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Nobel prize for economics: A win for the narrow view

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(Read caption) Alvin Roth, a Harvard Business School professor who is currently a visiting professor at Stanford University, listens at a press conference announcing his award of a shared Nobel Memorial Prize in Economic Sciences for his work on market design at Stanford University, at Stanford, Calif., Monday, Oct. 15, 2012. He shares the prize with Lloyd Shapley, professor emeritus at UCLA.

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This year’s Nobel-ish prize in economics goes to Alvin Roth and Lloyd Shapley for research on “matching methods” and the resulting application to “market design.” Briefly, this work deals with allocating resources in the absence of money and prices. Shapley applied noncooperative game theory to study the properties of different matching rules, and Roth studied various allocation rules to encourage “efficient” matching of actors or traders without using prices.

A good nontechnical summary of Roth’s work appears in a 2009 Harvard Business Review article. I discussed some of the issues in a 2007 blog post. There I noted that while the very idea of “market design” appears oxymoronic to those steeped in Menger, Mises, and Hayek, most of the work by Roth and colleagues deals with regulated markets, and can hence be interpreted as research in regulatory reform. More generally, none of this work deals with “designing markets” in the broad sense, but rather with narrow, technical issues in administrative design. (E.g., who gets to propose the first trade? How many potential trades are considered in each round? Etc.) As one friend of mine remarked, “this is one of the most boring prizes yet. At best it is a prize for some no doubt useful ideas in some small contexts of effecting coordination, but the real coordinating marvel is the market.”

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Note that the study of resource allocation without money and prices is part of praxeology, but not what Mises called catallactics, the study of market exchange with monetary calculation. Mises includes the economic analysis of socialism and war, and parts of Crusoe economics, as within the non-catallactic parts of praxeology, but there has been relatively little work by Austrians in this area. Some of my own research on resource allocation within the firm could fit, as does Mises’s analysis of bureaucracy.

Update: Is it economics? Two contrasting views. Steve Levitt:

[T]he first time I read Roth’s work in this area I had a strong reaction: this isn’t really economics. His applications, while based on general theories and principles, involve solutions that are highly dependent on the particular institutions and quirks of the setting he is studying.  In my youth, I was under the illusion that economic principles should be universal.  It was in part through my appreciation of Roth’s work, that I came to think very differently about the world and appreciate how critical it is to think about the specifics of the setting when coming up with solutions.

Charles Rowley:

The contributions of Roth and Shapley represent grunt work that can easily be provided by computer novices.  In environments where markets do not – or are not allowed – to function an infinite number of matching solutions vie for attention. Pick your preferred outcome and program the computer to deliver it.  Then sit back, hope that the Committee shares your prejudices, and wait for the 3 am call from Sweden!

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