This year’s Nobel Prize winners in economics are Oliver E. Williamson and political scientist Elinor Ostrom.
In organizational theory, we teach Williamson’s transaction costs economics (TCE) as a prelude to Mark Granovetter‘s work on embeddedness. To help students understand Williamson’s question about whether one should rely upon spot contracts or form an organization to handle transactions such as buying supplies or services, I ask students to imagine what their lives be like if they each had to negotiate with each professor about how much to pay them before each lecture. Upon reflection, students usually conclude that they would rather pay a set tuition to the university, which employs professors such as myself to run classes and other staff, such as the registrar to keep records and provide other needed services. This thought experiment quickly drives home the point that organizations had advantages over contracts for certain kinds of exchanges.
Back in the late 1990s, I read Ostrom’s Governing the Commons (1990, Cambridge University Press). I remember thinking that her work on how groups negotiated access to natural resources could help us understand open source, communes, and other collectives.
For other bloggers’ reactions to this year’s selection, click here, here, and here.
Congratulations, Williamson and Ostrom!