New at Reason
Alex Tabarrok explains the concept of "mechanism design," the research that won this year's Nobel Prize in Economics.
Comments to "New at Reason":
libertreee | October 16, 2007, 9:22am | #
Among the first principles of economics are the notions that benefits and costs are subjective, and that human beings tend to place different subjective values on goods and services. The latter notion is why trade takes place. If you value your used car at $5000 and I (subjectively)value it at say, $6000, then gains from trade are possible. If we strike a bargain at $5500, it creates a mutually beneficial gain. This is what makes the economic world go around.This year's Nobel Prize in economics was awared to three mathematicians (Leonid Hurwicz, Roger Myerson, and Eric Maskin)who clearly do not understand this freshman-level idea. They are "game theorists," and like many game theorists they seem mostly interested in mathematical games, not economic theory or economic reality.
The award was for "mechanism design theory," which purports to "correct" such alleged "failures" of markets as when "people hold back private information" or "when people refuse to divulge how much they are willing to pay for a good." As the Nobel committee said in its announcement, markets supposedly "fail" when "buyers and sellers privately know their evaluations" of goods and use this personal information to "gain personal advantage."
What a shocker. Everyone tries to get the best deal possible.
Naturally, this calls for more government regulation which, according to the Nobel committe's smarmy announcement, may not suffer from any information problems like the ones that supposedly plague private markets. Perfect politicians, imperfect markets.
What else should we expect from Swedish sociaists whose comrades believe Al Gore is the new Prince of Peace.
So sayeth Tom Di Lorenzo on LewRockwell.com. It is the Swedish Central bank that issues the Nobel Prize in Economics.
I have no dog in this hunt, but I thought since the Beltway Chicago School boys and the Austrians sometimes go at it I would submit this quote.
xon | October 16, 2007, 9:51am | #
I was most curious about this part:"An interesting special case of the above model occurs when the public good is excludable. If the public good is excludable then accept is a dominant strategy for each agent regardless of K. Consider a group of N agents and an excludable public good, like a bridge, which costs C to produce. Let the entrepreneur offer the agents an .F; S;K/ contract with the additional proviso
that only accepting agents can consume the public good if it is produced."
It seems like their model says, basically, if you can make an excludable public good, then risk of free-riders can be eliminated. But isn't that the definition of public good, i.e., something not excludable? If it were excludable, private markets are the most efficient valuator, and there would be no need for the public volunteerism.
Reminds me of Paul Riser's character in Aliens. "Come on, Ridley. If you do that, there's no exclusive rights for anyone. . ."
barry payne - economist | October 16, 2007, 10:43am | #
The recent article in Reason on October 5 by Ronald Bailey, "The Secrets of Intangible Wealth" highlights the first serious empirical study of the mechanism design issue by the World Bank in terms of institutions.The study shows that intangible wealth is closely associated with institutions such as the rule of law, property rights and effective government.
It demonstrates, for example, that when a Mexican comes to the U.S., he or she has access to $418,000 of this type of wealth compared to $34,000 in Mexico.
This explains why, for example, attempts to provide aid or invest in parts of Africa are far more likely to fail than more developed countries with institutions necessary to support the same.
In this context, for all the flaws, institutions, including governments, enable (or at least are statistically associated with) much more trade and economic growth than less.
However, that trade and growth may be associated more with imposing stability and predictable expecations than it does to promote economic freedom and competition, particularly that competition that tends to "creatively destruct" existing monopoly strongholds.
Ed Crane of CATO recently stated at an Ayn Rand celebration speech that supply side economists had replaced freedom with growth in the sense of crowding out bad government with more private growth. If true, this could include institutions "mechanically designed" to promote economic growth which infringe on individual and economic freedom.
The studies of the Nobel Prize winners seem to generally support the World Band study, that institutions do support efficient outcomes, at least more than they suppress it, at least compared to other countries.
For a contemporary application of the complicated principles involved, consider the spector of intimidating Blackwater operatives roaming heavily armed around New Orleans post-Katrina on behalf of private property owners. Is that a private market solution to a public good failure? Are the incentives and the ability to avoid accountability any better or worse than the corrupt police department in the Ninth Ward?
