A Teachable Moment

The awarding of the Nobel Prize in economics is always a teachable moment. This year’s award is no exception. It recognizes research on “economic governance” and goes to Elinor Ostrom for her work on “the commons” and to Oliver Williamson for his work on “the boundaries of the firm.” Both Ostrom and Williamson focus on the interactions between people outside the usual market mechanisms, an important topic to teach in the first lecture or the first chapter of Principles of Economics. The Nobel Prize Committee web page provides an excellent summary of their contributions with many examples. Ronald Coase originated research on this subject and won the Nobel Price for it back in 1991. I think it is important to note how Ostrom and Williamson build on Coase’s work in different ways. What do they teach us?

Williamson’s research teaches us to recognize when transactions will take place within a firm and when they will take place in markets. He significantly extended Coase’s insights on reducing transactions costs by delineating the advantages of such within-firm interactions when mutual dependence between people is high. The predictions of his theory are testable and have been confirmed in many empirical studies.

Ostrom’s research teaches us that “market failure” due to externalities or public goods of the kinds illustrated in Garrett Hardin’s famous “tragedy of the commons” example can be resolved by genuinely engaged individuals working together, and that government intervention may therefore not be needed to solve such market failures. Indeed she finds that individual arrangements frequently achieve better results than government intervention. In this way she too builds on the work of Coase.

Photos: Nobelprize.org

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

Visit: John Taylor's Page, Blog

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