Nobel prize in economics

WASHINGTON (MarketWatch) — Three economists — including one rejected by the Senate as too inexperienced to work at the Federal Reserve — have won the Nobel prize in economics for their work in explaining why markets sometimes don’t work so well.  

پ.ن. انگار در آمریکا هم گاهی نوابغ را اخراج می کنند، یا شاید جایزه نوبل اشتباها ...

Specifically, Peter Diamond of MIT, Dale Mortensen of Northwestern University and Christopher Pissarides of the London School of Economics were honored for their insights into unemployment. It’s certainly a timely topic. Read MarketWatch’s related article on the 2010 prize.

The problem with unemployment is that, theoretically, it shouldn’t exist. Efficient market theory says unemployed workers should always be able to find a job if they just lower their standards enough, just as all employers should be able to find workers if they just lower theirs.

By this theory, all unemployment is voluntary.

Diamond, Mortensen and Pissarides reject that theory, arguing that it’s costly to find just the right job — that is, one that matches your skills and abilities and pays you what you are worth. From the employer’s point of view, it’s just as costly: All the applicants look pretty much the same at first; it’s not easy to tell beforehand if they can do the job, or whether you can find someone who’ll do the job for less. Searching, in sum, is costly.

The upshot of this research is that this searching — they called it “friction” — can make markets inefficient. Taking the first job offered, or hiring the first applicant would mean the economy wouldn’t work as well as it could. We’d get Ph.D.’s driving cabs, and high-school dropouts running nuclear plants.

Sometimes government policies can reduce the inefficiencies, but sometimes they can make them worse. Providing unemployment benefits can keep workers from accepting the wrong job out of desperation, but providing too many benefits can lead to search times running even longer than necessary.

The research begun by Diamond, the one whose nomination to the Fed was left languishing by the Senate, as well as Mortensen and Pissarides has been extended into other markets and other economic conundrums, helping us to understand how markets actually work, and how we can make them work better.