Archives For Nobel prize

RIP, Elinor Ostrom

Josh Wright —  12 June 2012

Nobel Laureate (and UCLA alumna) Elinor Ostrom has passed.

From the IU press release:

The entire Indiana University community mourns the passing today of Distinguished Professor Elinor Ostrom, who received the 2009 Nobel Prize in Economic Sciences for her groundbreaking research on the ways that people organize themselves to manage resources.

Ostrom, 78, died of cancer at 6:40 a.m. today at IU Health Bloomington Hospital surrounded by friends. She was senior research director of the Vincent and Elinor Ostrom Workshop in Political Theory and Policy Analysis, Distinguished Professor and Arthur F. Bentley Professor of Political Science in the College of Arts and Sciences, and professor in the School of Public and Environmental Affairs.

She is survived by Vincent Ostrom, her husband and colleague. She also leaves behind a large extended family of colleagues, collaborators, staff and friends, in Bloomington and on five continents, who worked closely with her during an extraordinary 50-year career.

Ostrom shared the 2009 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, also known as the Nobel Prize in Economic Sciences, with University of California economist Oliver Williamson. She was the first woman and remains the only woman to be awarded the prize. …

In addition to her positions at IU, Ostrom was founding director of the Center for the Study of Institutional Diversity at Arizona State University. Known as a dedicated and tireless teacher and mentor, she chaired or served on dissertation and advisory committees for more than 130 Ph.D. students and took a continued interest in their careers.

The Royal Swedish Academy of Sciences awarded the 2009 Nobel Prize in Economic Sciences to Ostrom “for her analysis of economic governance, especially the commons.” Through a multidisciplinary approach that combined theory, field studies and laboratory experiments, she showed that ordinary people are capable of creating rules and institutions that allow for the sustainable and equitable management of shared resources. Her work countered the conventional wisdom that only private ownership or top-down regulation could prevent a “tragedy of the commons,” in which users would inevitably destroy the resources that they held in common.

Ostrom was born Elinor Awan on Aug. 7, 1933, in Los Angeles. She often talked about the influence on her life of being a child of the Great Depression, helping her family grow food in a large garden and knitting scarves for soldiers during World War II. As a self-described “poor kid in a rich kid’s school,” Beverly Hills High School, she swam competitively and competed on the debate team.

Although her parents didn’t have college degrees, she worked her way through UCLA, graduating in three years, and then worked in the private sector before entering graduate school. Despite resistance to admitting women to doctoral programs, she earned an M.A. and a Ph.D. in political science from UCLA.

Dissertation research on Los Angeles’ West Basin groundwater resource introduced Ostrom to the study of common-pool resources, in which multiple users have access and potentially compete for a limited supply of goods or services. Later, at IU, she studied police departments in Indianapolis and Chicago.

 

 

 

 

The great economist Armen Alchian turned 98 yesterday.  Armen is the father of the UCLA tradition in economics.  I had the great honor of having Armen on my dissertation committee and cannot imagine being prouder of my association with him.  Armen’s contributions to economics as diverse as they are penetrating.  Armen was one of the few economists capable of producing fundamental insights and advancements in macroeconomic and microeconomic theory, quantitative methods, as well as produce pathbreaking work in the economics of property rights and the theory of the firm.

Armen’s classic paper with Harold Demsetz (AER, 1972) coupled with Klein, Crawford and Alchian’s seminal analysis of vertical integration and the holdup problem (JLE, 1978) give him a prominent spot in the theory of the firm literature and transaction cost economics.  Those papers rank 12th and 30th, respectively, in  Kim et al‘s list of the top economics papers since 1970.   Alchian’s other scholarly contributions are remarkable.  Consider his collected works in two volumes.  Perhaps most well known among them are neither of the two papers discussed above but “Uncertainty, Evolution and Economic Theory” (1950), in which Armen lays out the case for a survival principle to be applied to efficient individual behavior – notwithstanding heuristics and irrational motivations.  Armen was ahead of his time in considering (along with the work of Becker and others at the time) rationality as an outcome of market institutions rather than merely an assumption.  Alchian’s work on learning and the costs of production was equally pathbreaking (see Reliability of Progress Curves in Airframe Production, 1963).

