In the 1950s and '60s, economics in America really had a heyday. Tinkering is easy when the economy is good. By the 1970s, it was realized that economics truly was, as historian Thomas Carlyle labeled it in the 19th century, a "dismal science" - except leave off the science.
Instead of being prospective efforts, economics tends to be retrospective - they take past events and create models that successfully predict them and then try to convince people that predicts the future. It's nice to read Paul Krugman in the New York Times but no one wants to actually give him control of any money. At what level do the models, experiments and econometric regressions of economics research provide something useful about the economy – and why and under what conditions are they useful in dealing with real-world problems?
That question will be at the heart of discussions among 17 Nobel Laureates in Economic Sciences and about 450 aspiring young economists meeting at the 5th Lindau Meeting on Economic Sciences next week.
They will address central fields of the discipline, ranging from econometrics, game theory, and neo-classical growth theory to mechanism design and systemic risk measurement. The question "How useful is economics – how is economics useful?" will be debated by the three economics Nobel laureates Peter Diamond, Robert Merton and Alvin Roth on Mainau Island on Saturday, 23 August. The panel will be chaired by Torsten Persson of Stockholm University, who serves on the prize committee for the Alfred Nobel Memorial Prize in Economic Sciences.
Economics is often abstract. Economic models are formulated in general terms, without reference to any particular economy. Theorizing involves assumptions that are patently unrealistic. Laboratory experiments involve artificial environments that may be quite different from real-world situations. Econometric studies often exploit specific data sets that allow the researcher to identify certain effects. The concluding panel will discuss why and under what conditions the insights gained from these models, experiments and econometric regressions can be used outside their narrow domains and how they contribute to dealing with real-world problems.
Earlier at the Lindau Meeting already, several plenary lectures by Nobel laureates will illustrate some of the ways in which economics can be useful for dealing with real-world problems.
Alvin Roth: "Matching kidney donors and recipients"
Almost every country in the world has laws against paying for kidneys. This is an example of a "repugnant market", where any benefits of matching demand and supply need to be achieved without monetary transactions. Alvin Roth, who will deliver a lecture on repugnant markets, set up the New England Program for Kidney Exchange, using an algorithm based on game theory to match donor-recipient pairs.
The exchange works like this: if, for example, a wife wants to donate a kidney to her ill husband but is not a genetic match, the system will find a couple in a similar predicament to arrange a compatible swap. Ideally the system is designed for two couples to reduce the need to coordinate surgeries across the country, but it has worked for chains of up to six couples.
Peter Diamond: "US unemployment"
The US economy is experiencing a higher level of unemployment than before the crisis for the same level of the vacancy rate. This shift in the Beveridge curve – the relationship between the unemployment and vacancy rates – suggests a deterioration in the matching/hiring process in the economy. It is tempting to interpret this decline as a structural change in the way that the labour market works.
This interpretation has an obvious policy implication: however useful aggregate stabilisation policies are while unemployment is very high, they are likely to fail in lowering the unemployment rate all the way to the levels that prevailed before the recession since the labour market is now structurally less efficient in creating successful matches. Peter Diamond's lecture will review theory, evidence and policy debates on the US labour market.
Robert Merton: "Systemic risk measurement and management"
Systemic risk is an enormous issue for both governments and large asset pools. The increasing globalisation of the financial system, while surely a positive for economic development and growth, does increase the potential impact of systemic risk propagation across borders, making its control and repairing the damage caused a more complex and longer process.
In his lecture, Robert Merton will develop a model of systemic risk propagation among financial institutions and sovereigns. This model can be refreshed almost continuously with "forward-looking" data at low cost and therefore, may be more effective in identifying dynamic changes in connectedness more rapidly than the traditional models.
While this research is still in progress, the basic approach and the empirical findings are encouraging and it would seem that at a minimum, this approach will provide "good" questions, if not always their answers, so that overseers and policy-makers know better where to look and devote resources to discovery among the myriad of places within the global financial system.