The Nobel Prize in Economics has been announced, and what a deserving prize it is: Bengt Holmstrom and Oliver Hart have won for the theory of contracts. The name of this research weblog is “A Fine Theorem”, and it would be hard to find two economists whose work is more likely to elicit such a description! Both are incredibly deserving; more than five years ago on this site, I discussed how crazy it was that Holmstrom had yet to win!. The only shock is the combination: a more natural prize would have been Holmstrom with Paul Milgrom and Robert Wilson for modern applied mechanism design, and Oliver Hart with John Moore and Sandy Grossman for the theory of the firm. The contributions of Holmstrom and Hart are so vast that I’m splitting this post into two, so as to properly cover the incredible intellectual accomplishments of these two economists.
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I’ve tried to not write of late. Tried. It isn’t easy. You’ve got be made of reasonably stern stuff if your inclination is to face the world with a keyboard during times like these. So why not write? For one, I’m not that informed. Sadly, neither is anyone else. Anyone who tells you she/he is in a position to call the cards is a liar or worse. Second, I think there is enough commentary. What we need now is calm analysis, policy ideas, and planning.
Eastern Europe is disintegrating. That’s the immediate crisis. With it goes the banking systems of Western Europe…especially Austria, England, Belgium and the Netherlands. wipe out those banking systems and the Euro starts to collapse. If the Euro goes South, recovery in the US becomes all the harder. People are still generally expecting the US to lead out of this nightmare. Hard to see it, but that is the expectation.
I have heard informally things are particularly bad for the UK if Eastern Europe burns. It looks like it might. Latvia, Estonia, the Ukraine, Hungary, Romania and Serbia look particularly bad. All are volatile…all rest close to a corrupt and foreign currency rich Russia. It’s a lot of sparks next to a pile of dynamite.
The IMF and ECB need to focus on that problem set first. Summer is coming and the priority is food and enough energy to survive next winter. Second, there has to be a plan for getting manufacturing off its back. That’s going to entail more government debt…has to. There is no other short-term way, and there isn’t a long term without a short term.
Governments are going into survival mode. They need time for something positive to happen. What that might be, I cannot say. But they need time…at least 9 months…probably 15 months. Without that much time, a series of cascading collapses continues the current run. Time is needed to start laying out enough policy to get something going. Time can only be bought with government debt and currencies that are worth something. On the other side, the resource rich countries and the wealthy of the East are going to have to be debt buyers. I don’t see another way.
If we choose market collapse in the hope of some market-driven recovery, it will end violently in ways we don’t now comprehend. One could imagine serious civil wars in Mexico, Russia, Venezuela and in Eastern Europe…or starvations/deflations that erase a generation and allow corruption to take hold in places it is in retreat. It’s all about time right now. Time to stabilize through micro-reorganizations, new visions, new parties, something.
Jim Manzi points to Conor Clarke taking on the fundamental truths of economics…here.
There should be some sort of evidential rules we start to apply universally at a fairly early age. We argue about evolution–which is all but definitive…no, it is definitive knowledge. Some know some things, while others dispute those same things with little knowledge. We choose not to argue about justice very much. Sometimes values trump knowledge; other times, what seems an obvious value parameter is essentially ignored by most of us.
On the other hand, there are fields like economics which are not, to my way of seeing things, scientific, nor are they false and predicated on nonsense. They are heuristic planning tools really. There are rules of thumb that can be formalized to varying degrees, but as a logical system, they are unsatisfactory as foundations on which to base large numbers of policy decisions. For example, we start economic assertions with restrictions like ceteris paribus… Regrettably, all things aren’t otherwise equal. And the devil is in the details.
We are in fact ignorant of our own wishes both as individuals and collectively. Economics is largely a theory about how wishes and plans might be put into effect in a reasonable framework driven by the reallocation of capacities to be rewarded financially for something…birth, work, prior inventions, etc.
Democracy is similar in scope…it is a heuristic model for reasonable decisions. Neither of these topics (democracy or economics) allow for much specificity the way a science should. That’s because they are less schemes of knowledge than they are projects for decision making.
What is hopeful about the present networked and collaborative age is that we seem to be driving toward a capacity to express ourselves more clearly than ever before in broader numbers. People can “digg” something. But are they informed enough to have a reasonable opinion? I doubt it. I think we have a need for specialization tied to speed and a system that rewards thouroughness and generality in leaders. Somehow reconciling that paradox is at the heart of any future political systems. We need a way to evaluate and accept fixed knowledge. We also must allow doubt and heterodoxy as insurance policies for systematic error. A very difficult problem.
I am convinced that we need a combination of technocratic agendas and participative processes to replace what is now a clear set of failures in so-called representative democracy.
Europe is the leader now. Re-public offers an excellent report on nascent processes there.
I noticed that Michel at P2P was carrying another article by re-public today. It’s become essential reading for me…excellent and thoughtful. Real cutting edge stuff…not warmed over news summary.
NAPA has put together a nice project on collaboration in government. You can find out how to register and see the content beginnings here.