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When markets fail

from David Ruccio (who also sends us to Arindrajit Dube)

The 2012 Nobel Prize in Economics (aka The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2012) was awarded today to Alvin E. Roth and Lloyd S. Shapley for their contributions to the “theory of stable allocations and the practice of market design.”

It’s called market design. But the argument I made just last year was that what Roth and others have been doing (based on Shapley’s earlier work in cooperative game theory) is attempting to design—for doctors, schools, kidneys, and so on—something other than markets. The nonmarket, matching mechanisms they propose are useful precisely when markets fail or don’t exist, which is often.

One way of understanding this year’s Nobel Prize in Economics, then, is as a signal to mainstream economists that it’s time to give up the idea of “the market” and start thinking about the existence (now and in the past) and the possibility (in the future) of a wide variety of both market and nonmarket mechanisms for exchanging goods and services and coordinating decisionmaking.

  1. October 16, 2012 at 2:47 pm

    One fine day they will award a Nobel to someone who explains why the land market fails to allocate to best use – and its very simple solution.

  2. October 16, 2012 at 3:03 pm

    “The market” ideal, like most ideals, come up short when applied to the real world.
    It is a generalized notion based on particular observations, such as feeling the shape of the trunk of the elephant and believing that you are dealing with the front end of a snake suspended from a tree.
    Economists, beware of generalizations!

  3. BC
    October 16, 2012 at 4:05 pm

    In the US, total gov’t spending, including personal transfers, is an equivalent to 100% of private wages and salaries and 54% of private GDP (GDP less total gov’t spending). Cumulatively, spending for household debt service, private medical services, and total gov’t spending is an equivalent to over 50% of nominal GDP and more than 80% of private GDP.

    Therefore, “the market” is household debt service (the “rentier tax”), “health care” (onerous regressive tax on small employers and the bottom 90% of employees), and gov’t equivalent to over half of GDP and more than 80% of private GDP.

    Under these conditions, “the market” cannot grow unless households take on still more debt, there is an increasing number of sick people (the more and the sicker the better), and gov’t increases spending incrementally (consisting of spending on war, food stamps, unemployment benefits, etc., over the past 10-12 years).

    Had “health care” and gov’t (“war”) spending grown at the overall rate of GDP since ’00, trend nominal GDP would have grown at 1% instead of 3.7%. Since ’08, nominal GDP has averaged 2% with no increase in gov’t spending since ’10, and real GDP per capita is negative (the 10-year change or real private GDP per capita is negative).

    Needless to say, a society, economy, and “market” that depends increasingly on aging and illness, war, and indebtedness of the population to “grow the economy” is a society and “market” in decline.

  4. Ken Zimmerman
    October 16, 2012 at 5:20 pm

    Really depends on how you conceive of a market. Or more accurately how the actors involved consider the market. For them what are they involved in and what is its purpose? Economists seldom ask these questions since most assume they know what a market is.and what it’s for. Commonly for actors involved a market is merely a coordination device to secure some good or service through an agreed to price. It is cooperative and generally must meet the needs of all actors involved to seem it is operating correctly.

    • BC
      October 16, 2012 at 6:51 pm

      Ken, et al., the Fortune 25-100 to 300 firms have total revenues equivalent to 40-75% to 100% of private US GDP. Increasingly, the Fortune 100-300 firms are “the (global) market”, which requires 73 Mbbl/day of crude oil (90 Mbbl/day of “petroleum”) and an imperial US military costing the US $800 billion to $1 trillion per year to secure.

      Also note that US corporate profits after tax are at nearly 11% of GDP, a record high going back to the late 1920s. Historically, the average of profits to GDP is 6%, and 4.5% at recessionary and bear market troughs. Were profits/GDP to decline as in the past to the average level of a recessionary trough, the US faces another episode like ’08-’09, during which the decline in profits/GDP will be 6%, or nearly $1 trillion during the next recession.

      Moreover, the U rate increases 50-100%+ during recessions, implying that the U rate during the next recession could reach 12-16%, with the US fiscal deficit reaching, or exceeding, 100% of receipts after Social Security and Medicare payroll receipts.

      We not only face a fiscal cliff, but below the cliff is a giant fiscal black hole.

