrary, their work found that people in business adopt for themselves numerous forms of regulation and rules of behavior — called “governance” in economic jargon — doing so independently of government or without being told to do so by corporate bosses.

. . . .

Summarizing their findings, the award announcement said: “Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated. Likewise, monitoring and enforcement work better when conducted by insiders than by outsiders. These principles are in stark contrast to the common view that monitoring and sanctions are the responsibility of the state and should be conducted by public employees.”

When I googled various combinations of uchitelle, international herald tribune, williamson and quotes from the print version I read this morning–nothing came up.  When I omitted the quotes from the print version, the version just quoted appeared.  Apparently somebody discovered Uchitelle’s misleading editorial cross-dressing as a news story, consigned it to the memory hole, and had him draft a (somewhat) more accurate story–or drafted it for him.

But even this alternative version gives a distorted view.  In fact, Williamson has argued against particular regulations (e.g., old style anti-trust actions against vertical integration).  Moreover, to call private organization and governance decisions admittedly adopted “independently of government” “regulation” is deeply dishonest, given the government involvement clearly connoted in the word “regulation.”  Look at the last quoted sentence of the committee statement: “These principles are in stark contrast to the common view that monitoring and sanctions are the responsibility of the state and should be conducted by public employees.”  That doesn’t seem like ringing regulation advocacy to me, at least as the word “regulation” is utilized by just about everybody outside of Uchitelleworld.

It is also interesting that Uchitelle gets a quote from Joe Stiglitz of all people.  That is a sufficient statistic for both Uchitelle’s bias and his cluelessness.

Yes, Williamson and Ostrom–and New Institutional Economists in general–are largely heterodox.  They are critical of much economics that is rooted in neo-classical formalism.  But to conscript them and their research into an “anti-market” pro-regulation campaign is farcical.  It tells us much more about Mr. Uchitelle’s prejudices, and those of the papers that run his drivel, than it does about Williamson, Ostrom, or New Institutional heterodoxies.  There is a debate here.  It deserves to be understood by a wider audience.  The Williamson-Ostrom prize (like the Coase, North, and Smith prizes before it) is a wonderful opportunity to do just that.  But nooooooooooooo.  The NYT and IHT feel obliged instead to turn this debate into another act in a morality play in which Mr. Market is the villain.

So wise up, folks.  If you’re looking to learn something about economics, cancel your subscription to the New York Times.