Feeling Better about the Peace Prize

After reading more about the Nobel Economics Prize -- which I do take seriously -- maybe the Hope and Change Prize was not poorly decided.

I reserve the right to revise and extend these remarks as I learn a little more. But the Michael Spense overview that Professor Mankiw links to puts me ill at ease. "The common theme underlying the prize this year is that markets do not solve all problems of resource allocation and incentives well or even at all."

The deeper insight that these scholars have helped us to come to understand is that there are many circumstances in which non-cooperative outcomes (nash equilibria) are deficient or sub-optimal, and that a good part of economic and social progress lies in the creative design of institutions whose purpose is to cause these non-cooperative equilibria to come closer to socially and economically efficient and fair results.

Climate change is a commons problem on a global scale with the added complication that collective action is designed not directly to produce results (in the sense of temperature reduction), but rather to acquire tail insurance by shifting the probability distributions against outcomes that are highly destructive but not certain to occur. Though some are not convinced this is a problem worth acting on, a majority globally recognize that there are risks to be taken seriously. This may be the most complex commons problem we have yet faced. We are in the midst of shifting values with respect to energy efficiency and clean technology. The challenge is to design institutions, mechanisms and incentives that move us in the right direction.

I stand ready to be disabused of my opposition. No doubt laureates Elinor Ostrom and Oliver Williamson know a couple of things that I do not. But the claim that "people and societies find ways through organizational structures and arrangements, political and other institutions, values, incentives and recognition, and the careful management of information, to solve these problems" leaves me cold.

UPDATE: Arnold Kling is more positive. CLearly I need to delve a little deeper.

UPDATE II: A roundup of positive reviews from FEE.org:

The bloggers emphasize that both economists have devoted their attention to voluntary forms of governance, Ostrom in commons (among other things) and Williamson in firms. Regarding Ostrom, Tabarrok notes, “[H]er work has explored how between the atomized individual and the heavy-hand of government there is a range of voluntary, collective associations that over time can evolve efficient and equitable rules for the use of common resources…. For Ostrom it’s not the tragedy of the commons but the opportunity of the commons.”

Economics and Markets Posted by John Kranz at October 12, 2009 12:57 PM