There is an article in the FT about the three economists who just won the Nobel prize in economics. Here is a quote that jumped out at me:
One of the basic problems in economics is that markets are remarkably efficient, but they work best only under rather extreme assumptions. If information held by buyers or sellers is private - for example how much someone is really willing to pay for something - trade can break down.
So it seems we're back to the notion that there is some optimal price independent of what buyers and sellers actually agree on.
Of course, and who better to determine that optimal price than government officials with a bunch of advanced mathematicians and some supercomputers?
We can do it better this time, we have the technology!
The aspiration toward freedom is the most essentially human of all human manifestations. -Eric Hoffer
Here is the rest of the article. Sorry I didn't realize you had to log in to the site. The author is Chris Giles, who is listed as the Economics Editor.
Three US economists who established and developed theories governing how trade between two individuals or companies takes place and how it can be optimised have won the Nobel prize for economics. The Royal Swedish Acadamy of Sciences announced on Monday that Leonid Hurwicz, Eric Maskin and Roger Myerson would share the 2007 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for “for having laid the foundations of mechanism design”. Mechanism design theory was initiated by Professor Hurwicz in the early 1960s and developed separately by professors Maskin and Myerson in the 1970s and 1980s. The economists will share a prize of SKr10m ($1.57m). One of the basic problems in economics is that markets are remarkably efficient, but they work best only under rather extreme assumptions. If information held by buyers or sellers is private - for example how much someone is really willing to pay for something - trade can break down. One example of the sort of problems mechanism design theory can analyse occurs regularly, when buyers and sellers lie about their true motives and economics. A company might say it is only willing to provide a service for $200 when, in fact it will make a profit if it charged $150. Another might say it is only willing to buy at $100 when it is really willing to pay up to $170. In this example, trade is certainly possible between the range of $150 and $170, but might not happen because both the buyer and the seller have an incentive to misrepresent their true positions. Professor Hurwicz, Russian-born but a US citizen and now 90, introduced to economics the important notion of “incentive compatibility” in 1972 which proved central to later developments, both theoretical and practical. One of the most important practical areas it has been used is in economic regulation of industry, where companies have huge incentives not to reveal their private costs or information. The theoretical work has led to more effective regulatory concepts, such as the design of auctions that give the parties an incentive to reveal their private information, enabling everyone to benefit. Professor Myerson’s 1981 paper “Optimal auction design” was a seminal work in this field. Similarly, the regulation of subscription television has benefited from the theoretical work of mechanism design in specifying when the bundling of channels in a packaged is in consumers’ interests. The theory provides economists with a general tool-kit to analyse different market structures and has wider applications in social science with its use in helping to design voting systems. One of its uses for the future will come in environmental theory and policy, areas in which professor Maskin has been active this decade, where the mechanism of and domestic and international regulation will be crucial for its success in preventing global warming and other environmental degradation.
Three US economists who established and developed theories governing how trade between two individuals or companies takes place and how it can be optimised have won the Nobel prize for economics.
The Royal Swedish Acadamy of Sciences announced on Monday that Leonid Hurwicz, Eric Maskin and Roger Myerson would share the 2007 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for “for having laid the foundations of mechanism design”.
Mechanism design theory was initiated by Professor Hurwicz in the early 1960s and developed separately by professors Maskin and Myerson in the 1970s and 1980s.
The economists will share a prize of SKr10m ($1.57m).
One example of the sort of problems mechanism design theory can analyse occurs regularly, when buyers and sellers lie about their true motives and economics.
A company might say it is only willing to provide a service for $200 when, in fact it will make a profit if it charged $150. Another might say it is only willing to buy at $100 when it is really willing to pay up to $170.
In this example, trade is certainly possible between the range of $150 and $170, but might not happen because both the buyer and the seller have an incentive to misrepresent their true positions.
Professor Hurwicz, Russian-born but a US citizen and now 90, introduced to economics the important notion of “incentive compatibility” in 1972 which proved central to later developments, both theoretical and practical.