  5. Bruce E. Woych
    October 16, 2012 at 9:45 pm

    This title sounds like a sophisticated and clever way to assemble equilibrium theory mechanics into rational choice game theory.
    Legitimating with prestige, a new lexicon for an alternate Neo-classical expression of
    market outcome as social arbitrator?

    “…critics argue that the prestige of the Prize in Economics derives in part from its association with the Nobel Prizes, an association that has often been a source of controversy. Among them is the Swedish human rights lawyer Peter Nobel, a great-grandson of Ludvig Nobel.[26] Nobel criticizes the awarding institution of misusing his family’s name, and states that no member of the Nobel family has ever had the intention of establishing a prize in economics.[27]”
    excerpted from:
    Nobel Memorial Prize in Economic Sciences (read it ALL)
    from above:
    “The 2012 Nobel Prize in Economics (aka The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2012)”

    This is exactly wrong. It should be reversed:
    The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2012
    (AKA: The Nobel Prize in Economics)
    This is cultural capture…

    “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is the only non-Nobel prize that has ever been associated officially with the Nobel Foundation.”

  6. Jason
    October 17, 2012 at 7:54 am

    Science is Discovery. Is this discovery or just formalization of fantasy?

  7. Bruce E. Woych
    October 17, 2012 at 8:20 pm

    The Nobel War Prize

    By Julie Lévesque
    Global Research, October 17, 2012


  8. October 18, 2012 at 12:06 pm

    A view from Sweden may add to our dialogue: The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel can,as I see it, essentially be seen as an attempt to further strengthen the (close to) monopoly position of neoclassical theory at a global level. The award contributes to the legitimacy of mainstream theory.
    One of the early winners of this award, Gunnar Myrdal, argued that “values are always with us” in social science research and education. This means that economics is science in some sense but at the same time ideology. It can therefore be argued that the monopoly for neoclassical theory in economics education is not compatible with normal ideas of democracy. A university department should not play the role of a political propaganda center.
    This years award is perhaps not so sensitive in ideological terms. But it can be interpreted in paradigm terms. Reasoning in terms of “matching” can be regarded as a step away from neoclassical market and optimization theory although the neoclassical economists do not want us to make that interpretation. Those of us who prefer institutional economics have since long looked upon interaction and decision-making in terms of “matching”, “appropriateness” and even “pattern recognition”. These ideas are not new. James G. March and Johan P. Olsen (The Free Press, New York 1989) refers to a “logic of appropriateness” as an example.
    But institutional economic theory is much more than this element. Hopefully the members of the award committee will at some stage understand that economics – for ideological and other reasons – has to become pluralistic with respect to paradigms.
    Peter Söderbaum

    • October 18, 2012 at 2:30 pm

      Peter, I am of course sympathetic to what you are saying about this year’s Nobel Prize, which is like the US claiming freedom of speech because it tolerates the occasional celebrity critic like Noam Chomsky. Likewise “matching” as a step away from optimisation theory, though in electronics it is more a way of avoiding diminishing returns, with the counter-intuitive moral for the 1% that for maximum productive throughput their resistance to supply of money should match that of the demand for it.

      It is your final point I find somewhat ambiguous. It seems to me economics has four different functional purposes (not just the two of neoclassical supply and demand, but biological and technical development) and two more imposed by nature (sustainability) and commercial policy (i.e. purpose of money supply). What I am not clear about is whether you are seeing different paradigms as different schools of economics or different aspects of a complex economic system. In my systematic view of an economy, different paradigms represent different functional purposes operating on different timescales within the system of economic institutions, most of which do not figure and cannot be differentiated in a neoclassical paradigm dominated by the policy of “money-making”.

