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Leonid Hurwicz, Eric Maskin, and Roger Myerson
Win the Nobel Prize in Economics. That's funny, because this is precisely the kind of work which is going out of style in the broader profession. These guys are smart, smart, smart, and Hurwicz is probably the best known of the three. They are all high-powered theorists, doing incentives, mechanism design, and social choice theory. None of them are easy to explain to your grandmother.
Here is the scientific overview.
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.
Posted by Tyler Cowen on October 15, 2007 at 10:07 AM in Economics | Permalink
Comments
So what's in-style these days then?
Posted by: fred at Oct 15, 2007 7:25:47 AM
Mechanism design is very much in style, Tyler. I'm not smart enough to understand it, either, but the insights of these guys have been used extensively in more applied setting, e.g. auction design, so you should be a little nicer.
Posted by: brutto at Oct 15, 2007 7:38:57 AM
Well.. Out of style probably in the sense that economists tend to turn away from purely theoretical work. Some mechanisms truly make little sense outside theory.. To make Nash equilibria hold, theorists sometimes appeal to things like integer games (two players have to say a number, the highest wins - obviously no Nash equilibrium in here). Many in this literature, though, are aware of this and try to avoid such games.
But those guys are indeed diabolically clever. And mechanism design is still a beautiful field, with, I believe, a long and flourishing future ahead.
Posted by: Tim at Oct 15, 2007 7:48:06 AM
I guess that Tyler would say that clever empirical work directed at social topics (poverty, education, sex, status, etc.) is in style.
But I think that some very hot work is being done with mechanism design at the intersection of economics and computer science.
Posted by: Mike-KP at Oct 15, 2007 8:45:39 AM
Will a woman ever win the Nobel Prize in Economics?
Posted by: Steve Sailer at Oct 15, 2007 9:24:18 AM
Will a libertarian ever win the nobel peace prize?
Posted by: Erik at Oct 15, 2007 9:27:23 AM
I wouldn't say that this topic is out of style. Just recently, the Harvard Business Review (in the October 2007 issue, article "The Art of Designing Markets") discussed "a new field of economics" - market design, formed thanks to the developments in game theory and experimental economics. The applications mentioned were organization of radio spectrum auctions and efficient matching in markets in general - in particular kidney exchange (paired kidney donation), medical labor markets, deferred-acceptance algorithm to match students with schools - I think that pretty much could be classified as the "clever empirical work directed at social topics."
Posted by: Matt P. Dz. at Oct 15, 2007 9:33:58 AM
Would it be crass of me to point out that I was the *only* person talking about Eric Maskin and the Nobel prize in the same sentence? :)
Posted by: Mike Moffatt at Oct 15, 2007 9:49:41 AM
Well said, Tyler.
Posted by: John H. at Oct 15, 2007 9:50:34 AM
"Would it be crass of me to point out that I was the *only* person talking about Eric Maskin and the Nobel prize in the same sentence? :)"
I got Hurwicz right.. :-)
Posted by: Michael Greinecker at Oct 15, 2007 10:12:36 AM
"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."
I find that a remarkable statement. It is extremely difficult to point to any field of economics which has obviously made any positive contribution at all to human welfare. (And it is not so difficult to point to a few which have probably had large, negative impacts). Mechanism design is one of economic's rare success stories. It may only be a more efficient allocation of the airwaves, and huge windfalls for government coffers, but that simply demonstrates how difficult it has been for economics to make significant practical contributions in wider fields. Beggars shouldn't be so choosey...
Posted by: Justin at Oct 15, 2007 10:34:01 AM
Really? The end of mercantilist/zero-sum government economic policy was not positive? The massive decreases in economic volatility? The credit market changes which have allowed huge swaths of humanity to own their own businesses?
I would take, in nearly any year, the contributions the Econ winner over any of the other Nobels - peace prizes tend to be important, but ephemeral, while economic contributions are more lasting. The scientific prizes, and particularly medicine, are closer, but even there you have many prizes that are more for our understanding of how the world works (certainly a nobel human goal, sic intended) than for something practical.
Posted by: cure at Oct 15, 2007 10:47:39 AM
Perhaps Tyler is so snarky because in many many respects this is the anti-Austrian prize.
Posted by: Chris at Oct 15, 2007 10:52:37 AM
I question whether any of the winners have had direct effects on practical applications of auction theory. After all, Myerson formalized material originally developed by Vickrey and others. It's not clear that ANY of the gains in the real world depended at all on the high theory. Most of the math was unnecessary for the arguments themselves [on a related note, see Tyler's discussion of Freitas' caste model being unnecessary for her arguments.] Can someone point me to anything in the spectrum auction that would not have been possible if the core theorems had never been proven and had remained mere informal intuitions based on pre-existing work in auction theory?
It's interesting high theory and quite influential in the profession. But giving economics Nobels to this sort of work would be like giving Physics prizes for obscure theorems in group theory or topology.
Posted by: core at Oct 15, 2007 10:55:34 AM
"Will a libertarian ever win the nobel peace prize?"
