Home > The Economics Profession > Nobel Prize in neoclassical economics

Nobel Prize in neoclassical economics

from David Ruccio 

Last week’s announcement confirmed, once again, that it is—and should be renamed—the Nobel Prize in Neoclassical Economics.

But, of course, there are two groups of neoclassical economists: those who celebrate markets, assume they operate seamlessly, and almost always achieve efficient outcomes; and those who celebrate markets, assume they operate with a certain amount of “friction,” and often fail to achieve efficient outcomes. On the latter view, markets need some help—a guiding hand instead of the invisible hand—to find the appropriate equilibrium. 

The winners of this year’s prize—Peter Diamond, Dale Mortensen, and Christopher Pissarides—fall into the second category.

On many markets, buyers and sellers do not always make contact with one another immediately. This concerns, for example, employers who are looking for employees and workers who are trying to find jobs. 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. Simultaneously, there are both job vacancies and unemployment on the labor market.

In the world of DMP, an increase in either unemployment benefits or the costs of firing workers leads to a decline in job creation and higher unemployment. The recommendation, in this neoclassical view, is the development of better technologies to “match” available workers and jobs.

One problem is that productivity and workers’ wages have been diverging since the mid-1970s, leading up to the current crises. A second problem is that unemployment has skyrocketed in the current depression, and shows no signs of decreasing anytime soon.

All neoclassical economists can do with the DMP model is attempt to account for these problems via imperfect markets—search frictions, matching costs, and real-wage stickiness—and to recommend policies that create “better” labor power markets.

The alternative, of course, is to abolish the market allocation of labor power.

  1. Michael
    October 17, 2010 at 6:00 pm

    It is worthy of mention that DMP also implies that a social safety net is efficiency-increasing, by allowing liquidity-constrained workers to continue searching until a better match is found.

    Social safety nets continue to be both humane and producers of prosperity.

  2. Omahkohkiaayo
    October 17, 2010 at 11:51 pm

    What can one say about the central thesis of the work of DMP? Duh? That structures of supply of labor power often do not match structures of demand? Brilliant. That government is some kind of neutral and/or “efficiency-restoring” interventionist force in the economy? And what do some on the “left” have to offer? So many of them are so obsessed with appearing “respectable” to the “mainstreamers” and their journals that we get critiques that are but weak imitations of the real thing; just enough to carve out some academic “market niche” and keep the ol CVs notches piling up but not enough to say or write anything that could actually be read, understood and heaven forbid utilized by real oppressed peoples involved in real struggles in the real world.

    And where do all these forms of narrow, market niched, “identity politics” lead? I remember a time when, for example, straights played Gay to get out of going to Vietnam or participating in illegal and genocidal wars; now we have Gays playing straight in order to get in and become “acceptable” and willing tools of U.S. imperialism in illegal wars all over the globe.

    When my students praise Harvard and Yale, I point out that the likes of George Bush has degrees from both institutions and he is a total moron as well as war criminal. When they point out the Nobel Prize (in Peace, Economics, etc) I point out that war criminals like Kissinger got it, Obama got it for mere “potential” and the likes of Milton Friedman, a collaborator with fascism in Chile and elsewhere got it for Economics. That is what these awards are worth.

  3. October 18, 2010 at 2:09 am

    Those economists who are “recognized” for their prowess by the establishment generally receive a bone for being good dogs, saying what their masters want the populace to hear.
    And as we now, most “good” dogs are not very smart.

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