      • October 19, 2012 at 10:56 am

        Thank you for this comment and question. The word ‘paradigm’ is used as ‘theoretical perspective’ in the sense of conceptual framework and relationships between concepts. In the case of neoclassical theory Economic Man assumption is one starting point and profit-maximizing firms another. The focus is on markets in mechanistic terms of supply and demand. The economy is limited to markets for commodities and factors of production. Concepts are based on simplified assumptions that are at the same time conceptual and ideological. One way of socially constructing another paradigm (theoretical perspective) is to start with a different idea of the human being, of organization, of market and of the economy. Social economics, feminist economics and ecological economics are examples of this.
        Pluralism means that we should replace the idea of ‘paradigm-shift’ with ‘pardigm co-existence’. Since we are not only dealing with scientific but also ideological perspectives no paradigm can claim monopoly. But there may still be dominance of one paradigm and also a ‘shift in dominant paradigm’.
        Economists who celebrate competition in markets should move away from technocracy and dictatorship toward democracy and awards such as the one discussed could play a role in this. This means, among other things, that the standardization of economics textbooks which began in the 1960s with Paul Samuelson’s ‘Economics’ and continued with Gregory Mankiw´s ‘Principles of Economics’ is not exclusively a good thing. I see it as a global problem at a time when we need some new thinking.

      • October 20, 2012 at 11:42 am

        Peter, thanks for your very helpful response to my query. So I’ve started (and agree) with your “different ideas” on four fundamentals, but offer catholic (all-inclusive) economics as an example of a paradigm AT A DIFFERENT LEVEL. In short, I understand Kuhn’s paradigm shift as not a shift in direction of focus but as a shift in depth of focus, like going from a google map of the world which is mainly outlines to close-ups including more and more local detail. In compiling such a map one goes from knowledge of concrete details to more and more abstract understanding: ultimately to a method of systems analysis generating both objective and technical understanding as well as the specialist knowledge produced by Humean scientific method. This was what I was trying to get at when I distinguished “the economy” from “different schools of economics”.

        On ideology, again I largely agree with you, if in terms of unacknowledged purpose achieved by omission, bias and lies. What I might caution is that the word doesn’t always seem to be used that way. In a Spanish paper I read it seemed to be understood as doctrine logically formalising ideas. Over-all, the choice seems to be between money-making as a cover for physical domination and true understanding of terrestrial reality as the basis for choice in sustainable policy-making. Within the latter, there is room and indeed need for co-existence of second-order paradigms explicitly focussed on particular functions. With the money-making paradigm dominant, however, of course I too am distressed by global standardisation on its not even Humean-science ideological texts.

    • Bruce E. Woych
      October 18, 2012 at 3:25 pm

      Thank you Peter. The view from Sweden is most welcome and appreciated.

      To add to your implicit contentions of a bias to the award, beyond the obvious; it is critical to look at the politics of the time-span and both the continuity and the changes that accrued over time. (One could argue that most of the early awards went to theories that dominated their day but have since proven to be core values to the crashing magnitudes we see today in dependency markets and their domination by finance. It is not a simple coincidence that “The institution with the most affiliated Nobel laureates in Economics is the University of Chicago, which has 26 affiliated laureates.[9]” http://en.wikipedia.org/wiki/List_of_Nobel_laureates_in_Economics. It is instructive and insightful to see the listing of the laureates and the series that exists from their contributions being recognized. (There are certainly exceptions, but than this could be interpreted as distinctions without an authentic departure from the paradigm by critical skeptics. Be that as it may, there is plenty of room to wonder why true “peace” economics or “misery & poverty” resolutions are not the primary focus in the line of intentionality and tradition of the Nobel heritage as the world has perceived it. Supply side formulas that coordinate the neo-conservative balance of forces appear as a step ladder to our present complex failures, and the alternatives are often simply the new norm of seeing the obvious flaws in the status quo).

      The economics of power and global markets dominate; and perhaps with some exception these awards have failed to capture the exploitation of millions upon millions of people over the past several decades; and trillions of dollars in capital flight, asymmetrical market schemes and grand scale pump and dump escalations that have dominated the progression of control and coincidental deterioration of human and natural resources.

      Economics as Warfare is still the predominant undercurrent to both class and global market mechanisms of control that emerge from any objective study of these very “subjective” technical blueprints that present as science to the naive and misinformed who fall victim to a cleverly decorated appeal to authority and legitimation.

      It is easy to soften this stance, but better to present it ruthlessly honest and let the exceptions speak for themselves.

