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Source link: http://archive.mises.org/7306/the-sveriges-riksbank-prize-in-economic-sciences-2007/

The Sveriges Riksbank Prize in Economic Sciences 2007

October 15, 2007 by

The Royal Swedish Academy of Sciences has decided to award The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2007 jointly to Leonid Hurwicz, University of Minnesota, Eric S. Maskin, Institute for Advanced Study, Princeton, and Roger B. Myerson, University of Chicago, “for having laid the foundations of mechanism design theory”.

Alex Tabarrok tries to explain mechanism design in terms your grandmother would understand.

Tyler Cowen has his doubts about the practicality of their results.

Peter Boettke discusses the relationship between Hurwicz and Hayek and links to Co-Nobel Prize winner Roger Myerson’s views on the connection between Hurwicz, Hayek, and Mises.

Barkley Rosser looks at the influence of the Committee Chair, Juergen Weibull, a game theorist, in the awarding of another prize for game theory so soon.

Rosser concludes:

“In any case, for those who are not aware of it, Hurwicz’s approach to mechanism design looks an awful lot like an effort to figure out how to do central planning right.”

As The New York Times noted:

“The prize winners’ groundbreaking work has been pivotal in assessing how institutions perform under such conditions [where markets supposedly work imperfectly], and in designing the best mechanism to make sure that goals, such as optimal social welfare or maximum private profit, are reached, the academy said. The winners’ work has helped determine whether government regulation may sometimes be necessary.”

As Thomas DiLorenzo sees it the prize was awarded to three mathematicians who clearly do not understand the freshman-level idea that benefits and costs are subjective, and that human beings tend to place different subjective values on goods and services.

Update: Following up on Dr. DiLorenzo’s post, David Bratton in the comments section points out that from Alex Tabarrok’s explication, the Nobel Laureates are reintroducing the notion that there is some kind of more perfect price other than what the buyer and seller may agree upon (something that the government would be very keen on when it comes to spectrum auctions in order to enlarge their coffers).

Moreover, The Financial Times article posted in the Austrian Forum implies a relationship between this prize and the global warming movement:

One of its uses for the future will come in environmental theory and policy, areas in which professor Maskin has been active this decade, where the mechanism of and domestic and international regulation will be crucial for its success in preventing global warming and other environmental degradation.”

{ 23 comments }

Bruce Koerber October 15, 2007 at 9:46 pm

One of the characteristics of a ‘Dark Age’ is the passing off as science of what can be termed pseudo-science. Awarding the Nobel Peace Prize to Al Gore for his politically motivated work on the subject of global warming is like a trumpet call announcing to the world that pseudo-science has risen to the top and is now endorsed by the corrupted class of academics.

It comes as no surprise to anyone who knows that subjectivism is the proper methodology of the social sciences. Economists since 1969 have been rewarded a similarly prestigious award annually for their application of empirical methods to economic issues, which is nothing but pseudo-science. We subjectivists also know the reason behind the selection process.

It is politically motivated. Empiricism props up the control economy.

Why is the Royal Swedish Academy considered reputable? I call into question their credibility. How can we start putting to the test their conclusions?

David Bratton October 15, 2007 at 9:46 pm

There is another thread in the forum about a Financial Times article on this topic.

These guys seem to be reintroducing the notion that there is some kind of more perfect price other than what the buyer and seller agree on.

David Bratton October 15, 2007 at 9:54 pm


Awarding the Nobel Peace Prize to Al Gore for his politically motivated work on the subject of global warming is like a trumpet call…

And now that you bring it up, the FT article implies that globalwarmism may have had something to do with this award as well.

One of its uses for the future will come in environmental theory and policy, areas in which professor Maskin has been active this decade, where the mechanism of and domestic and international regulation will be crucial for its success in preventing global warming and other environmental degradation.

Anthony October 15, 2007 at 10:43 pm

So what are the actual ‘innovations’ in Economics that this guy has achieved?

Stefan Karlsson October 16, 2007 at 8:52 am

As I point out here, the winners come to the conclusion that market mechanisms will stop people from making mutually advantageuos deals based on completely unrealistic assumptions and failure to understand basic concepts in Finance and Economics.

Joe Salerno October 16, 2007 at 2:04 pm

There is a rich silver lining in the awarding of the so-called Nobel Prize in Economics this year: modern economics has at long last been outed as a branch of applied mathematics by the august Swedish Central Bank itself. Maskin and Myerson both have Ph.D.’s in Applied Mathematics and Hurwicz held a position for many years at the University of Minnesota as professor of economics and mathematics. He was also a consultant to the notorious Rand Corporation, the Cold War think tank that was established in the late 1940′s with Air Force funds under the aegis of Douglas Aircraft Corp. It was the thinkers at RAND who revived the arcane mathematical discipline of game theory as a strategy of nuclear conflict. What is deliciously ironic about all this is that the bogus Nobel Prize in Economics that was established and funded by the Swedish Central Bank (not by the estate of Alfred Nobel) in 1969 to enhance the prestige and market value of economists has been bestowed on mathematicians for “mechanism design theory” which is based on a complete misconception of a core principle of economics. Specifically, our eminent mechanism design theorists fail to surmount the pons asinorum of freshman economics, which is to grasp the process by which the market itself transforms the subjective valuations of buyers and sellers into the objective phenomena of prices. Perhaps they should put aside their mathematical texts and read Menger and Boehm-Bawerk.

