Wherever the soul of British economist John Maynard Keynes is, it must be warmed by this year’s award of the Bank of Sweden’s prize in memory of Alfred Nobel.
This went to two Americans, Lloyd Shapley of UCLA and Alvin Roth of Stanford, “for the theory of stable allocations and the practice of market design.” More practically, this means discovering practical ways of matching hospitals needing residents with the residents themselves, matching kidney donors with those needing kidneys, and students with alternative schools within their districts.
So why would Keynes be pleased? This work may be valuable, but it has nothing to do with fleshing out Keynes’ ideas on how to end inflation by cutting money growth, cutting government spending and raising taxes. Nor the other half of his prescription, ameliorating unemployment and recessions by increasing spending, cutting taxes and increasing the money supply.
That would be macroeconomics, the study of how resources are allocated at the national and international level. Shapley and Roth’s work is decidedly microeconomics, the study of how humans allocate resources at the level of the individual, family or firm.
What would please Keynes is that the honored work achieves his famous wish that “if economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid.”
Keynes knew the dangers of economists setting themselves up as philosopher-kings who could tell everyone how nations’ economies should be run. The irony, of course, is that this is exactly how Keynes himself spent most of his professional life.
Nevertheless, his wish that more economists focus on fixing problems in everyday life, just as dentists do, was a sound one. The long-term benefits to society of micro-level work may well be greater than flamboyant, but often flawed, prescriptions for national economic policies.
The committees that decide the Nobel for economics also apparently understand this. In the past 20 years, a high proportion of the awards have gone to scholars for micro-level work.
That was not true when the prize was first instituted in 1969. For the first decade, most of the awards went to scholars like Paul Samuelson, Milton Friedman, Friedrich von Hayek and George Stigler, who worked on national-level issues.
The exceptions tended to work in the field of finance, which often is largely micro. Some went to those, like Franco Mogdigliani and James Tobin, who worked on finance as well as national policies.
There has been occasional recognition of micro insights, notably in the 1979 award to South Dakotan Theodore Schultz for noting, among other things, that peasant farmers may be illiterate, but they are not stupid and that putting resources into education and health is as much “investment” as buying new locomotives.
However, with the 1991 award to Ronald Coase for his work on the importance of property rights and transaction costs, the Nobel committee moved to more consistent recognition of micro work.
The next year, it went to Gary Becker for research on family-level, nonmonetary decisions like whom and when to marry or how many children to have.
I personally disagree with many of Becker’s conclusions, but as a micro teacher, it was gratifying to have his examples of how some of the most important economic decisions don’t involve money. Getting students to understand that, at its core, economics need not involve money is one of the hardest tasks for teachers.
In the two decades since, there have been awards for work in structuring auctions, explanations of deals such as sales of used cars, when one party knows much more about the product than the other, and the insights from modern cognitive psychology into how humans actually make decisions.
This year’s award follows in this vein. It is true that few people seeking partners will be helped by studying Shapley’s mathematical algorithm. However, Roth’s application of that math to assigning medical residents has greatly improved the satisfaction of both residents and hospitals with the outcomes. It has greatly increased parents’ satisfaction with the assignment of their children to various schools within a given district. And it promises to increase the number of people whose lives can be extended with organ transplants.
As with Becker’s work, the fact that most of these decisions really don’t involve money is gratifying to those who want the public to understand economics better.
In short, this year’s awards to Shapley and Roth are well deserved. They don’t have any solutions for the mess that the U.S. and global economies are in, but their work is making the everyday lives of millions of people better.