Armen’s contributions to economics as a teacher were equally remarkable.  Nobel Laureate William F. Sharpe captures some of this in his autobiographical exposition explaining Alchian’s influence on his own career:

Armen Alchian, a professor of economics, was my role model at UCLA. He taught his students to question everything; to always begin an analysis with first principles; to concentrate on essential elements and abstract from secondary ones; and to play devil’s advocate with one’s own ideas. In his classes we were able to watch a first-rate mind work on a host of fascinating problems. I have attempted to emulate his approach to research ever since. When I returned to pursue the PhD degree, I took a field in microeconomics with Armen and he also served as chairman of my dissertation committee.

Former FTC Chairman Timothy Muris and my GMU colleague characteristically cuts to the heart of matters:

Armen Alchian was unexcelled in teaching economics to lawyers. He often presented economics socratically – a technique familiar to lawyers. For years Armen was one of the most popular instructors in Henry Manne’s programs for teaching economics to lawyers. In short courses, he taught literally hundreds of federal judges and law professors.

TOTM readers will be familiar with my annual posts calling for a Nobel Prize for Alchian.  Susan Woodward, a former co-author of Alchian, has authored a wonderful chapter on Alchian’s contributions to law and economics that will appear in the Cohen & Wright Pioneers of Law and Economics volume.

As Armen’s long-time collaborator William Allen put it in his own letter to the Nobel Committee on Armen’s behalf:

Economics is a broad discipline in methodology, as the Committee is fully aware, ranging from detailed historical, institutional, legalistic description to totally abstract, arcane theory. All such approaches, techniques, and emphases are appropriate. But there is much specialization among the members of the fraternity. And, increasingly, the profession has dealt in rigorous, elegant manipulation, even when the work is purportedly empirical—and even when the substantive results hardly warranted such virtuoso flair. Professor Alchian is a splendid technician, and he has contributed significantly and conspicuously to general “theory.” But, in contrast to many, he has always appreciated that the final payoff of Economics is elucidation of the real workings and phenomena of the world. I know of no one at any time who has had a finer sense of how to use economic analytics to explain the world. Sometimes the explanation requires involved, complex analysis, and Professor Alchian does not fear to use the tools which are required; what is uncommon is his lack of fear in using the MINIMUM tools which are required. In large part, his peculiar genius (the word is used advisedly) is to make extraordinarily effective use of elemental, and often elementary, techniques of analysis. And a host of people—many of whom are now in strategic positions in universities, in government, in the legal system, in the world of business and finance—have enormously benefited from the tutelage of Professor Alchian. … I present Armen Alchian as a giant—a giant who, because of his lack of pretension, is easily overlooked by laymen and even by some supposed professionals—who has greatly honored his profession and uniquely contributed to its usefulness. He would grace the distinguished fraternity of Nobel Laureates.

Well said.  Here are some Alchian links for interested readers:

William Allen is right that it is precisely because of Armen’s lack of pretension Armen Alchian is too often overlooked as a true intellectual giant and ambassador of economics.   Here’s hoping the Nobel Committee bestows the award upon in recognition of his contributions.
Happy 98th Birthday, Armen.

Halbert White, RIP

Josh Wright —  4 April 2012

Renowned UCSD economics professor, and founder of Bates White, Halbert White died on Saturday.  His CV is here.  James Hamilton offers a touching tribute and wonderful summary of White’s important work in econometrics here.  Of White standard errors, perhaps his most well known contribution, Hamilton explains:

An example arises in ordinary regression analysis, in which a common assumption is that the variance of the regression model’s error is the same for all observations. Suppose that assumption is wrong, and instead the variance depends in an unknown way on the various explanatory variables. Hal found that it is possible to characterize how that dependence would affect the reliability of the inference from the regression, and construct modified t-statistics or F-statistics that take this into account. This was such a useful contribution that it is now a standard option a user can easily select in any decent regression software package. Hal once lamented to me that this was an example of a contribution that became so successful and widespread that people forgot who came up with it in the first place. Hal’s proposed adjustments are often described as “robust standard errors” or “heteroskedasticity-consistent standard errors”, though I have always introduced them to my students as “White standard errors”.

Hamilton ends with a nice description of Hal’s personal and professional interactions with colleagues:

I used to have lunch each week with Hal, Clive Granger, Rob Engle, and others, at which people would bring up econometrics questions they’d been working on. If you had something important and difficult for which you needed a solution, it was a good idea to save the topic for discussion until Hal got there. I remember a number of occasions when the rest of us would struggle with something for 15 minutes, and then Hal would arrive and provide the key insight within 60 seconds. It was an incredible resource to have somebody like that around.

