Monday, October 11, 2010

Nobel Prizes in Economics

This year's Nobel Prizes in Economics went to Peter Diamond, Dale Mortensen, and Christopher Pissarides, for their work on the economics of search. Excellent choice! This work has been highly influential. Diamond developed an early Keynesian coordination failure model in a search framework, and the Mortensen-Pissarides model has become a workhorse in labor economics and in modern macroeconomics, changing entirely how we think about labor markets. Search has also been used extensively in monetary economics, at least since the late 1980s. It's hard to imagine what economic research would look like today without the work of Diamond/Mortensen/Pissarides.

9 comments:

  1. "It's hard to imagine what economic research would look like today with the work of Diamond/Mortensen/Pissarides."

    You mean "without the work of...." dont you? :)

    ReplyDelete
  2. I thought Greg Ransom put this work into a useful historical and methodological perspective on his blog today:

    There is something of a parallel here with the work of Leonid Hurwicz and Joseph Stiglitz and George Stigler — take an aspect of Hayek’s recalculation problem / knowledge problem / coordination problem, put it into a formal “model” built up out of mathematical “givens” (e.g. “given” probability distributions and “given” costs, etc.), and then look for “market failures” within this God’s-eye-view construct, failures which theoretically can be ameliorated by a benevolent government “intervention” looking and acting from something like a God’s-eye-view of the world.

    pe

    ReplyDelete
  3. Looking forward to see what you think of PK comment here: http://krugman.blogs.nytimes.com/2010/10/11/what-we-learn-from-search-models/

    ReplyDelete
  4. Note that he tells us he really doesn't know anything about the economics of search. Of course that was already apparent from reading his blog entries. I'm not sure what an aggregate demand shock is in a Mortensen-Pissarides model.

    ReplyDelete
  5. Come on Steve, you can be more charitable than that. Krugman gave a nice summary of the Blanchard-Diamond model, for the layperson. Diamond was one of this year's laureates, and Krugman honored him with a nice application of his work to today's issues.

    I don't quite understand your attitude to Krugman. It's true that, intellectually, he seemed to throw the baby out with the bathwater when financial crisis hit. However, it's also true that he was one of the very few who had the guts to publicly take on the Bush administration in its darkest and scariest days. Where were you at that time?

    Don't get me wrong -- I enjoy your blog immensely. It's informative, witty, and regularly delivers really tasty insights. Your reactions to Krugman, however, have an unfortunate dogmatic flavor that spoils the brew for me sometimes...

    ReplyDelete
  6. Maybe he should just stick to politics. It's nice that he paid a complement to Peter Diamond, but he also used the opportunity to throw in a plug for his "aggregate demand shock," which has nothing much to do with what Diamond/Mortensen/Pissarides were getting the prize for.

    ReplyDelete
  7. Krugman took on Bush not just in politics, but also in economics. He went after the tax cuts, the deregulation, the systematic regulatory capture, and the coddling of oil barons and war profiteers, to mention a few. He also warned about bubbles in asset markets that could take us all down...

    You may have a clearer view into the collective mind of the Nobel committee than I do, but I don't recall them specifically ruling out aggregrate demand effects in the prize-winning work. Although Mortensen and Pissarides never ventured there, Diamond certainly did. In the early 1980s, when search and matching theory really started to take hold, it was Diamond's work with multiple equilibria and coordination problems -- and, hence, aggregate demand effects -- that arguably caught the most attention at the time.

    Thus, in applying matching theory to the "Great Recession", as Krugman did, it does not seem unreasonable to mention aggregate demand effects, unless one is really dogmatic.

    Are you really arguing that aggregate demand has played no role whatsoever in our recent troubles?

    ReplyDelete
  8. "In the early 1980s, when search and matching theory really started to take hold, it was Diamond's work with multiple equilibria and coordination problems -- and, hence, aggregate demand effects -- that arguably caught the most attention at the time."

    Diamond's paper is called "Aggregate Demand Management in Search Equilibrium," but what is going on in Diamond's model (coordination failure) is very far from what Krugman has in mind, which is basic Keynesian Cross.

    "Are you really arguing that aggregate demand has played no role whatsoever in our recent troubles?"

    I'm not sure what "aggregate demand" means. What I see are financial factors interacting in some way with sectoral phenomena, with some potential for a role for government and central banks in there. I don't see anything going on that looks like it is somehow caused by traditional sticky wage and price mechanics, or by aggregate productivity shocks, for that matter. I don't think anything is as simple and obvious as Krugman makes out.

    ReplyDelete