Skip to main content

Explaining the Sveriges Riksbank Prize and the Post-Modern Mainstream

The so-called Nobels (not original Nobels, and the Nobel family is against them; I tend to dislike the criteria for the winners, which leaves out Harrod, Kahn, Kaldor, Kalecki, Prebisch, Robinson and Sraffa, to mention a few, but not the prize per se, after all Myrdal and Leontief did get it) are out (here for a journalistic account), and it went to Lloyd Shapley and Alan Roth. I won't explain anything about the Gale-Shapley algorithm, which is not my area of research, even though I sat back in the early 1990s in course taught by Marilda Sotomayor who co-authored some papers with both Gale and Roth. My concern is what it means a prize for a matching algorithm and its applications and the current state of economics science.

The algorithm is actually less about matching preferences, even though that is the most common description, than you might think. For example, one of the practical uses is related to matching kidney donors and recipients, andrather than subjective preferences the matching involves sorting out problems related to the compatibility of immune systems. It is more of an engineering problem really. Arindrajit Dube is right that this is a Nobel for planning, if you think about it (h/t Mark Thoma for pointing this out). Also, the stability of the matches (the fact that there is no mutually preferable match) is irrelevant in this context, since who would 'divorce' a kidney that is perfectly compatible from an immunologically point of view (what, you didn't like the kidney's political views?), or which kidney for that matter wouldn't be satisfied with its match?*

It is particularly important that this prize has little to do with the core of neoclassical economics. Yes, the algorithm is about exchanges, and individual decisions, and hence about allocation, and surely has little if anything to say about production (let alone the social relations of production). However, note that it is an idiosyncratic rule, not a general proposition based on the principle of substitution, according to which relative scarcities determine relative prices and individual choices.

This has been a general trend in neoclassical economics since their defeat in the capital debates demonstrated that the latter proposition does not hold water. The use of the disaggregated General Equilibrium model (as I argued here with Kirsten Ford and Nate Cline) has not been able to change the problems from a logical point of view, and that's why they still use the aggregative model to give policy advice (i.e. structural reforms in Europe to cope with unemployment, meaning lower wages so firms hire the cheap 'factor of production').

It is also why prizes for game theory based research are popular with the Swedish bankers that make decisions about who is an authority in this profession. Game theory is an instrument that fits well the post-modern version of the mainstream, in which everything is possible (but the 'free' markets are still the mantra). So beyond the question of what practical use this particular algorithm might have, there is a deeper question of the bankruptcy of the mainstream, that pretends to be more general and flexible, when is exactly the opposite. It is internally illogical and incoherent, but increasingly attached to the dogmatism of 'free' markets, which has become just a way to defend the interests of the wealthy and corportaions (any similarity to the Conservative movement, and the current GOP in the US, is NOT a coincidence).**

* I'm not suggesting that the algorithm works perfectly in the real world. In fact, in Brazil the National Association of Graduate Economic Centers (ANPEC, in Portuguese), following Marilda's lead, adopted the system in 1997 to match students with centers to produce a stable matching, that is, there would be no mutually preferable matches. Note that before good students were sometimes left without a graduate center, since they were not chosen by anyone (even though some students that had lower grades did), and a few centers were left with empty vacancies. However, as noted in this dissertation supervised by Marilda (in Portuguese), the algorithm did NOT work, and a stable matching was not achieved, with the same problems taking place as before. The algorithm was abandoned the following year.

** Supply-side economics, New Classical and Real Business Cycles authors (as I claimed in another post) are the equivalent in economics to Intelligent Design in Biology, and the GOP has adopted all of these views as part of their world view.


Popular posts from this blog

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible
There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Aust…

A brief note on Venezuela and the turn to the right in Latin America

So besides the coup in Brazil (which was all but confirmed by the last revelations, if you had any doubts), and the electoral victory of Macri in Argentina, the crisis in Venezuela is reaching a critical level, and it would not be surprising if the Maduro administration is recalled, even though right now the referendum is not scheduled yet.

The economy in Venezuela has collapsed (GDP has fallen by about 14% or so in the last two years), inflation has accelerated (to three digit levels; 450% or so according to the IMF), there are shortages of essential goods, recurrent energy blackouts, and all of these aggravated by persistent violence. Contrary to what the press suggests, these events are not new or specific to left of center governments. Similar events occurred in the late 1980s, in the infamous Caracazo, when the fall in oil prices caused an external crisis, inflation, and food shortages, which eventually, after the announcement of a neoliberal economic package that included the i…

What is the 'Classical Dichotomy'?