I must also say that he was one of the kindest and dearest people I have known. He didn’t have insecurities or something to prove about who he was– anybody with any sense would recognize his towering intellect. It was always a joy and honor to sit with him in seminars, and learn yet another new thing from his off-hand remarks and insights. And, since he wrote more in his lifetime than I would be able to read in mine, I can take some comfort in the fact that there is much more that I have yet to learn from this gentle and noble man.

Go read the whole thing.  I always have considered myself fortunate to have the opportunity to interact with Professor White a little bit while at UCSD as an undergraduate.  Rest in Peace.

Douglas Holtz-Eakin and my former George Mason colleague and Nobel Laureate Vernon Smith are in the WSJ today discussing the economic wisdom and constitutionality of ObamaCare.  From the WSJ:

The Obama administration defends the mandate on the ground that a person’s decision to not buy health insurance affects commerce by materially increasing the costs of others’ health insurance. The government adds that health care is unique and therefore can be regulated constitutionally in ways other markets cannot.

In reality, the mandate has almost nothing to do with cost-shifting. The targeted population—the young, healthy and not poor who choose to forgo coverage—has a minimal role in the $43 billion of uncompensated health-care costs. In 2008, for example (the latest figures available), the Department of Health and Human Service’s Medical Expenditure Panel Survey showed that the uncompensated care of the mandate’s targeted population was no more than $12.8 billion—a tiny one-half of 1% of the nation’s $2.4 trillion in overall health-care costs. The insurance mandate cannot reasonably be justified on the ground that it remedies costs imposed on the system by the voluntarily uninsured.

The government’s other defense is that the health-care market does not exhibit textbook competition. No market does. The economic features relied upon by the government—externalities, imperfect information, geographically distinct markets, etc.—are characteristic of many markets.  The presence of externalities and other market imperfections does not justify a departure from the normal rules of the constitutional road. Health care is typically consumed locally, and health-insurance markets themselves primarily operate within the states. The administration’s attempt to fashion a singular, universal solution is not necessary to deal with the variegated issues arising in these markets. States have taken the lead in past reform efforts. They should be an integral part of improving the functioning of health-care and health-insurance markets.

Holtz-Eakin and Smith conclude:

Without the individual mandate, ObamaCare imposes total net costs of $360 billion on health-insurance companies from 2012 through 2021. With the mandate, the law would provide a net $6 billion benefit—i.e., revenues in excess of costs—over that same time period. In other words, the benefits of the individual mandate to health-insurance companies, along with their additional revenues provided by ObamaCare’s Medicaid expansion, are projected to balance, nearly perfectly, the costs that the law’s various regulatory mandates impose on insurers.

The individual mandate and Medicaid expansions appear to many to be unconstitutional. They are certainly bad economic policy. When they go, the entire law must fall. The administration built an intricate, balanced policy on a flawed economic foundation. It is up to the Supreme Court to pull it down.

Go read the whole thing.

TOTM alumnus Todd Henderson recently pointed me to a short, ten-question interview Time Magazine conducted with Nobel prize-winning economist Daniel Kahneman.  Prof. Kahneman is a founding father of behavioral economics, which rejects the rational choice model of human behavior (i.e., humans are rational self-interest maximizers) in favor of a more complicated model that incorporates a number of systematic irrationalities (e.g., the so-called endowment effect, under which people value items they own more than they’d be willing to pay to acquire those same items if they didn’t own them). 

 I’ve been interested in behavioral economics since I took Cass Sunstein’s “Elements of the Law” course as a first-year law student.  Prof. Sunstein is a leading figure in the “behavioral law and economics” movement, which advocates structuring laws and regulations to account for the various irrationalities purportedly revealed by behavioral economics.  Most famously, behavioral L&E calls for the imposition of default rules that “nudge” humans toward outcomes they’d likely choose but for the irrationalities and myopia with which they are beset.

 I’ve long been somewhat suspicious of the behavioral L&E project.  As I once explained in a short response essay entitled Two Mistakes Behavioralists Make,  I suspect that behavioral L&E types are too quick to reject rational explanations for observed human behavior and that they too hastily advocate a governmental fix for irrational behavior.  Time’s interview with Prof. Kahneman did little to allay those two concerns.

Asked to identify his “favorite experiment that demonstrates our blindness to our own blindness,” Prof. Kahneman responded:

It’s one someone else did.  During [the ’90s] when there was terrorist activity in Thailand, people were asked how much they’d pay for a travel-insurance policy that pays $100,000 in case of death for any reason.  Others were asked how much they’d pay for a policy that pays $100,000 for death in a terrorist act.  And people will pay more for the second, even though it’s less likely.

