There is a wealth of fascinating research being produced by microeconomic theorists. It is really hard for nonspecialists to understand it, though, as it tends to be presented in esoteric journal articles full of difficult math and jargon. Even applied economists and economic policy makers have a hard time absorbing the lessons of cutting-edge microeconomics research. I was glad to find out today, via a post by Al Roth, about this new website which has the mission of bridging this exact gap. It’s not easy; I should know, having tried for years to make difficult mathematical papers in microeconomics digestible to students. But it is a worthy endeavor.
Adblockers. They’re all the rage in discussions about the future of news organizations. This post on Medium by Dave Pell is one more restatement of the positive externalities generated by news organizations. While it is eloquent, it has no suggestion of how to deal with the problem. That’s because the problem of externalities is a genuinely hard one for our market-based economic organization (and way of thinking). Activities that generate positive externalities (and by extension public goods) are constantly under-provided and are likely to continue to be under-provided for the foreseeable future.
Another title for this post could be “Why people who talk about general equilibrium theory should always mention the Arrow-Debreu-McKenzie model, without omitting McKenzie”.
Prompted by a post by Joshua Gans, which I saw first on Google+, I recently bought the book Finding Equilibrium, as on the title of this post. The book contains an insightful discussion of the problem of assigning scientific credit in economics, as the book’s subtitle makes clear: Arrow, Debreu, McKenzie and the Problem of Scientific Credit. I finished the book today. It was published by Princeton University Press very recently, in 2014.
The authors continue an old project of the more senior of the two, Weintraub, that dates from the early 1980s. It has to do with why the Arrow-Debreu paper on the existence of general equilibrium gets more airtime in economic theory circles than McKenzie’s paper, even though the latter was submitted to Econometrica and published a bit earlier than the former.
I must disclose here that Lionel McKenzie was a member of my doctoral dissertation committee. I defended my dissertation at the University of Rochester in 1988 to earn my Ph.D. Furthermore, the professor responsible for my applying (and being accepted, I am sure) to the graduate program in economics at Rochester, Emmanuel Drandakis, was the second person to receive a Rochester Ph.D. in economics after McKenzie created the economics department and graduate program there in the late 1950s. Thus, I was immersed in the story of McKenzie’s unfair treatment in not receiving a Nobel Prize, unlike Arrow and Debreu. The story was “in the air” at Rochester, but I did not hear McKenzie himself talk about it, to the best of my recollection. This accords with my memory of McKenzie as a perfect gentleman; in the book I am talking about here, he is described as “classy” by one of the economists quoted there.
I enjoyed the book and read it in a couple of days, even as it came in the middle of a week that started with some worries in my personal life. It gave me the idea of writing a paper about the now ignored general equilibrium approach as it, I think, should be revived in conjunction with extensions to make it properly include collective goods and externalities (an approach that should proceed with techniques not only limited to the axiom-and-proof ones that were the hallmark of the emergence of general equilibrium in the 1950s). I have worked in this area before, myself, so I may have something new of interest to say by revisiting it. However, I did not want to wait to post here until I wrote a paper; that would mean quite a long wait!
Apart from the inclusion of some jargon from the sociology of science and (naturally) from economics, the book is very well written for a general audience. It flows well and is very instructive. The authors make the best of the fact that their topic allows them, by its very nature, to tell it as a story of people and their interactions. Readers always want stories (as we must remember every time we have to teach abstract ideas in the classroom).
As someone who is well versed in general equilibrium theory (although I’ve been neglecting it lately), I found the exposition of the theory’s inception in the book well done. Furthermore, it gave me a few perspectives and some context I did not already have. If I were to teach general equilibrium again, I would be sure to assign parts of this book to complement the rather dry and scary (for students) mathematics that dominate the theory.
Gans’s post that led me to this book concluded that, of the three main protagonists, Debreu emerges in the most unfavorable light. That is indeed my impression and it comes from documentary evidence of his behavior as a referee of McKenzie’s paper for Econometrica and also vis-a-vis his own co-author, Kenneth Arrow, from whom he kept secret his knowledge that McKenzie was already working on his own paper on pretty much the same topic. By contrast, McKenzie emerges clearly as the wronged party and Arrow as quite generous in giving credit to scholars who preceded him.
So, for the very few of you who say “Arrow-Debreu”, please do remember to say “Arrow-Debreu-McKenzie” when talking about general equilibrium theory.
[Edited 2014-09-29 to correct some infelicities in my use of English.]
Noah Smith has a good article on the useful parts of economics, mostly microeconomics and its offshoots. He highlights specifically the usefulness of expertise in game theory, statistics, financial economics, and policy analysis based on microeconomic analysis.
As I am gearing up to teach an intermediate microeconomics course for the first time in several years, it caught my attention and I will be sharing it with my students before the first class. The article is at the link below:
I am late to the commemoration of Ronald Coase’s contribution to economics, on the occasion of his death yesterday at the age of 102 years. You will find a large number of online posts about this with a simple search. The New York Times publishes its obituary here. The Economist points to its article published two years ago on the occasion of Coase’s 100th birthday.
After reading a number of other posts on Coase’s legacy, I decided to offer here this fantastic piece by Kevin Bryan. I heartily recommend a careful reading of it and the links it offers. In the Toolbox for Economic Design there are several cautions against taking the “Coase Theorem” seriously. After studying Bryan’s post and the links he offers in it (especially that to McCloskey’s article), you will have a better idea why this nomenclature (Stigler’s baby, Coase proclaimed no theorems) is wrong and misleading, while Coase’s contributions to institutional economics, stemming from his 1960 article The Problem of Social Cost, are important.
Let us also not forget Coase’s 1937 (!) article The Nature of the Firm, an early and fundamental contribution to the way economists ought to view the limits of the efficacy of markets.
Al Roth has a post in the Market Design blog that links to the Nobel lectures by Lloyd Shapley and Roth himself.
I recently got a copy of John G. Riley’s Essential Microeconomics and today a copy of Microeconomic Foundations I: Choice and Competitive Markets by David M. Kreps. While I am pleased that Riley’s book covers standard general equilibrium approaches as well as game theory and mechanism design, I am intrigued by Kreps’s book, which covers “only” the necessities for a deep understanding of general equilibrium under certainty and uncertainty. From a very quick skimming, it appears that Kreps has incorporated in his latest book his famous lecture notes on decision theory of many years ago.
Even more, I am intrigued by the vague promise by Kreps in the preface of his book that he is planning two more volumes; one on “strategic interaction, information, and imperfect competition” and one on “institutions and behavior”. Given that I see less and less reason to teach the (admittedly quite beautiful) theory of general equilibrium, I am very impatient for the promised volumes to appear, as Kreps is a great explainer.
Wiley offers this page with links to published research by the two prize winners at no charge. (Via Diane Coyle on Twitter.)