Imphal, October 14 2009: We are now passing through a crisis of Economics and economies around the world.

This has caused a serious rethinking among economists about their subject, and a renewed debate on the role of the state in national economic management.

It is in such a time that the Nobel Economics Prize for 2009 has been awarded to two American economists, Elinor Ostrom of Indiana University and Oliver Williamson of University of California, Berkeley.

Both have contributed to governance related issues within the broad field of institutional economics.

Major Contributions: Ostrom has been awarded the prize for her contribution on "how common property can be successfully managed by user associations".

Her contribution on common property and community management has been particularly influential.

She speaks of design principles for successful community management.

According to her: "A design principle is defined as a conception used either consciously or unconsciously by those constituting and reconstituting a continuing association of individuals about a general organizing principle." She speaks of eight such principles:
1.Membership and boundaries are clearly defined.
2.Rules that govern the appropriation of the resource and provision of inputs are sensitive to local conditions.
3.Collective choice arrangements allow most group members to participate.
4.Individuals who monitor the behaviour of group members are accountable to the members.
5.Appropriators who violate rules are likely to be punished according to the seriousness of their offence.
6.Resource users and officials have access to low-cost local arenas for the resolution of conflicts.
7.The right of the resource users to organize is not challenged by external authorities.
8.Governance activities are organized in nested layers of enterprise.

Uncertain production levels, large user group, and infrequent interactions are the conditions detrimental to successful community management.

Oliver Williamson, on the other hand, is another economist, along with the 1993 Nobel Prize winner Douglas North, responsible for the resurgence of Institutional Economics in recent decades.

He has been awarded the Prize for development of "a theory where business firms serve as structures for conflict resolution".

His governance approach to Institutional Economics has been enjoying a parallel journey with the rules of law approach of North.

He starts with the assumption that in the beginning there were markets and puts emphasis on the use of transaction cost in his analysis.

Transaction costs are all costs made in transactions, either as an exchange of property rights in a market, or as an exchange of responsibilities in a hierarchical situation.

An entrepreneur able to keep his transaction costs low will naturally be more successful to offer an attractive product to the market, as this type of costs plays a considerable role in international trade.

In principle two types of transaction costs exist.

There are "hard" or direct transaction costs and the "soft" or indirect transaction costs.

The hard transaction costs are the readily perceptible and quantifiable costs, such as transport charges, import levies and customs tariffs.

The soft transaction costs, on the other hand, are much more difficult to observe and quantify.

We can think of all kinds of costs of making and checking contracts, information costs, costs because of cultural differences and communication failures, tacit knowledge on legal procedures, formation of trust and reputation, network building, costs associated with risks and with rules and regulation in order to reduce risks, security requirements, etc.

Williamson sees institutions as organisations having hierarchy.

He emphasizes the governance aspect of institutions as significant for reduction of transaction costs and development.

As he says: "economics of governance is principally an exercise in bilateral private ordering, by�the immediate parties to an exchange�actively involved in the provision of good order and workable arrangements".

Further "although hierarchies have the appearance of being more complex governance structures than markets are, that can be disputed.

As Friedrich Hayek observed, 'The price system is just one of those formations which man has learned to use .

after he stumbled upon it without understanding it' .

..If the 'natural' way to manage transactions is through authority (hierarchy) then the presumption that 'in the beginning there were markets' must be reversed.

Authority is something with which we have direct experience .

and think that we understand.

By comparison, markets are where the subtleties reside." Governance within a hierarchical organisation/firm reduces transaction costs and leads to an amicable exchange process.

But we must remember here, as Williamson himself emphasised repeatedly his organisation/firm the concept of the firm need not be equated with the real world one we come across, and may treat as just an economic agent.

The Context: As stated in the beginning, the globe is now going through a crisis within the discipline of Economics as well as in the real world economies.

This has led to the revival of Keynesian policies where state intervention in the running of economic affairs plays an important role.

This, in other words, is posing a threat to the western liberal philosophy.

As such there has arisen a need for rediscovering within Economics a tradition where we can still think of addressing the ongoing crisis without resorting to state intervention.

Both the economists who have been awarded Nobel Prize this year have a close connection with the Austrian School of Thought.

In the Austrian tradition of Economics, the question is not about how to make the state stronger or viable, but is rather of whether the state is necessary at all or not.

So the award of the prize this year is a politically right one as well.

The Implications: Whereas the Williamson approach can be considered to be more generally applicable to the analysis of development issues of Manipur, the Ostrom approach has particular relevance to the situation prevailing in the mountains of Manipur.

The conflicts and trade-offs in the mountains can be profitably analysed from her angle of design principles.

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