 This answer pattern is admittedly strange.  Since death from a terrorist attack is, a fortiori, less likely than death from any cause, it makes no sense to pay the same amount for the two insurance policies; the “regardless of cause” life insurance policy should command a far higher price.  So maybe people are wildly irrational in comparing risks and the value of risk mitigation measures.

 Or maybe, as boundedly rational (but not systematically irrational) beings, they just don’t want to waste effort answering silly, hypothetical questions about the maximum amount they’d pay for stuff.  I remember exercises in Prof. Sunstein’s class in which we were split into groups and asked to state either how much we’d pay to obtain a certain object or, assuming we owned the object, how much we’d demand as a sales price.  I distinctly recall thinking how artificial the question was.  Given the low stakes of the exercise, I quickly wrote down some number and returned to thinking about what I would have for lunch, what was going to be on Sunstein’s exam, and whether I had adequately prepared for my next class.  I suspect my classmates did as well.  Was it not fully rational for us to conserve our limited mental resources by giving quick, thoughtless answers to wholly hypothetical, zero-stakes questions?

If so, then there are two possible reasons for subjects’ strange answers to the terrorism insurance questions Kahneman cites:  Subjects could be wildly irrational with respect to risk assessment and the value of protective measures, or they might rationally choose to give hasty answers to silly questions that don’t matter.  What we need is some way to choose between these irrational and rational accounts of the answer pattern.

Perhaps the best thing to do would be to examine people’s revealed preferences by looking at what they actually do when they’re spending money to protect against risk.  If Kahneman’s explanation for subjects’ strange answers were sound, we’d see people paying hefty premiums for terrorism insurance.  Profit-seeking insurance companies, in turn, would scramble to create and market such risk protection, realizing that they could charge irrational consumers far more than their expected liabilities.  But we don’t see this sort of thing.

That suggests that the alternative, “rational” (or at least not systematically irrational) account is the more compelling story:  Subjects pestered with questions about how much hypothetical money they’d spend on hypothetical insurance products decide not to invest too much in the decision and just spit out an answer.  As we all learn as kids, you a ask a silly question, you get a silly answer.

So again we see the behavioralist tendency to discount the rational account too quickly.  But what about the second common behavioralist mistake (i.e., hastily jumping from an observation about human irrationality to the conclusion that a governmental fix is warranted)?  On that issue, consider this portion of the interview:

Time:  You endorse a kind of libertarian paternalism that gives people freedom of choice but frames the choice so they are nudged toward the option that’s better for them.  Are you worried that experts will misuse that?

Kahneman:  What psychology and behavioral economics have shown is that people don’t think very carefully.  They’re influenced by all sorts of superficial things in their decisionmaking, and they procrastinate and don’t read the small print.  You’ve got to create situations so they’ll make better decisions for themselves.

Could Prof. Kahneman have been more evasive?  The question was about an obvious downside of governmental intervention to correct for systematic irrationalities, but Prof. Kahneman, channeling Herman “9-9-9” Cain, just ignored it and repeated his affirmative case.  This is a serious problem for the behavioral L&E crowd:  They think they’re done once they convince you that humans exhibit some irrationalities.  But they’re not.  Just as one may believe in anthropogenic global warming and still oppose efforts to combat it on cost-benefit grounds, one may be skeptical of a nudge strategy even if one believes that humans may, in fact, exhibit some systematic irrationalities.  Individual free choice may have its limits, but governmental decisionmaking (executed by self-serving humans whose own rationality is limited) may amount to a cure that’s worse than the disease.

Readers interested in the promise and limitations of behavioral law and economics should check out TOTM’s all-star Free to Choose Symposium.

 

Its time to dust off (and slightly update) an old post for its annual republication around this time each year.   With the start of the school year comes another fall tradition here at TOTM: Nobel speculation.

More specifically, every fall I yell from the rooftops that some combination of Armen Alchian, Harold Demsetz and Ben Klein should win the award.  In 2006, I argued that the UCLA trio outperformed the more conventional and popular trio of Holmstrom, Hart and Williamson by standard citation measures.  In 2007 I repeated my call for the UCLA trio (hedging my bets by also pulling for GMU colleague Gordon Tullock — another well deserving candidate) and was disappointed again.  2008?  I’m nothing if not consistent.  In October 2008 I wrote:

I’m sticking with the UCLA economists: Alchian, Demsetz and Klein for contributions to the theory of the firm, property rights, and transaction cost economics.  An Alchian and Demsetz prize is probably more likely, but Klein’s contributions with Alchian to the theory of the firm along with his own subsequent extension of that work (see my article on Klein’s contributions to law and economics here) makes the trio especially formidable.

