Arnold Kling  

The Latest Economics Nobel

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As Tyler reports, it goes to Peter A. Diamond (unqualified to be a Fed governor, according to some self-styled experts), Date T. Mortensen, and Christopher A. Pissarides. A few comments.

1. This appears to be for theories of labor matching. Diamond has much more on his resume, but the others do not.

2. One could easily have added several other economists to the list of contributors to this notion. Robert Hall and Robert Shimer, for two.

3. I wrote,


Many economists believe that it is fruitful to study the labor market as a "matching market." There is a voluminous literature that adopts this perspective. It is tempting to describe good economic times as periods when it is easy to match worker with vacancies and to describe bad economic times as periods in which matches are difficult to make. However, such stories do not fit with the sense that we have that recessions involve a general excess supply of labor, not just a matching problem.

That was this past July. Now, I will have to come up with a more careful consideration of the matching paradigm.

On the one hand, I like the approach. You may recall the "game" I describe (in my expert failure piece, for example), in which there are two decks of cards, one with a list of workers and one with a list of jobs.

On the other hand, it fails to capture some important dynamics about the problem of creating patterns of sustainable specialization and trade. In the real world, the jobs are not just sitting out there, looking for workers. Some job openings are like that. However, a lot of jobs first appear when (a) entrepreneurs start new firms or (b) existing businesses launch new projects or seek new capabilities. Not surprisingly, most of the increases in employment come from fast-growing firms, not from stable firms. My guess is that somewhere in the vast literature on job search there are papers that include growth and decline of firms, but my impression is that the basic model is not about that. I could be wrong.

If you read this paper by Diamond (good luck), you can get a sense that he is talking about PSST. But I think of entrepreneurs as having to create production opportunities and that those opportunities last until something changes to make them no longer profitable. For Diamond, the production opportunities "arrive" randomly, and they seem to disappear as soon as they are realized. Maybe the math would be the same for the economy as I think about it, but I can't tell.


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COMMENTS (6 to date)
wcudon writes:

Response to the Latest Economics Nobel

I agree with the statement that it is beneficial to study labor markets and the matching principal. However, I feel that economist that branch out and delve into other subjects would also be an effective field of study. I say this because labor matching helps put workers where they are qualified to cut down on training and thus to decrease cost and increase productivity. However, if people were matched in their fields all the time, there would be no growth and people would not develop a variety of skills.

AJ writes:

"But I think of entrepreneurs as having to create production opportunities and that those opportunities last until something changes to make them no longer profitable. For Diamond, the production opportunities "arrive" randomly, and they seem to disappear as soon as they are realized. Maybe the math would be the same for the economy as I think about it, but I can't tell."

This distinction is absolutely critical in economic policies. It may not make much difference to the math in this one model, but the thinking leads to very very different views of growth economics.

Peter Diamond comes from the slightly leftist M.I.T. tradition of downplaying the role of entrepreneurial opportunity creation (entrepreneurial meaning early stage firm, start-up or within existing company). All business activity in any firm is constantly evolving to seize new or changing opportunities. I always thought that was one of Robert Hall's (as well as others) particular strength in that he got that.

In some ways, Peter Diamond is like Obama in that neither really has much grasp on where private sector jobs and profits really come from.

Huh writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog.--Econlib Ed.]

david writes:

Latest from the self-styled expert:

‘“While the Nobel Prize for Economics is a significant recognition, the Royal Swedish Academy of Sciences does not determine who is qualified to serve on the Board of Governors,” Sen. Richard Shelby (R., Ala.) said in a statement provided by his office.

The good Senator from Alabama is, of course, an indisputably better judge of qualifications...

[Link fixed--Econlib Ed.]

Rebecca Burlingame writes:

Long before the labor market got to its present dilemma, entrepreneurs were trying to create businesses that - for one reason or another, simply would not 'take'. Much of the economic activity of the early 21st century was those false starts. Some of what they wanted to provide, people actually needed but could not presently buy, whereas some of what they would have provided people no longer needed. A lot of people will not try again for they do not have the money to do so. How do people offer economic options to one another, without going bankrupt in the effort?

fundamentalist writes:

A few months ago Cowen posted on his blog an article in which he claimed that a Mortensen and Pissarides paper was the best in the past 20 years, so I had to read it. What struck me about it was how everything hung on price shocks, but they made no effort to explain those shocks. Hayek's Ricardo Effect explains the price shocks very well, which makes the paper nothing more than filling in the blanks left by Hayek on how the Ricardo Effect works. The paper is "Job Creation and Job Destruction in the Theory of Unemployment."

PS, The Adam Smith Institute has an interesting comment on the price at http://www.adamsmith.org/blog/misc/tell-me-something-i-don%27t-know/ Here's a section:

It is said that when the Nobel Prize in economics was first established, prizes were given for using economics to teach people things they didn’t already know, e.g., that economic growth might increase inequality, that depressions are caused by central banks, that macroeconomic stabilization policy doesn’t work, etc. Now, prizes are given to economists who teach other economists things that regular people already know — politicians are self-interested, you shouldn’t put all your eggs in one basket, institutions matter, different people know different things, etc.
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