Presentation Speech by Professor Tore Ellingsen, Member of the Royal Swedish Academy of Sciences, Member of the Economics Prize Committee, 10 December 2009
Your Majesties, Your Royal Highnesses, Laureates, Ladies and Gentlemen,
Two hundred seventy years ago, on June 2, 1739, Carl Linnaeus and five other men founded the Royal Swedish Academy of Sciences. For the last one hundred eight years, the Academy has selected the Laureates in Physics and Chemistry. For the last forty years it has selected the Laureates in Economic Sciences.
What would the Academy’s founders have thought of this year’s Laureates?
A reading of the Academy’s history offers some clues. The six founders saw in science a promise of prosperity. They even considered naming their society an economic academy. Accordingly, the questions that concerned them were quite concrete: How to exterminate pests, how to tar roofs, how to improve the harvest with new tools and methods, and how best to draw beer and wine from barrels in the cellar.
If the founders were to pick this year’s Laureates in Economics, my sense is that they might well have awarded it to Kao, Boyle and Smith for their work on fiber optics and digital imaging. These technological triumphs are highly economic, as they allow us to utilise our scarce resources in a substantially better way. – Indeed, do social scientists ever create knowledge of comparable economic significance?
Yes, I think so. Social innovation is as important as technological innovation. Most modern scientific breakthroughs occur in highly developed societies whose institutions support the accumulation of human, physical and financial capital. And while new technologies create new possibilities, we all know that technological progress by itself does not guarantee increased prosperity. Modern boats allowed us to fish more efficiently, but we used them to empty the seas. The invention of dynamite facilitated mining and building, but also allowed more devastating warfare. Good institutions are required for sustainable fisheries as well as for lasting peace.
In our search for better institutions, a crucial step is to understand existing institutions. Thanks to Elinor Ostrom and Oliver Williamson we now have a much deeper understanding of economic governance than ever before.
Elinor Ostrom has studied the management of common property. Conventional wisdom said that resources such as woods, lakes, pastures and groundwater should not be commons, but ought to be either owned by individuals or tightly regulated by governments. To the contrary, Ostrom showed that self-governing user groups frequently establish regulations that enable them to manage such resources remarkably well. One deep insight is that rational usage rules are only one part of the solution. People are more respectful of rules that they themselves have taken part in creating, monitoring and enforcing. The process for creating and implementing the rules can be as decisive as the rules themselves.
Oliver Williamson has provided the first testable theory of why some economic transactions take place within firms and other similar transactions take place between firms, that is, in the marketplace. Firms and other hierarchical organisations exist, he claims, not primarily for the purposes of planning and administration, but in order to resolve conflicts of interest. This theory explains why the boundaries of firms are relatively wide when transactions are complex and involve relationship-specific assets. More generally, the theory informs us about one of the most basic choices in human organisation: When should decision power be centralised in the hands of authorities, and when should decisions instead be made through voluntary agreements?
Professors Ostrom and Williamson:
Mankind has prospered from science, but prosperity will endure only if institutional innovation keeps apace of technological innovation. In the years to come, we will have to develop countless new rules, agreements and enforcement mechanisms. In doing so, we are blessed to be able to build on your foundations. In its two hundred and seventy-first year, the Royal Swedish Academy of Sciences could not have awarded a more timely prize.
May I ask you please to come forward and receive the Prize from the hands of His Majesty the King.
See them all presented here.