David Rollins | October 16, 2007, 10:55am | #
Also see Peter Boettke commentary in today's WSJ:http://online.wsj.com/article/SB119249811353060179.html
prolefeed | October 16, 2007, 11:03am | #
It appears this award went to economists trying to revive the arguments for socialism that were refuted during this:the Socialist Calculation Debate
That is, they're advancing theories that imply we can replace free markets with socialist government planning if we can just have sophisticated enough pricing systems, etc.
Neu Mejican | October 16, 2007, 11:20am | #
[snark]ah yes, nuanced view of markets = socialism, of course[/snark]thoreau | October 16, 2007, 11:37am | #
And the Libertarian Nobel Economics Prize goes to.....(opens envelope)
Every blog commenter who ever shouted "DEMAND KURVE!" in the "Matt Damon!" voice from Team America.
We don't need no education!
Fluffy | October 16, 2007, 11:38am | #
Libertree -Yes, I have always had a huge problem with definitions of "market failure" that include things like unequal knowledge, location advantage, etc.
This is because economics as a science views the free market as an instrument for maximizing efficiency, and not as an arrangement necessary for justice.
For example: the fact that system participants have unequal amounts of information, and that the market rewards the participants with more information and penalizes those with less, is to me a positive feature of the market, because I think that it is just to reward preparation and punish mediocrity. But this messes up the equilibrium charts the economists love, and strikes them as therefore less than perfectly efficient. That makes them see a bug where I see a feature.
Neu Mejican | October 16, 2007, 11:41am | #
prolefeed,In non-snark mode, it seems to a degree you are correct, the theory attempts to formalize the factors discussed in the Socialist Calculation Debate.
It, however, does not provide a clear advantage to either side of the debate, giving pro-market positions some empirical support, and providing strict demonstrations of how and why public-goods market failures can come about. (See the Nobel prize papers for an example- 16th century England beat France to some public goods innovations because France required consensual voluntary agreements prior to implementation).
The prize went to a tool, not a partisan political position.
Neu Mejican | October 16, 2007, 11:43am | #
[snark]if we define "success" as "that which the market produces" then of course there can be no market failures[/snark]You pricks move, and I'll execute every mother fucking last one of you.
Neu Mejican | October 16, 2007, 11:50am | #
fluffy,I think that it is just to reward preparation and punish mediocrity.
Market failure, if'n I understand this theory correctly, would be defined by a situation where your preparation is punished by my mediocrity. In the public good realm, consensual decisions by the community (that is, decisions without coercion for some members of the community), lead towards zero chance of being implemented as the number of agents increases, even in a situation where the aggregate economic health of each individual would benefit from implementation of the public good project.
Timothy | October 16, 2007, 11:53am | #
Market failures exist where there are externalities due to lack of sustainable pricing mechanisms. If you think there aren't externalities, I'm moving in next door and playing nothing but Toybox at 5000db 24 hours a day.COASE BARGAIN THIS MOTHER FUCKER!
Neu Mejican | October 16, 2007, 11:59am | #
[preemptive snark] The prize went to a tool...NO, that was the PEACE prize[/preemptive snark]
thoreau | October 16, 2007, 1:09pm | #
The curriculum at a Libertarian Economics Department:Econ 101: Micro. Make sure you get the Demand Kurve down. And Coase. That makes it easy to dismiss all sorts of pesky "facts."
Econ 102: Macro. All you really need to know is "Gold Standard!"
Stats 101: Correlation is not causation. There you go. Done!
For advanced students:
Econ 301: Atlas Shrugged. Yes, it's an economics textbook.
Econ 302: Von Mises, highly selective readings from Adam Smith, and bits of Friedman.
And that's it. That's all you need to know.
JasonL | October 16, 2007, 1:23pm | #
thoreau,You are probably being a bit harsh on GMU, which is as close to a libertarian econ department as you are likely to find.
thoreau | October 16, 2007, 1:27pm | #
Jason-My comment was directed at some of the comments in this thread, not at GMU. I admire GMU's econ department.
Theodore Dawes | October 16, 2007, 2:00pm | #
Typically the mechanisms that work in theory are very complicatedOnce we finish completely computerizing our economic and legal processes, complexity will not be an issue. There might be some problems on the design side, but even that could be eventually automated. Run time of a complex economic mechanism would be almost instantaneous.
I'd like an award for pointing out that the Dismal Science leads to dismal threads.