What are economists good for? The question has been asked a lot in the past year, by everyone from the UK's Queen Elizabeth to small savers who have lost out – and by this column. If anyone has an answer, it should be the Swedish Academy, which awarded the Nobel prize in economic science yesterday. It did not disappoint.
The winners – Elinor Ostrom of Indiana University and Oliver Williamson of the University of California – are deserving in their own right. But their award also highlights – after a financial crisis and a crisis of confidence in economics – the great insights that good economic science can provide.
Both laureates address economic governance: how economic transactions are structured by institutions of authority and co-operation. Mr Williamson's work starts from the question of why there are firms. The answer is that in the presence of transaction costs, the formal authority of company decision-making may solve bargaining problems better inside the firm than market trading outside. This carries lessons for fields from competition policy to finance.