The Nobel prize for economics has been awarded to two American academics who have pioneered research into how individuals co-operate and share common resources, and work together within companies.
The Royal Swedish Academy of Sciences announced this lunchtime that Elinor Ostrom, professor of political science at Indiana University, and Oliver Williamson, professor emeritus at the Haas School of Business, will share the 2009 prize.
It said their various work into economic governance beyond the financial markets has played a major role in challenging established thinking.
Ostrom, who is the first female winner of the economics prize, was recognised for her work on how "common property can be successfully managed by user associations".
Ostrom's research has examined how politics, economics and the legal system affect how natural resources are used - and has shown that community-driven projects can be more efficent than privatisation or socialism.
"Elinor Ostrom has challenged the conventional wisdom that common property is poorly managed and should be either regulated by central authorities or privatised. Based on numerous studies of user-managed fish stocks, pastures, woods, lakes, and groundwater basins, Ostrom concludes that the outcomes are, more often than not, better than predicted by standard theories," explained the academy.
Ostrom said it was "an immense surprise" to learn of her success today. "To be chosen for this prize is a great honour, and I'm still a little bit in shock," she said.
Ostrom said that her research into the way in which citizens will organise themselves to protect an important asset was particularly relevant to the issue of climate change.
"A lot of people are waiting for more international co-operation to solve it [global warming]. There is this assumption that there are public officials who are geniuses, and that the rest of us are not.
"It is important that there is international agreement, but we can be taking steps at family level, community level, civic and national level … There are many steps that can be taken that will not solve it on their own but cumulatively will make a big difference."
Williamson's work has centred on the way in which conflicts of interest are handled in different ways by hierarchical organisations, such as firms, compared with stock markets. It explains why it is sometimes better for a company to develop a product or service inhouse, rather than buying it from outside.
"The drawback of markets is that they often entail haggling and disagreement. The drawback of firms is that authority, which mitigates contention, can be abused. Competitive markets work relatively well because buyers and sellers can turn to other trading partners in case of dissent. But when market competition is limited, firms are better suited for conflict resolution than markets," explained the academy.
Williamson was not available to comment on his award. The academy said they had "woken him at 3am to tell him the news, and he is a happy laureate".
This is the 40th time that the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded. Ostrom and Williamson will each receive five million Swedish crowns, the equivalent of £453,000.
Favourites miss out
By choosing Williamson and Ostrom, the Swedish academy looked beyond the area of economics devoted to stockmarket behaviour. The financial crisis has done little for the reputation of economics in general, with some pundits even suggesting that the prize should not even be awarded at all this year.
The bookmaker's favourite for the prize was Eugene Fama, the University of Chicago professor who is known as the father of the "efficient market hypothesis". This theory, which essentially states that the price of a traded asset, such as a share, fully reflects its true value, has been discredited by the market turmoil of the last two years.
Along with fellow academic Kenneth French, another favourite for the Nobel prize, Fama went on to develop the "Fama-French three-factor model". It included the size of a company, and whether it was a "value stock" (the kind pursued by Warren Buffett) to describe market behaviour. The Fama-French model explains why small, value companies typically outperform the rest of the stock market.
Last year the prize was awarded to Paul Krugman for his work on international trade, which explains why it is more efficient for countries to specialise in the production of certain goods or products. Through his popular blog, The Conscience of a Liberal, Krugman has argued for larger government stimulus packages to drag the world economy away from a depression, and criticised the Obama administration for the way that it rescued the US banks.
Krugman congratulated today's winners, saying that Williamson's work "underlies a tremendous amount of modern economic thinking". He admitted that he was not familiar with Ostrom's work before today, but now understood why she had won.
"If the goal is to understand the creation of economic institutions, it's crucial to be aware that there is more variety in institutions, a wider range of strategies that work, than simply the binary divide between individuals and firms."
The economics prize is not one of the original five awards set up by Alfred Noble, but was added in 1969.
