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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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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.
Three possible groupings of outcomes emerge from the general circumstances I wrote on in the last post.
- The means to handle the complexity and the associated breakdowns are found within the existing governance paradigms and the system continues to expand. My shorthand for this outcome is “conventional wisdom rules.”
- The system collapses and systematic debilities result. Shorthand: doomsday.
- Arrangements of global governance with clearly established criteria for boundary conditions are established in those areas where threats are high. Shorthand: technocracy.