The disappointment was a little bit more salient in 2008, as Thomson Reuters listed Alchian and Demsetz in their list of top 3 possible picks.  What a tease.  Well, its not quite October yet, but I thought I’d get an early start this year and release my 2009 predictions:  Armen Alchian, Harold Demsetz and Ben Klein for contributions to the theory of the firm, property rights and transaction cost economics.

Alchian’s contributions to economics and law and economics are Nobel worthy. Armen’s classic paper with Harold Demsetz (AER, 1972) remains influential in the theory of the firm literature and is listed as the 12th most important paper in economics since 1970 by Kim et al.  Klein, Crawford and Alchian’s seminal analysis of vertical integration and the holdup problem (JLE, 1978) ranks #30 on this list.  With two hits in the top 30 economics papers since 1970, there is no doubt that Armen had impacted the field.  Susan Woodward, a former co-author of Alchian, has authored a wonderful chapter on Alchian’s contributions to law and economics that will appear in the Cohen & Wright Pioneers of Law and Economics volume (there will also be essays on Klein and Demsetz).  As I’ve written previously, Alchian also thrives by other measures of scholarly output.  Cite counts do not begin to do his body of work justice.  Consider, for example, that Armen’s teaching style is the stuff of legend (I say this having the great benefit of having Armen on my dissertation committee, but also sharing as colleagues two Bruin economists that studied under Alchian and knowing many more).  Tales are abound of the careers of economists-in-the-making that Armen influenced in one way or another.  Nobel Laureate William F. Sharpe captures some of this in his autobiographical exposition explaining Alchian’s influence on his own career:

Armen Alchian, a professor of economics, was my role model at UCLA. He taught his students to question everything; to always begin an analysis with first principles; to concentrate on essential elements and abstract from secondary ones; and to play devil’s advocate with one’s own ideas. In his classes we were able to watch a first-rate mind work on a host of fascinating problems. I have attempted to emulate his approach to research ever since. When I returned to pursue the PhD degree, I took a field in microeconomics with Armen and he also served as chairman of my dissertation committee.

Alchian has also contributed greatly to the law and economics movement through his involvement in the George Mason University LEC judicial training programs.  In an important antitrust policy speech, former FTC Chairman Timothy Muris and my GMU colleague articulates a sentiment I’ve heard repeatedly from those who went through the program or watched Armen teach:

Armen Alchian was unexcelled in teaching economics to lawyers. He often presented economics socratically – a technique familiar to lawyers. For years Armen was one of the most popular instructors in Henry Manne’s programs for teaching economics to lawyers. In short courses, he taught literally hundreds of federal judges and law professors.

As Armen’s long-time collaborator William Allen put it in his own letter to the Nobel Committee on Armen’s behalf:

Economics is a broad discipline in methodology, as the Committee is fully aware, ranging from detailed historical, institutional, legalistic description to totally abstract, arcane theory. All such approaches, techniques, and emphases are appropriate. But there is much specialization among the members of the fraternity. And, increasingly, the profession has dealt in rigorous, elegant manipulation, even when the work is purportedly empirical—and even when the substantive results hardly warranted such virtuoso flair. Professor Alchian is a splendid technician, and he has contributed significantly and conspicuously to general “theory.” But, in contrast to many, he has always appreciated that the final payoff of Economics is elucidation of the real workings and phenomena of the world. I know of no one at any time who has had a finer sense of how to use economic analytics to explain the world. Sometimes the explanation requires involved, complex analysis, and Professor Alchian does not fear to use the tools which are required; what is uncommon is his lack of fear in using the MINIMUM tools which are required. In large part, his peculiar genius (the word is used advisedly) is to make extraordinarily effective use of elemental, and often elementary, techniques of analysis. And a host of people—many of whom are now in strategic positions in universities, in government, in the legal system, in the world of business and finance—have enormously benefited from the tutelage of Professor Alchian. … I present Armen Alchian as a giant—a giant who, because of his lack of pretension, is easily overlooked by laymen and even by some supposed professionals—who has greatly honored his profession and uniquely contributed to its usefulness. He would grace the distinguished fraternity of Nobel Laureates.

