Congratulations…but let’s not over do it
I was waiting to write something about today’s announcement of the Nobel Memorial Prize in Economics being awarded to Diamond, Mortensen, and Pissarides. Josh has already provided his thoughts and provided links to comments by Ed Glaeser and Steve Levitt, respectively. As they describe it, the honorees’ research provides a theory of unemployment, explaining why we see willing buyers and willing sellers of labor go without finding trading partners, thus resulting in persistent unemployment. The Nobel committee paints it a bit more broadly, explaining:
Since the search process requires time and resources, it creates frictions in the market. On such search markets, the demands of some buyers will not be met, while some sellers cannot sell as much as they would wish.
This basic lesson certainly has broader implications for the workings of markets and the build-ups or mismatches of production capacity, inventories, and consumer demand more generally. In that sense, I believe the honorees provided much more than simply a theory of unemployment, though that is certainly where their particular applications have focused.
My colleague, Peter Klein, over at O&M has offered a little more crude assessment of the economics Nobel Prize in general, and this year’s award in particular. In short, Peter suggests the Nobel Prize in economics has become an award for those who most elegantly state (or prove) the obvious. That there are information and search costs that keep buyers and sellers from finding one another and efficiently taking advantage of all possible gains from trade is one of those things you don’t really need a PhD in economics to figure out. (Perhaps that’s why it isn’t taught much in Econ 101…overestimating students’ grasp of the obvious.)
Indeed, this idea (of search costs) was already awarded the Nobel Prize at least once, in 1991 when Ronald Coase received the prize “for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy” (see here). The work of this year’s recipients is simply one specific application of Coase’s theory, which identified the cost of searching out trading parties and determining relevant prices as part of the set of costs that affect behavior (and boundaries) in the market.
So, I am very delighted that Messrs. Diamond, Mortensen and Pissarides have received this honor, further illustrating the importance of understanding transaction costs (or more specifically, search costs in this case) and their implications for the workings of the economic system.
That said, I am appalled at the New York Times report today that suggests the action of the Nobel Prize committee somehow qualifies Peter Diamond to serve on the Federal Reserve Board. While Republicans may be making too little of Mr. Diamond’s experience, I don’t believe they have suggested his academic research is sub-par. The Nobel Prize committee may have added weight to the idea that Mr. Diamond’s (and his fellow honorees’) research has made significant contribution to the field, it bears nothing on the relevance of that research–or on Mr. Diamond’s personal experience–for setting federal monetary policy, the role of the Federal Reserve Board.
It is a shame that, for the second year in a row, Alfred Nobel’s memory is being abused as a battering ram for partisan politics in the US. We may expect that more of the Peace Prize. And while I would like to think that was not the intent of the selection committee for the 2010 Economics prize, its use to that effect by the NYT and others detracts from whatever significance the Prize imbues to the research contribution of its recipients.