Peter Boettke October 16, 2007 at 2:43 pm

I agree with Joe, despite my WSJ editorial, which chose to emphasize a different point. But if you look at my original post on the issue from yesterday on Hurwicz and Hayek you will see that I don’t believe Hurwicz has met Hayek’s Challenge and I encourage younger Austrians to get serious about addressing this. A good start is Esteban Thomsen’s Prices and Knowledge, but it is just a start and more work needs to be done to not only address Hurwicz’s efforts, but also those of Stiglitz that follow later.

If that is something you want to do, working from inside of mechanism design theory would seem to be the place to start. The point Joe raised about how the market translates the subjective assessment of some into objection knowledge for others is RIGHT ON POINT. But how do we communicate that point in a way that will engage our colleagues in the field?

Pete

Bruce Koerber October 16, 2007 at 3:54 pm

They are weaving their web and trying their best to not leave any loose threads: ‘One of its uses for the future will come in environmental theory and policy, areas in which professor Maskin has been active this decade.’

Perhaps interconnecting these awards (Peace and Economics) assures credibility, or so they scheme.

But they are transparent and their motives are clear and their methods are static and irrelevant. They have institutionalized their ignorance and are hidden behind a name that sounds reputable (Royal Swedish Academy), empowered by a trust fund.

Was the founder of the trust fund, Alfred Nobel, aware at all of any methodology other than empiricism? Very unlikely.

Archaic? Proven over and over again!

Nelson October 16, 2007 at 4:16 pm

… the Nobel Laureates are reintroducing the notion that there is some kind of more perfect price other than what the buyer and seller may agree upon

This sometimes is indeed the case, particularly when it comes to dealing with externalities.

From the wikipedia:

Economic theory considers any voluntary exchange to be mutually beneficial to both parties, for example a buyer and seller. Any exchange, however, can result in additional positive or negative effects on third parties. Those who suffer from external costs do so involuntarily, while those who enjoy external benefits do so at no cost.

Anthony October 16, 2007 at 6:46 pm

What is ‘Hayek’s Challenge’ exactly?

David Bratton October 16, 2007 at 7:57 pm

Nelson:

I think the wiki article on externalities is flawed in that it assumes the existence of an objective means of judging and comparing outcomes in the market.

FYI: There is a lot written on the subject of externalities available on this web site.

Nelson October 16, 2007 at 9:22 pm

I think the wiki article on externalities is flawed in that it assumes the existence of an objective means of judging and comparing outcomes in the market.

The explanation of what an externality is is accurate enough. Your objection, regardless of truth value, does not render the accounting of externalities useless. Even if we are uncertain about the true cost of externalities we can make reasoned estimates and, by incorporating those costs into price, achieve an economic outcome that is closer to optimal than would otherwise be the case.

Artisan October 17, 2007 at 7:29 am

One of the main costs of externalization I can see is … the destruction of human free will!

The problem isn’t always easy though…

Is the vanishing (extermination) of a living specie always manageable by the free market, or even tolerable (Maybe it is sometimes, think of “Alien”)?

Free market actors certainly do have the choice to boycott some products if they are well informed of a displeasing situation, like the catastrophic vanishing of some unique marine specie …. And the proper customer information can be delivered by the different watchdog “clean environment” – independent quality agencies… if society feels like it. BUT: the trouble is the TIME factor though…

Everybody knows destruction goes quicker than construction…

Can the proper information come to consumers quickly enough to save a specie which, once disappeared, will not return with people’s awareness process?

So I would advocate to define a libertarian collective right of living for species, to take care of that objection…

Artisan October 17, 2007 at 10:06 am

Practically it goes like this:

This libertarian right is basically nothing more than to give a homesteading right on the specie as a “study resource” for biologists.

So yes, biologists in the free market could prevent some industry to just disseminate a specie if they built a strong case in court, why not…

No need for government to prevent “evil externalization” as far as I can see.

James Pierce October 17, 2007 at 10:47 am

Question: How much credence does a Nobel prize have when Al Gore is named a recipient?
Answer: About as much as when Miss [State] is named Miss America.
Point: Many “qualified” candidates are overlooked in a beauty pagent, rendering the pagent basically meaningless. I no longer have any respect for the Nobel prizes.

Nelson October 17, 2007 at 4:06 pm

So yes, biologists in the free market could prevent some industry to just disseminate a specie if they built a strong case in court

Even this solution is imperfect. Courts judge on actions. The biologists may receive some kind of compensation (perhaps non-biologists too) for the elimination of a species, but it would not prevent the elimination of the species (due to the time factor you already mentioned).

