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Monday, October 22, 2007

Nobel Prize for Superfluous Economics

I've never been a fan of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Giving it to Milton Friedman at all and to the Chicago School folks 80 times is enough evidence the Nobel committee doesn't have intellectual sobriety. In addition to Friedman, they honored the mathematical sophistry of the authors of the Long-Term Capital Finance debacle, Robert Mundell before he took Argentina into collapse, and various others whose work was apparently incomprehensible enough to seem intelligent. Also honored has been the now-defunct Rational Expectationist school, whose presumption of omniscience on the part of all actors was a remarkable leap in search of the market.

John Kenneth Galbraith, Michal Kalecki, Joan Robinson and others of the first rank have been passed up. Thus I was predisposed to dismissing all Nobel recipients since Tobin until, of all things, they gave it to Joseph Stiglitz in 2001. Muhammad Yunus, the pioneer of micro-lending got a Nobel last year. But it was the Peace Prize.

The Nobel name has been used in general to glorify a market-first economic orthodoxy. The current winners Leonid Hurwicz, Eric Maskin and Roger Myerson, have, as I understand it, concentrated on a form of game theory called mechanism design whereby they attempted to construct models that could generate optimal outcomes in terms of public goods from market-type situations.

This is complicated, since the fact is that markets do not create public goods well. As Paul Samuelson said in 1954, no decentralized system will work for the production of public goods. It was apparently the work of the Nobel winners to try to design one.

Until they get it right and it becomes acceptable to the big guys in the private sector, we need to step back from admiring the intellectual dexterity and realize time is getting short. We need to establish clear rules for markets or they are not going to work. We're going to have unregulated financial markets hurting lots of people and eventually breaking down (unless the Fed steps in to bail them out). Oh.

We need to begin structuring and creating markets that will provide water, food and security to the destitute and environmental stability for the survival of the human race. Markets are powerful, but if they are left to their own devices, they go off in the wrong direction. The most basic game in Game Theory, the Prisoner's Dilemma, demonstrates that self-interest unregulated leads to sub-optimal results.

Against the backdrop of a burning world, the Nobel committee of the Swedish central bank is rewarding academic Nero.

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