Posts Tagged ‘Nobel’

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Today’s announcement that Angus Deaton was awarded the Nobel Prize in Economic Sciences was greeted in the usual fashion: plenty of versions of “a brilliant selection” (Tyler Cowen) and a few of the usual criticisms that economics is not really a science (Joris Luyendijk).

What I find interesting is that, like last year, the prize is given to a thoroughly mainstream economist—but Deaton’s work can be read as cutting against the grain of much of what has passed for mainstream economics over the years. Let me give a few examples:

First, Deaton spent a great deal of time trying to figure out how, at the microeconomic level, consumers distribute their spending among different goods. Basically, Deaton was telling his mainstream colleagues, “you just can’t assume demand curves are downward-sloping, for individuals and markets, and that actual consumer behavior is or is not consistent with the postulates of neoclassical utility-maximization, without actually measuring how consumers respond to changes in prices.”

Deaton’s work, at the macroeconomic level, was similar: he cast doubt on the existing mainstream theories concerning the relationship between consumption and income (based on representative-agent models) and suggested, once again, that it’s necessary to study how different consumers—some with falling incomes, others with rising incomes—actually respond to changes in incomes.

Third, Deaton used his work on demand and consumption to challenge facile models based on income per capita and exchange-rate-calculated comparisons of poverty across nations. He pioneered a consumption-based approach, based on cross-sectional surveys to determine actual consumption expenditures and levels of well-being, especially in Third World countries.

There’s no doubt that, in the end, Deaton’s work in challenging many of the existing theoretical and empirical models within mainstream economics—in the areas of microeconomics, macroeconomics, and development economics—were themselves firmly ensconced within and contributed to the further development of mainstream economics.

But the mainstream nature of that work has also permitted him to intervene in other debates, for example, concerning the effectivity of foreign aid (which, he argues, mostly helps keep nonpopular governments in power and does little to actually eliminate poverty), the role of poor health (which, as he sees it, is a result, not a cause, of poverty), and the current fascination with randomized trials (which fail to account for the causes of positive outcomes and, as a result, can’t be generalized to other problems and situations).

And, in the one previous mention of him on this blog, to sound a warning about growing inequality in the United States and other advanced countries:

The distribution of wealth is more unequal than the distribution of income, and very high incomes will eventually pupate into very large fortunes, ultimately leading to a hereditary dystopia of idle rich.

A Nobel prize and a few well-paid neoclassical microeconomists and the Economist declares a golden age of micro.

Really?!

It’s become a common refrain in recent years: mainstream macroeconomics finds itself in shambles (true that) but microeconomics, well, it’s doing just fine.

Except that it isn’t. Not when neoclassical economics, for all the attention to market (and, in my view, nonmarket) design, is still based on a theory of markets in which money plays no significant role (and therefore Say’s Law still holds). And in which income inequality is just a reflection of given technology, human capital, and globalized markets (such that nothing can be done about it). And in which the problems of economic development are reduced to microfinance and providing incentives for individuals to make the “right” individual decisions (and thus land reform plays no significant role).

Accept the pronouncements of the Economist (and the imprimatur of the Nobel committee and of major corporations like Google, Microsoft, Amazon, and eBay), and you might imagine that we’re in a golden age of microeconomics. However, as it turns out, this is really a golden age of the critics of neoclassical microeconomics.

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When planning succeeds

Posted: 16 October 2012 in Uncategorized
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Yesterday, I made the argument that the 2012 Nobel Prize in Economics can be interpreted as an award for the design of nonmarkets, that is, for mechanisms that can be used when markets fail.

Arindrajit Dube would appear to agree:

The use of the word “market” in describing exchanges of every sort has become ubiquitous, even in cases where there is no actual price that helps clear the market or channel information. Perhaps due to this slippage, an interesting fact about the work receiving the award has been largely ignored. The concrete applications that are discussed as ways of “improving the performance of many markets”–such as matching residents to hospitals, matching donors to organs, and students to schools–are not really “markets.” At least not if we think of markets as institutions where prices help clear supply and demand. Instead, they involve non-market interactions, where the matches are actually formed by centralized exchanges. In these situations, decentralized and uncoordinated matching can produce unstable and inefficient matches, and gains are possible from centralization of some sort. Sometimes the price may not exist because of legal restrictions, but in other cases the participants may voluntarily forego using prices, as it might conflict with other objectives. This is exactly where the Gale-Shapley algorithm can be useful in implementing a “stable” allocation: an allocation where no pair-wise trades exist which can make both parties better off, which is one notion of optimality. In other words, this and similar algorithms can help implement … gasp! … economic planning. . .

A final note. A popular view today is that it is not possible to implement an efficient allocation using planning because people don’t have the incentives to reveal their true preferences to begin with, which makes this whole exercise rather pointless. A variant of this position was originally articulated by Austrian economists, including Ludwig von Mises, during the so called “socialist calculation” debate of the early 20th century. And in many cases this criticism rings true. However, it does not follow that the truthful revelation problem is ubiquitous. For example, it is interesting to note that Alvin Roth and Elliott Peranson show (both theoretically and empirically) that when implementing optimal matching, this problem may be smaller than one might imagine: when each applicant only interviews a small number of positions overall, the gains from strategic manipulation of preferences are small. This, too, has important implications for the “socialist calculation” debate, as it suggests that for a range of cases, a centralized exchange implementing planning without using prices can (and indeed does) implement relatively efficient allocations. And it can do so without having distributional effects such as rationing kidneys out of the reach of the 99 percent by using prices to allocate organs.

So when asked by our students and friends “what was the ‘Nobel’ all about?” we could do a lot worse than by answering “economic planning.”

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When markets fail

Posted: 15 October 2012 in Uncategorized
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The 2012 Nobel Prize in Economics (aka The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2012) was awarded today to Alvin E. Roth and Lloyd S. Shapley for their contributions to the “theory of stable allocations and the practice of market design.”

It’s called market design. But the argument I made just last year was that what Roth and others have been doing (based on Shapley’s earlier work in cooperative game theory) is attempting to design—for doctors, schools, kidneys, and so on—something other than markets. The nonmarket, matching mechanisms they propose are useful precisely when markets fail or don’t exist, which is often.

One way of understanding this year’s Nobel Prize in Economics, then, is as a signal to mainstream economists that it’s time to give up the idea of “the market” and start thinking about the existence (now and in the past) and the possibility (in the future) of a wide variety of both market and nonmarket mechanisms for exchanging goods and services and coordinating decisionmaking.

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