      • October 19, 2012 at 11:19 am

        I agree with your idea that there is a bias in the award and that it is meaningful to take a look at the list of so called Nobel laureates in economics. (But the ‘fact’ that ideology is involved in economics means that some ‘bias’ can not be avoided.) Based on my scientific experiences and my ideological orientation the many rewards to University of Chicago is something that I regret (to use an understatement).
        It appears that members of the award committee only know about positivism as a theory of science. They believe that economic theory can and should be separated (as far as possible) from politics. But since such separation is not possible (considering that ideology is involved) I think that ideology has to be taken seriously in the selection of candidates. In the present situation of ecological and financial crises, it is a bit cynical to avoid these issues. Peace and poverty should similarly be taken seriously as you suggest. Critical assessments of neoclassical economic theory is another urgent category to consider for the committee.
        Taking ideology seriously would also mean that the economics prize gets closer to the Nobel peace prize. Here, I also like to mention that another international prize, The Right Livelihood Award is administered in Sweden. This award focuses on development in a broad sense and is not limited to economics. It is sometimes referred to as an “alternative Nobel Prize” and no doubt my sympathies are with this award.

      • Bruce E. Woych
        October 20, 2012 at 4:32 am

        Peter: I respect what you state but I don’t think the purpose and intentionality is honest behind these trumped up awards, and I do not think that ideology as systems withing human cognitive biases are actually in question. The politicized world has become something of a tactical and strategic battle field of ideas and actions that are cloaked in ideas (and false ideals). Furthermore, the “set-up” created by campaigns of money driven “front groups” have become incredibly sophisticated at mass media manipulation and very clever posturing under prestigious brand-names. The “market” mentality of the ne0-conservatives is well practiced and mass marketing is an advertizing skill that has become the foundation for political campaigns. The bought and sold brand names disguise reality behind a mask of institutional authority, and this has also become a widespread practice that is a false face presentation of ideas (ideology) for “…other then…” purposes and intentions.

        Add to this the fact that since the 1950s the idea of economic war was the foundation to the cold war and today those methods of false flags and deceit are simply the real politik of the global power forces in play. The Nobel Prize is more than just an institutional prize…it was built out of the counter-intuitive proceeds, profits and (some would say) guilty wealth of armaments.
        It was a monument to turning back from war and creating incentives for a peaceful world through humanitarian achievements. The “CAPTURE” of this award through market forces bent upon political war and market domination of global economies deserves no such recognition and it is cultural theft…writ large. While it has become somewhat accepted by some degree of historic ignorance and sheer audacity of presentation…it does not deserve to hold this honorable title any more than an Olympian who chemically induces a championship performance. It is fake at the foundation and it is a false flag for hypocrisy.

        Thank you so much for mentioning the “Right Livelihood Award” from Sweden. Perhaps this can be an award that alternative economists outside the market mainstream can honestly call their own (when and if) they will strive to achieve it in practice.
        (4) perhaps someone can point out the “economist” in this list?

      • pesod
        October 23, 2012 at 8:24 am

        I agree that extreme market mentality is a big problem in most parts of the world but perhaps more accentuated in the US. I also agree with you when you argue that the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel can be seen as a case of cultural theft. The reference to Alfred Nobel should somehow be deleted. At one place in your comment you refer to “ideology” as “a false representation of ideas” however. I have noted before that ‘ideology’ in the USA is often used in a negative sense. And you are informing us about how you use ideology so in that sense it is OK. But for me ‘ideology’ stands for ‘means-ends philosophy’ in a broad sense. It is about where you are (present position), where you want to go (future positions) and how to get there (strategies). In that sense not only political parties but also you and I as individuals are necessarily guided by our ideological orientations. Such ideological orientations are normally fragmentary and uncertain but still useful in guiding action. They differ from mathematical objective functions of the kind normally used in neoclassical economic theory.
        Democracy and ideology has to enter into economics. If the dominance of a specific ideologi (Neo-liberalism for example) is among factors behind present unsustainable trends, economists as scholars should not avoid the word ‘ideology’. We should rather discuss both those ideological orientations that represent problems and those ideological orientations that can be helpful, such as specific interpretations of sustainable development. And we should socially construct a conceptual framework for economics where individuals and organizations as actors become visible and responsible. Political Economic Person (PEP) assumptions as an alternative to neoclassical Economic Man is an example of this.
        Peter Söderbaum