Well said.

Here are some Alchian links for interested readers:

As strong as the case for an Alchian Nobel is, the likelihood of a solo Nobel in the areas of the theory of the firm or property rights is unlikely.  And what better way to share the prize than with two co-authors who have made substantial and significant contributions, but individually and collectively, to economic problems involving the theory of the firm, property rights and transaction cost economics taking a similar methodological approach and bringing distinction to the UCLA School of economics.  I’ve written extensively about Klein’s contributions here.  But the most well known contributions (in addition to Klein, Crawford Alchian (1978) and the important exchange between Coase and Klein concerning asset specificity, vertical integration and contracting) include Klein & Leffler (1981), Priest & Klein (1984), Klein and Murphy (1988) and Klein (1995) and Klein (1996) ranging on topics from the role of reputation in the design and performance of contracts, the seminal model of litigation and settlement, vertical restraints, and the economics of franchising.

Demsetz’s contributions to economics are perhaps the most well known of the trio, including the coining of the phrase “Nirvana Fallacy,” but a cursory list as a refresher for the Nobel Committee:

  • 1967, “Toward a Theory of Property Rights,” American Economic Review.
  • 1968, “Why Regulate Utilities?” Journal of Law and Economics.
  • 1969, “Information and Efficiency: Another Viewpoint,” Journal of Law and Economics.
  • 1972 (with Armen Alchian, “Production, Information Costs and Economic Organization,” American Economic Review.
  • 1973, “Industry Structure, Market Rivalry and Public Policy,” Journal of Law and Economics.
  • 1979, “Accounting for Advertising as a Barrier to Entry,” Journal of Business.
  • 1982. Economic, Legal, and Political Dimensions of Competition.
  • 1988. The Organization of Economic Activity, 2 vols. Blackwell. Reprints most of Demsetz’s better known journal articles published as of date.
  • 1994 (with Alexis Jacquemin). Anti-trust Economics: New Challenges for Competition Policy.
  • 1995. The Economics of the Business Firm: Seven Critical Commentaries.
  • 1997, “The Primacy of Economics: An Explanation of the Comparative Success of Economics in the Social Sciences” (Presidential Address to the Western Economics Association), Economic Inquiry.

And of course, most recently, Professor Demsetz released his newest book, From Economic Man to Economic System on Cambridge University Press.

I know, its early for this stuff.  But its time to break the streak.  Maybe this is the year ….

P.S. Comments about whether the Nobel Prize is a “real” Nobel or not will be immediately deleted for lack of creativity.

Thomson-Reuters has listed its “Citation Laureates,” its predictions for particular scholars winning a Nobel prize sometime in the future (not necessarily this year).  Of particular interest to readers of this blog is that George Mason Law Professor Emeritus Gordon Tullock (long mentioned as a favorite of those predicting the Economics prize on this blog) is now included in the list:

* Douglas Diamond at the Graduate School of Business, University of Chicago, for his analysis of financial intermediation and monitoring.

* Jerry A. Hausman of Massachusetts Institute of Technology and Halbert White of University of California San Diego for their contributions to econometrics.

* Anne Krueger of Johns Hopkins University and Gordon Tullock of George Mason University School of Law, Arlington for their description of rent-seeking behavior and its implications.

Unfortunately, Thomson’s prediction rate has not been altogether impressive (see chart); but then again, predicting Nobel prizes isn’t so easy.

Here’s hoping the get this one on the first try.  Gordon is an incredibly well-deserving candidate.

Of course, Thomson-Reuters listed Armen Alchian & Harold Demsetz as Citation Laureates back in 2008 — and they remain my absolute favorites for the prize (along with fellow UCLA economist Benjamin Klein).

I was waiting to write something about today’s announcement of the Nobel Memorial Prize in Economics being awarded to Diamond, Mortensen, and Pissarides. Josh has already provided his thoughts and provided links to comments by Ed Glaeser and Steve Levitt, respectively. As they describe it, the honorees’ research provides a theory of unemployment, explaining why we see willing buyers and willing sellers of labor go without finding trading partners, thus resulting in persistent unemployment. The Nobel committee paints it a bit more broadly, explaining:

Since the search process requires time and resources, it creates frictions in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish.

This basic lesson certainly has broader implications for the workings of markets and the build-ups or mismatches of production capacity, inventories, and consumer demand more generally. In that sense, I believe the honorees provided much more than simply a theory of unemployment, though that is certainly where their particular applications have focused.

