By Dr. Douglas Rice
Provided by 
Who cares about the Nobel Prize in Economics? Everyone, they just don’t know it.
Before President Obama won this year’s Nobel Peace prize, it’s highly likely that most people couldn’t name any other Noble prize winner in any category. They might have remembered something about Al Gore or Jimmy Carter winning the peace prize or, if pressed for a name, they might have thrown out Nelson Mandela or Mother Teresa. But when television shows grown adults losing quizzes to fifth graders, the odds on someone knowing the Nobel prize winners in economics are astronomical.
While the prize in economics may not be common knowledge or have the star power of the peace prize, the impact can be just as profound, perhaps more. For example, in 1997 the prize in economics was given to Myron Scholes and Robert Merton for their creation of financial derivatives markets. That same year the peace prize was focused on banning landmines. While the devastation of landmines is clearly a problem needing resolution, the impact of derivatives, as evidenced in the recent financial crisis, can’t be overstated and shouldn’t be overlooked.
The work of this year’s winners, Elinor Ostrom from Indiana University and Oliver Williamson from Cal Berkeley, focused on the problems associated with economic governance, another area that was overlooked until the recent debacle. Even though most people may not care to quite grasp the details, they know that executive pay is out of line, some corporations are out of control, and many that write and enforce the regulations aren’t doing their job very well. While they never use the term, many people are talking and thinking about economic governance every day.
Williamson’s work focuses how institutions are created and developed and what impact they have on economic growth. For example, while firms are good at resolving conflict because there is a decisive decision maker, they are bad at limiting the abuse of power for that same reason. The decision maker left unchecked has difficulty in self-limiting their own power. Start to sound familiar?
Ostrom focused on governance of common shared property, such as natural resources. She challenges the centralized command and control approach to governance and the thought that common property will always be mismanaged. Through her extensive global field work, she uses empirical evidence to show that in many situations the people involved can and do monitor each other even when there isn’t a central authority regulating the situation. Essentially she showed that, at least in some situations, common resources can be successfully managed without privatization or government regulation. In other words, less government and less corporate greed is possible. Get your attention yet?
It’s economic governance that allowed the financial system to boom and bust, not once, but twice in the last decade. More than that, it’s economic governance that will pave the path the future, good or bad. While President Obama’s peace prize makes major headlines, but has no real impact, the overlooked and misunderstood economic prize has the potential to have significant impact and change all of our lives. Given the recent debacle in the markets, economic governance should garner attention without the Noble committee pushing it. But we should all be glad they did.
Dr. Douglas Rice helps individuals about financial matters in a variety of ways. In addition to his financial advisory practice, he also writes, speaks, and conducts seminars about money and financal planning topics. To learn more, start with his blog, Taking Risks and Reaping Rewards, and follow him on twitter @drdouglasrice
Read the original family finance article on FiLife: http://www.filife.com/stories/the-nobel-prize-in-economics-and-you