      • Bruce E. Woych
        October 23, 2012 at 8:22 pm

        Greetings to You, Peter:
        On the subject of ideology I should point out that it is frequently manipulated in political economy for its rhetorical powers derived from (legitimate) Semantic domains of authentic thinking based upon core value ideas and systemic beliefs. If an individual is a student of philosophy or scholar then these may well be formal or informal “systems of perceiving” or the very makings of a cognitive reality. This is why it harnesses such power intellectually, but other modalities such as nationalism and religious enculturation have a profound influence upon the symbols and non-linguistic aspects of realization and phenomenological consciousness that derive from some ideological bias…or preconceived template of a cultural and social order. When these are “captured” for purposes that facilitate a politicization process, mass social-cultural influences become technically a moral “bounded rationality” and can easily mask what is a cognitive capture and “covert” propaganda tactic. The political abuse of ideology goes so far as to create mythic portrayals of fundamental memberships in society
        (and certainly we have seen a massive display of this in the previous century).

        Are we at it again????

        I agree with you that authentic ideologies of humanity are the wellspring for the human condition, but the human use and abuse of other human beings are both the curse of humanity as well as the rudiments for a politically balanced cosmological society. Much like the ideas from the enlightenment they are easily co-opted for manipulation by unscrupulous people who bankrupt “utilitarianism” as well as religion or philosophy for their own ends.

        I should mention that I am a cultural anthropologist and perhaps have two different chapter available for ideological realities. One would certainly be the beauty and fascination of the spectrum that you see along with its history of ideas and future potential idealism in a prism of appreciation and respect.

        The other is what we are dealing with in real time and where options are no longer pretty.

  9. Bruce E. Woych
    October 18, 2012 at 5:16 pm

    Nobels Pile Up for Chicago, but Is the Glory Gone?
    Published: November 04, 1993

    “The University of Chicago, the home of great conservative economists like Milton Friedman and George J. Stigler, has had an extraordinary run. Just how extraordinary was underscored last month when Robert W. Fogel, an economist who revised history’s view of slavery, took the university’s fourth Nobel Prize in economics in four years. ”
    “Time on the Cross: The Economics of American Negro Slavery (1974) is a book by the economists Robert William Fogel and Stanley L. Engerman. Asserting that slavery was an economically viable institution that had some benefits for African Americans, the book was reprinted in 1995 at its twentieth anniversary. First published a decade after the landmark Civil Rights Act of 1964, the book contradicted contemporary assessments of the effects of slavery on African Americans in the American South before the Civil War.”

  10. Bruce E. Woych
    October 20, 2012 at 4:38 am

    For those who may not test the links: Here is the laureates from “economics” that have been selected for the “Right Livelihood Award”


  11. robert r locke
    October 20, 2012 at 8:17 am

    Time on the Cross is certainly one of the most discredited books in American History. An American History I.A. Newby, expert on the History of the South, told me that there is no truth in the book at all. So how could the economists be at such odds with historians? I’ll tell you, economists are lousy historians and their science has very little to say about what happens in the real-world.

  12. Bruce E. Woych
    October 23, 2012 at 8:58 pm

    Bounded Rationality

    Cognitive Bias

    see for example:
    Searching for the Sustainable City: Competing Philosophical Rationales and Processes of ‘Ideological Capture’ in Adelaide, South Australia
    by Graham Haughton
    abstract: http://usj.sagepub.com/content/36/11/1891.short

  13. Alice
    October 24, 2012 at 9:43 am

    I agree with robert r.
    Economists are lousy historians but Ill add a qualifier – these days.
    Since economists who were actually econbomic historians started being hounded out of unis and their jobs in favour of the neoliberals somewhere from the time Milton Friedman and his ilk started drinking the koolaid of free markets will solve all (only their koolaid was models of the future will solve all – theirs??)

    These days economists are lousy historians. Really lousy. One might think economic history mattered, but thats all in the past. You dont want economists to go poking around in neoliberal failed policies and how do you tell if policies fail? Well my bet is its by analysing economic history and that can be very inconvenient for some clearly.

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