My colleague, Peter Klein, over at O&M has offered a little more crude assessment of the economics Nobel Prize in general, and this year’s award in particular. In short, Peter suggests the Nobel Prize in economics has become an award for those who most elegantly state (or prove) the obvious. That there are information and search costs that keep buyers and sellers from finding one another and efficiently taking advantage of all possible gains from trade is one of those things you don’t really need a PhD in economics to figure out. (Perhaps that’s why it isn’t taught much in Econ 101…overestimating students’ grasp of the obvious.)

Indeed, this idea (of search costs) was already awarded the Nobel Prize at least once, in 1991 when Ronald Coase received the prize “for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy” (see here). The work of this year’s recipients is simply one specific application of Coase’s theory, which identified the cost of searching out trading parties and determining relevant prices as part of the set of costs that affect behavior (and boundaries) in the market.

So, I am very delighted that Messrs. Diamond, Mortensen and Pissarides have received this honor, further illustrating the importance of understanding transaction costs (or more specifically, search costs in this case) and their implications for the workings of the economic system.

That said, I am appalled at the New York Times report today that suggests the action of the Nobel Prize committee somehow qualifies Peter Diamond to serve on the Federal Reserve Board. While Republicans may be making too little of Mr. Diamond’s experience, I don’t believe they have suggested his academic research is sub-par. The Nobel Prize committee may have added weight to the idea that Mr. Diamond’s (and his fellow honorees’) research has made significant contribution to the field, it bears nothing on the relevance of that research–or on Mr. Diamond’s personal experience–for setting federal monetary policy, the role of the Federal Reserve Board.

It is a shame that, for the second year in a row, Alfred Nobel’s memory is being abused as a battering ram for partisan politics in the US. We may expect that more of the Peace Prize. And while I would like to think that was not the intent of the selection committee for the 2010 Economics prize, its use to that effect by the NYT and others detracts from whatever significance the Prize imbues to the research contribution of its recipients.

Congratulations to Peter A. Diamond, Dale T. Mortensen, Christopher A. Pissarides for taking home the 2010 Nobel Prize.  As Alex Tabarrok notes, this year’s prize can usefully be thought of as a prize for unemployment theory.  See also Tyler Cowen’s profiles of Diamond, Mortensen, and Pissarides.  I think the most useful short summary of this year’s prize is from Ed Glaeser (HT: Steve Salop).    Glaeser writes about the new Laureates contribution to understanding frictions in the labor market:

The most traditional economic model of the labor market assumes a labor supply schedule, which reflects the number of workers willing to work at a given wage, and a labor demand schedule, which describes the number of workers that companies are willing to hire at a given wage. At some wage, supply equals demand and that’s the market equilibrium, which is where traditional economics predicts the world will end up. In markets with undifferentiated products — like copper or winter wheat — that model works pretty well, but it has some pretty obvious failings when it comes to labor or housing markets.

In particular, the Economics 101 model does an awful job explaining an American civilian labor force where nearly one-tenth say they want a job and can’t find one. Die-hard supporters of the basic model sometimes argue that wage floors, like the minimum wage, keep wages too high for the market to clear. But American minimum wages are low, and only a small fraction of jobs are affected by that barrier. Another attempt to save the old model is to argue that unemployed workers just value their time too highly to take a job at current market rates. But the view that the unemployed are just having a swell time hanging out watching cable is wildly at odds with the real world. New paradigms emerge when reality crashes against theory, and that’s what brought us the search theory of Professors Diamond, Mortensen and Pissarides.

More from Steve Levitt here.

 

Nobel Speculation Time

Josh Wright —  8 October 2010

Every year around this time, I repeat my prediction that Armen Alchian, Harold Demsetz, and Ben Klein will win the Nobel Prize for contributions to the theory of the firm, property rights, and transaction cost economics.  I understand that last year’s prize makes this combination less likely, but I see no reason to deviate.  I make the case for that combination, one that I think compares quite favorably to the more frequently discussed trio of Hart-Holmstrom-Tirole, in the linked post.  One can also imagine an Alchian / Demsetz prize for narrowly grounded in their work on property rights.