One of the most important practical areas it has been used is in economic regulation of industry, where companies have huge incentives not to reveal their private costs or information.
The theoretical work has led to more effective regulatory concepts, such as the design of auctions that give the parties an incentive to reveal their private information, enabling everyone to benefit. Professor Myerson’s 1981 paper “Optimal auction design” was a seminal work in this field.
Similarly, the regulation of subscription television has benefited from the theoretical work of mechanism design in specifying when the bundling of channels in a packaged is in consumers’ interests.
The theory provides economists with a general tool-kit to analyse different market structures and has wider applications in social science with its use in helping to design voting systems.
A Nobel Prize was awarded... for this? I'll be interested in Austrian critiques on the matter, but I am not impressed by the 'discovery'. The whole 'markets only work under extreme assumptions' is a problem for neoclassical economics to deal with, since it introduces the assumptions to begin with.
Inquisitor: A Nobel Prize was awarded... for this? I'll be interested in Austrian critiques on the matter, but I am not impressed by the 'discovery'. The whole 'markets only work under extreme assumptions' is a problem for neoclassical economics to deal with, since it introduces the assumptions to begin with.
Its Mechanism Design, much more than that. A good summary is here.
Grant:It's Mechanism Design, much more than that. A good summary is here.
Interesting article, thanks. I find such articles 'contaminated' though, by the assumption that the government is there to do anything but take things from some people and give them to others. It's all well and good to talk about what contracts might work the best when the government is outsourcing activities it typically handles. However I think the practical reality is that such ends are never reached because people are trying to get a barking cat, or a government that does not steal. If you take even an almost universally agreed upon government role, say in outlawing robbery and prosecuting those who rob, in the end the government is still going to be taking from many and using those resources to benefit the few, those who are victimized. And in the end, the resources are not provided voluntarily. I think that's what most people miss about the government: its very existence is predicated on forcing people to do things they otherwise wouldn't do voluntarily, or to take from them things they otherwise wouldn't give voluntarily. I think they understand it instinctually and implicitly, but engage in verbal and mathematical BS and obfuscation around the subject to try and make it appear otherwise.
Grant, thanks for the article.
xahrx: Grant:It's Mechanism Design, much more than that. A good summary is here. Interesting article, thanks. I find such articles 'contaminated' though...
Interesting article, thanks. I find such articles 'contaminated' though...
Its on Reason, a libertarian magazine... In any case, studying why markets work doesn't at all justify government action. Plenty of private firms (such as ebay) could use such information to improve their own business. Better designed markets attract both buyers and sellers, voluntarily.
This is so bogus. At least they're consistent with the Peace Prize committee.
I disagree. Reason is a libertarian magazine, but libertarianism isn't synonymous with sound economic analysis. Most of those who study how markets work tend to do so because they want to fix supposed failures and imperfections that they find, deviations from their percieved ideal, and to find ways to make them work 'better'. Especially ways to make government work 'better'. Which only makes sense if you think the government has any purpose other than theft. It doesn't. Even its most universally agreed upon functions rest on theft from some to benefit others. That simply is what the government is: institutionalized theft. A case of social herpes if you will. And as with the STD, once you've got it you're not going to be to be rid of it, and the only way to make things honestly better in any way is to take steps to minimize it as much as possible.
Uh, alright. Mechanism design could still prove to be very useful, though. Its not like its something only governments would use. Actually, I bet it will shed light on more government failure, because there are clearly few incentives for government to make good decisions for its citizens.
I suppose it'll be of use to public choice theorists and likeminded Austrians.
Grant:Uh, alright. Mechanism design could still prove to be very useful, though. Its not like its something only governments would use. Actually, I bet it will shed light on more government failure, because there are clearly few incentives for government to make good decisions for its citizens.
Show me one government failure that wasn't used to justify a government fix. I just think as a practical reality very few people are looking for reasons or means to limit government. More than likely they're looking to get on the dole in some way.