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<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, October 18, 2009 A victory for those grounded in reality By James McCusker Whatever else they may be, Nobel Prizes capture our attention. While the prize in economics is not, technically, a Nobel Prize — it is awarded by the Bank of Sweden — it's close enough. And it is perhaps appropriate to a profession that isn't exactly a science — but is close enough. The market crash and subsequent financial system collapse have taken some of the luster off economics, and certainly “economics as the study of financial markets.” This year's prize went to two Americans who were looking beyond Wall Street to areas that have been less traveled by economists, especially in recent years. Elinor Ostrom, a professor at Indiana University, shared the award with Oliver Williamson, professor emeritus at the University of California, Berkeley. The award was given for their work in examining how things are worked out by individuals and businesses when there are no price-driven, organized markets to guide them. Professor Ostrom looked at shared resources — the open rangeland, parks, public lands and similar things that are used by people and groups that often have very different, even conflicting, purposes and interests. Professor Williamson looked at how business firms make decisions and allocate resources internally, and how they work out accommodations with other firms, both suppliers and competitors when there are few guidelines to theoretical efficiency. There may have been some politics behind the selection of these two economists, but as Ira Gershwin titled one his brother's songs, “Who Cares?” The point is that economics needed a dose of the real world to make its practitioners recognize the limitations of its obsessive focus on Wall Street. The obsession with financial markets wasn't as wacky as it might sound, even though economists failed to be much help in predicting a major recession, or even detecting a market bubble. Exactly what kind of a science is it that can see the surfers out there and not notice the wave they're on? Despite these painfully obvious failures, economists were not wrong to pay attention to financial markets. Over the past 50 years or so, financial markets have expanded to include every last person, place and thing in our economy, or so it seemed. Almost everything that we do is reflected in some way in Wall Street, and almost everyone has a stake in the market's movements. That, plus the fact that financial markets were well-organized and kept records like professional baseball, lent itself to economic theories that could be formulated in mathematical terms and tested for their statistical validity … big advantages in a science that can get fuzzy at times. And, of course, it didn't hurt that Wall Street work paid very handsomely, either. But financial markets, although they seem lightning fast, are incredibly slow to realize some things. It wasn't an accident, for example, that the Wall Street wizards were the last to know that the party was over and we were headed into a recession. That possibility wasn't in the math, it wasn't in the model, it wasn't really happening. Except that it was. It turned out that “almost” everything and everyone missed a lot of people and a lot of things that were going on in the real world. It also turned out that economists had a lot to learn about the institutions of our society and the push-me-pull-you relationship between Wall Street and Main Street. Will the work of this year's Nobel Economics prize winners heal the damaged reputation of economics and signal a new direction for the science and a rebirth of original economic thought? Maybe, but probably not. The works cited by the prize committee, while praiseworthy, have the faint scent of restatement rather than that outrageously rich flavor of a genuine breakthrough. Still, the Nobel Prize ensures that these works will be read and discussed in economics classes, and that is a good thing. We might wonder at the significance of dissecting the effects of a half-century of failed collectivization and failed privatization policies on Mongolian grazing lands — one of the studies analyzed by professor Ostrom. But there are some important economic issues and principles illuminated in her work, and it can't hurt to get aspiring economists to stop and think about them, especially in a world that finds itself falling in love with alternatives to market capitalism. And at a time when regulation is in the air, we all can profit from reading professor Williamson's work, which will encourage economists to explore why some firms expand and prosper and others expand and sink of their own weight. Both laureates have shown economists the value of leaving Wall Street and Washington, D.C., and taking a look at the real world. That deserves a prize any day. There is still a lot to learn. James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal. READER COMMENTS Be the first to comment. You must be a registered user and verify your e-mail address to post comments to blogs or articles on HeraldNet. To register, click here. To read other terms and conditions, click here. Log out

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