As Armen’s long-time collaborator William Allen put it in his own letter to the Nobel Committee on Armen’s behalf:

Economics is a broad discipline in methodology, as the Committee is fully aware, ranging from detailed historical, institutional, legalistic description to totally abstract, arcane theory. All such approaches, techniques, and emphases are appropriate. But there is much specialization among the members of the fraternity. And, increasingly, the profession has dealt in rigorous, elegant manipulation, even when the work is purportedly empirical—and even when the substantive results hardly warranted such virtuoso flair. Professor Alchian is a splendid technician, and he has contributed significantly and conspicuously to general “theory.” But, in contrast to many, he has always appreciated that the final payoff of Economics is elucidation of the real workings and phenomena of the world. I know of no one at any time who has had a finer sense of how to use economic analytics to explain the world. Sometimes the explanation requires involved, complex analysis, and Professor Alchian does not fear to use the tools which are required; what is uncommon is his lack of fear in using the MINIMUM tools which are required. In large part, his peculiar genius (the word is used advisedly) is to make extraordinarily effective use of elemental, and often elementary, techniques of analysis. And a host of people—many of whom are now in strategic positions in universities, in government, in the legal system, in the world of business and finance—have enormously benefited from the tutelage of Professor Alchian. … I present Armen Alchian as a giant—a giant who, because of his lack of pretension, is easily overlooked by laymen and even by some supposed professionals—who has greatly honored his profession and uniquely contributed to its usefulness. He would grace the distinguished fraternity of Nobel Laureates.

Indeed.  See also Fred McChesney’s entry on Alchian’s pathbreaking contributions to economic science is available here, and David Henderson’s entry on Alchian in the Concise Enyclopedia of Economics here.

Thomson-Reuters also adds Kevin M. Murphy (another Bruin, at least as an undergraduate!) to their “Watch list” this year, which is also a splendid idea.

Gordon Tullock remains, along with Armen, at the very top of the list of the most deserving.

I’m seeing a lot of predictions for Thaler / Schiller.  That would be the prize that least surprises me.

 

A Plug and Some Links

Josh Wright —  29 September 2010

I’ll be talking about the Intel Settlement in an ABA program, The Intel Settlement: A Perspective From the Trenches, today at lunchtime along with a great group of panelists with a wide variety of perspectives on the issue, Kyle Andeer (FTC Counsel), Ken Glazer (KL Gates), and Henry Thumann (O’Melveney & Myers).   If you’re interested, you can register and get call-in numbers at the link above.

And now, some links:

That’s the title of Steve Horwitz’s blog post reflecting on a recent celebration honoring the lifetime contributions of 1986 economics Nobel Prize winner James Buchanan. (HT: Art Cardin for pointing it out on FB) Horwitz describes Bachanan’s comments about how “the most basic insight of economics is fairly simple: the spontaneous order of  the market.” He goes on:

At the core of the economic way of thinking is the idea that economic coordination requires no coordinator and that an order which serves the interests of all can emerge from the interaction of self-interested choices. Although simple, it is also highly counterintuitive when first encountered.

This fundamental insight underlies much of the spirit that unites the collection of bloggers called Truth On The Market (at least as I see it…Geoff and Josh can delete me if I’m wrong). Horwitz then goes on to describe Buchanan’s remarks on a subject that relates even more closely to TOTM. To wit:

Buchanan’s final point, however, was one that is perhaps the most important in our own time and place. He reminded the audience that not all spontaneous orders are equally good. The quality of the outcomes depends crucially on the rules that frame the economic processes and behavior which produce that order.

In short, the rules matter. Or, as one of my professors, 1993 economics Nobel Prize winner Douglass North might say, “institutions matter.”  Spontaneous order will emerge from the interaction of individual decision makers as they work to maximize (or satisfice) their own well-beings, regardless the nature of the rules. However, the rules themselves create incentives and constraints that shape the nature of the spontaneous order itself.  Often, the rules result in spontaneous orders which are neither intended nor desirable…largely because those responsible for creating the rules have such little grasp of and/or appreciation for that most basic insight of economics: the spontaneous order of the market.

When I was in grad school I had the pleasure of attending a talk by Buchanan and picked up an anecdote that I still use with my students. Buchanan told a story of a trip to Russia just shortly after the reforms of the early 90s. He learned that there had been (or was at the time) a thriving market for burned out light bulbs. It was a great tale of how spontaneous market order can emerge, even in a society that had been taught for generations to eschew the market.

So,while not so presumptuous as to write on behalf of all my colleagues, I will simply suggest that TOTM readers may better understand the philosophy behind much of what is posted here by coming to an understanding of the complexity of simple economics; remembering the spontaneous order of the market and the importance of the rules by which it is shaped.