Tuesday, October 16, 2007

Slow death economics gains three gongs

Three Americans Leonid Hurwicz, Eric S. Maskin and Roger B. Myerson won the Nobel prize in economics on Monday for developing a theory that helps explain how incentives and private information affect the functioning of markets. It is called mechanism design theory. Roughly it is concerned with establishing a mechanism to get individuals to reveal information about their preferences.
One-page discussions of mechanism design theory are here and here. Serious surveys are here and in the background document for the Nobel Prize awards here. It is often rather abstract stuff derived in the brain rather than from observation - note that the references to the survey on environmental applications contained in the last link include nothing on any specific environmental issue – the best description is a nice thought experiment in search of an application.

MDT is an intensely mathematical area that does not seem to me to have generated much insight for policy-makers – Joshua Gans obviously disagrees (and here) – but the posts at Marginal Revolution broadly reflect my assessment:

“No doubt mechanism design, and the general problem of inducing truth-telling, will be with us forever. But how practical are these general results? Or have the theorists simply provided us with cautionary notes and left the real applications to the context-specific world of practice?

Did these guys get at the real reasons why we don't organize the entire economy as a second-price auction?

Part of me thinks: "Hey, let's say Natasha wants Yana to tell her the truth about when she will clean her room. This stuff isn't useful!"

Another part of me thinks: "It is most important to get theory right. These guys are brilliant. Only the philistines demand that all scientific contributions have immediate applications....

Some of you might argue: "These guys have already had a big impact on real world auctions and incentive schemes." In terms of the induced improvement in human
welfare, I find that a difficult case to make. The important progress has come from recognizing much simpler truths about incentives.”

Frankly I find this stuff to be slow death – I am interested in observing and interpreting the world not in mathematical insight divorced from reality. But others, no doubt reflecting on the real intellectual challenges of MDT, get a thrill from it all.

It all shows how I have aged – 20 years ago I would have objected loudly to the negativity I display here. 'The bloody philistine!' I can imagine myself saying. Now I like congestion pricing and the economics of tobacco smoking. To totally bury my chances of ever being seen as having any sophistication I have to say that from my perspective a better choice for the Nobel gong would have been an economist like William Baumol.


Gradstudent said...

Auction theory was developed using these techniques, by Roger Myerson. Hurewictz studied the deepest questions comparing the functioning of a socialist centralized system with a capitalist decentralized one, eschewing political rhetoric for rigorous analysis.

Auction theory is the single most successful empirical and policy tool derived from pure theory since traditional demand theory (which was also derived from `pure mind theory' as you call it). It is used for spectrum auctions that have raised billions for governments.

It is only ``slow death'' because it is from after the time you learned your techniques, and it is costly for you to invest in these new ones. This is the typical pattern for the life-cycle of academics: last generation's thinkers attacking this generation's. A typical response of those who feel their relevance threatened, but a response that is very surprising from you.

hc said...

Dear gradstudent, You pretentious little prat - you can't even spell - it is Hurwicz. I studied his models of price adjustment (with Arrow) and dynamic stability in the early 1970s. It was interesting if inconclusive work.

Basic auction theory is useful but I doubt the advances justify the concentration of efforts to extend it.

Yes it is costly to learn new techniques.

I made no reference to 'pure mind theory' - you invented this term and attributed it to me.

If instead of being so aggressive you had actually read my post you would have seen in the last paragraph that I recognise the intergenerational issues and parodied my own position.

Gradstudent said...

Your personal attacks an ad-hominm arguments are sad and pathetic. Blogging is a low quality exercise and nobody cares much about typos and spelling.

You may have parodied yourself, but it doesn't change your view. Perhaps you need to hear it from the younger generation itself! Hence your very angry and defensive reaction to criticizm. Also, you know what I mean about pure mind theory, so grow up and stop playing games.

Nowhere in the post did I say you didn't study Hurwicz. If you had studied the optimal auction problem, you might realize what a fantastic contribution it was. As for your doubts as to usefulness, the facts are against you big time.

Michael Harris said...

Hi Harry

I've been in the Baumol-for-Nobel camp for a while. Pretty much as a lifetime achievement kind of thing. The problem is that he has no single "big ticket" contribution that is associated with him that they can hang a Nobel on.

This isn't me speaking. I chatted with Karl-Goran Maler about this in January, and that's pretty much what he told me.

hc said...

Michael, I quote from Baumol's wiki:

'Among his better-known contributions are the theory of contestable markets, the Baumol-Tobin model of transactions demand for money and Baumol's cost disease, which discusses the rising costs associated with service industries.

The 2006 Annual Meetings of the American Economic Association held a special session in his name, and honoring his many years of work, where 12 papers on entrepreneurship were presented. http://www.aeaweb.org/annual_mtg_papers/2006papers.html

The British magazine, The Economist published an article about William Baumol and his lifelong work to develop a place in economic theory for the entrepreneur (March 11, 2006, pp 68). They note that traditional microeconomic theory holds a place for 'prices' and 'firms' but not for that (seemingly) important engine of innovation, the entrepreneur. Baumol is given credit for helping to remedy this shortcoming: "Thanks to Mr. Baumol's own painstaking efforts, economists now have a bit more room for entrepreneurs in their theories."'

Its quite an impact. Note that in pushing his case I wish to point out that he is no slouch as a theorist but has his eyes on the world - he is trying to make sense of the world he sees out there.

Michael Harris said...

Preaching to the choir, Harry. :-) A few years ago I found a "who do you think should get the next economics Nobel?" webpage and I voted for Baumol.

I couldn't convince an influential Swede though.

Gradstudent said...

Want a different opinion? Easy.
Market contestability theory is nonsense that was developed in a consultancy to justify AT&T's monopoly. Crazy assumptions like entry can occur before price can adjust. No self-respecting industrial economist believes this silliness. Transactions demand for money?? Poorly modeled and obvious pseudo-theory. Search is the way to go. Baumol's stuff is pragmatically clever but theoretically shallow, and will never attract the Nobel.

Blissex said...

«Market contestability theory is nonsense that was developed in a consultancy to justify AT&T's monopoly. Crazy assumptions like entry can occur before price can adjust. No self-respecting industrial economist believes this silliness.»

But if you are an economist with an Ivy league degree contestability theory is a meal ticket that can seriously enhance your wealth as an expert witness paid generously by big monopolistic companies...