David Bratton October 17, 2007 at 8:46 pm


Your objection, regardless of truth value, does not render the accounting of externalities useless.

Yes it does. Accounting implies counting. For that you need a scale.


Even if we are uncertain about the true cost of externalities we can make reasoned estimates and, by incorporating those costs into price, achieve an economic outcome that is closer to optimal than would otherwise be the case.

You’ve put your finger on our disagreement. I deny that we can make those reasoned estimates without some standard by which to judge what is reasonable. What we can do is apply interests and prejudices to benefit one party or another. And that’s what always happens when an authority interferes with the market.

David Bratton October 17, 2007 at 8:56 pm


Even this solution is imperfect. Courts judge on actions. The biologists may receive some kind of compensation (perhaps non-biologists too) for the elimination of a species, but it would not prevent the elimination of the species (due to the time factor you already mentioned).

You are right. There is no system that will guarantee that no species ever goes extinct. Free market proponents do not claim that all outcomes in a free society will be positive. We only claim that all other systems are worse.

As for saving species: everything has a cost. Were you aware that the monkey that caused AIDS was on the endangered species list?

TokyoTom October 18, 2007 at 5:12 am

David, you forget that presently markets are not free, precisely because we have governments that interfer with the processes by which people develop informal mechanisms (private and common property rights, contracts, rules and customs etc.) to reduce externalities.

We can be aware of that interference and figure out how to ameliorate it in its various manifestations. For example, we can replace failed fishery regimes within our EEZ with individual transferable quotas (ITQs), at least as a step in the right direction.

Outside our borders, we can use the state to facilitate multiparty discussions that will necessarily involve other states, such as ocean fisheries, seabed petroleum and climate change).

Perhaps the most difficult problems are those that arise from the pressures exerted by global markets on localized resources in foreign countries that are not effectively owned (through lack of clear or enforceable property rights, or cases of “government” ownership) in foreign countries.

Do you suggest that ignoring these problems is the most effective way of resolving them?

Nelson October 18, 2007 at 8:52 am

Even if we are uncertain about the true cost of externalities we can make reasoned estimates and, by incorporating those costs into price, achieve an economic outcome that is closer to optimal than would otherwise be the case.

You’ve put your finger on our disagreement. I deny that we can make those reasoned estimates without some standard by which to judge what is reasonable. What we can do is apply interests and prejudices to benefit one party or another. And that’s what always happens when an authority interferes with the market.

I say there are standards. For example, one way of measuring the cost of polluting a lake is to take inventory of the creatures who depend on that lake and use their market price to tally up the costs of their deaths. Another way is to calculate the cost of cleaning up pollution where it is possible to do so.

More generally I’ve already said votes are an objective measurement. One argument I’ve seen against votes is they have no cost. But that is not true. To cast a vote, you are removing your option to vote for the other choices. Also you have to take time to actually vote (if voting had NO cost, surely we’d have a much higher turnout). Voting has costs, but even if the cost were zero, you could also say that the pollution would have a negative net cost (profit) to the polluting party but a great cost to everyone else.

Not taking into account certain fundamentals like externalities and free riders is where Austrian economists fail. If they can do nothing other than wave their hands and pretend these problems don’t exist (or should be ignored) then they fail and their system should be abandoned.

Anthony October 18, 2007 at 6:22 pm

Nelson, please share which Austrian economists you’ve read on the matter.

David Bratton October 18, 2007 at 6:25 pm

TokyoTom:


David, you forget that presently markets are not free

I can assure you I do no such thing.


We can be aware of that interference and figure out how to ameliorate it in its various manifestations. For example, we can replace failed fishery regimes within our EEZ with individual transferable quotas (ITQs), at least as a step in the right direction.

When you say “we” what you mean is government. Why don’t we just stop causing the problem? The problem is governments that will not permit the development of private property rights in the ocean.


Outside our borders, we can use the state to facilitate multiparty discussions that will necessarily involve other states, such as ocean fisheries, seabed petroleum and climate change).

States acting as traders in a market? That’s a completely utopian notion. States wield guns, exact taxes, print money, and make deals with other governments. They do not engage in free trade with each other. It’s a political impossibility for them – especially democratic government.


Perhaps the most difficult problems are those that arise from the pressures exerted by global markets on localized resources in foreign countries that are not effectively owned (through lack of clear or enforceable property rights, or cases of “government” ownership) in foreign countries.

So… the market is punishing them?

Nelson October 18, 2007 at 7:07 pm

Nelson, please share which Austrian economists you’ve read on the matter.

You mean besides the blog posters? I read a bit of Rothbard, who wants a system of “judges, juries, or arbitrators who are expert in the particular resource or industry in question” to regulate through torts and points out a few problems with this (such as difficulty of proof) without really addressing them and Stephen P. Halbrook who is much easier to read, but says obviously incorrect things such as “The theory of externalities has as much relevance to economics as a theory on how the alignment of planets affects people’s moods.”

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