Vernon Smith, Friedrich Hayek and Milton Friedman all won Nobels. Douglass North and Robert Lucas are pretty pro-market/anti-intervention, even if not outright libertarians.
Posted by: AMW at Oct 15, 2007 10:57:46 AM
Hurwicz is very much a Hayekian, a mathematically sophisticated Hayekian to be sure but his themes of incentive-comptability, information etc. are explicitly Hayekian. Thus, not an anti-Austrian prize at all.
Posted by: Alex Tabarrok at Oct 15, 2007 10:59:57 AM
Alex,
The "themes of incentive-comptability, information etc" are not the exclusive province of Hayekians. How do you think Maskin and Myerson's work (I have to admit to knowing it better than Hurwicz's) fits into the socialist calculation debate? Not on the Austrian side, I'd submit. A standard interpretation would be that these are tools for alleviating Hayek's concerns about the information content of prices. There is a reason why it's called mechanism *design* and not mechanism *spontaneous order*.
Posted by: Chris at Oct 15, 2007 11:07:23 AM
The point isn't, will a libertarian win the Nobel in Economics; that's not unlikely. However, Ayn Rand winning the Nobel Peace! Prize is unlikely in her lifetime, or the next ten.
Posted by: Jeff at Oct 15, 2007 11:09:33 AM
They asked Hayekian questions and got not-so-Hayekian answers.
Posted by: Michael Greinecker at Oct 15, 2007 11:10:45 AM
There is no doubt that the development of the "high" theory was essential for the subsequent development of auction designs that have been highly successful. If you don't believe me, take it from a famous auction designer: http://news.independent.co.uk/business/analysis_and_features/article277208.ece .
I stand by my point, the "end of mercantilist/zero-sum government economic policy" notwithstanding!
Posted by: Justin at Oct 15, 2007 11:11:44 AM
I am a bit surprised. I was strongly expecting a prize in an applied micro area: either international, IO or public finance. People like Bhagwati, Tirole etc. Hadn't expected a pure theory so soon after the game theory prize a couple of years ago.
As for mechanism design I haven't studied it in detail but it does seem to be one of those areas where the broad ideas seem interesting and relevant but most of the energy is spent on mathematical minutiae which tell us more about the models rather than the real world. Unfortunately a lot of economic theory is like this: the basic principles are useful but the marginal utility drops sharply as the sophistication increases.
Posted by: Dissector at Oct 15, 2007 11:15:47 AM
Michael,
Exactly.
Posted by: Chris Edmond at Oct 15, 2007 11:16:59 AM
I am surprised by Alex's comment. No doubt Hurwicz sees himself as the heir of Hayek, but a) the social problem is treated as fully about articulable information, b) it ignores the elements of Hayek brought out by Buchanan, c) it is indeed about "design," d) social order is seen as stemming from single nodes, unlike as in Hayek and Polanyi, and e) it is not obvious that the incentives of the designer are properly factored in; see for instance Hayek's *The Road to Serfdom*. To be sure, economists are used as consultants in auctions. But on auctions I stand by my words: "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." Just how much better do you think Sotheby's is run these days? Most of all, auctions are about marketing, not the static revelation of preferences.
Posted by: Tyler Cowen at Oct 15, 2007 11:24:53 AM
Justin,
Why should I accept Binmore's characterization? He is also a high theorist. I'm not doubting the value of auction theory in general. I'm doubting the value of most of the formal exercises that count as "results" in this literature. The applied auction work did not require ANY of the formal theorems that were proven to be true. If some of the core theorems were found to be reversed tomorrow (say, because of an error in the original math) none of the applied work need change.
It's like high-end game theory. Most of the useful applied stuff keys off the Prisoner's Dilemma or the War of the Sexes or similar simple games. Multiply layered solutions, complicated stability conditions, or complex appeals to subgame perfection remind me more of medieval disquisitions on angels and pinheads than scientific contributions.
Question: Why do none of the top applied empirical economists' research agendas rely on the results from high theory?
Levitt -- who is doing research on pricing -- admitted in his blog that he's completely unfamiliar with Hurwicz's work. As an economist, even I was taken aback by that revelation.
Posted by: core at Oct 15, 2007 11:35:08 AM
"They asked Hayekian questions and got not-so-Hayekian answers."
That's a fair reading but I would say it's an odd and ahistorical reading. If we compare Hayek with his opponents in the socialist calculation debate the mechanism design literature has Hayek winning hands-down and his opponents looking very naive. Thus on the first page of the explanation for the award the prize committee says:
"These results support Friedrich Hayek's (1945) argument that markets efficiently aggregate relevant private information."
Of course there are also results from mechanism design showing where markets break down. But what sets mechanism design apart from say the standard public finance literature is the attempt to create "market-like" institutions to solve some of these break downs.
Thus, I would say that mechanism design uses a deeper understanding and appreciation of how markets work to create market-like institutions to improve on markets, in the cases where standard markets do not work well.
Posted by: Alex Tabarrok at Oct 15, 2007 11:42:44 AM
