Neo-classical Economics Theory

nobel Nobel Prize Winners in Economics ...

Evolutionary economic theory originates outside the orthodox neo-classical tradition, however the tradition is enriched not contradicted. Neo-classical theory becomes a special case in a much more complex reality.

The Nobel Prize winners have a deserved position of acclaim and influence and the evolution of neo-classical economics can be traced through their work. The orthodox laureates emphasise rational, efficient, designed, equilibriums but heterodox economists emphasising evolution, behaviour, institutions and history are represented also.

The Nobel Foundation website contains a wealth of information ... so here we go with a list of the greats from last year to the first award in 1969 ...

2022 Ben Bernanke, Douglas Diamond & Philip Dybvig - Bank Runs - risks from borrowing short and lending long to cover 'impossible gaps'.

2021 David Card - Empirical Labour Economics. Joshua Angrist & Guido Imbens - Causal Relationships -

2020 Paul Milgram & Robert Wilson - Auction Theory - Stanford does it again! Common & private values and the winners curse. As all 'financial advisers' know valuations of assets is pathetically difficult because the market price is a clearing price but valuations are different for different people in different place at different times ... and 'he would say that, wouldn't he.

Ester Duflo 2019 Esther Duflo & Abhigit Banerjee - Empirical Economics - randomised controlled trials, experimental data from policy interventions, policy effectiveness not theory. We don't know the answers to the big questions about outcomes of Complex Adaptive Systems, so gather the evidence 'dot' by 'dot'. The problem is not so much how you raise the tax revenue but rather how do you spend it effectively? Most economists believe trade is beneficial overall, 2+2=5. But some communities lose out and are reluctant to change, 'stickyness', creating a demand for empathetic compensation of some sort if gains for everyone are to be realised.
Economics is too important to be left to economists!

2018 - Paul Romer & Bill Nordhaus - Endogenous Growth Theory - Paul Romer at last! 'no free lunch' from a scarcity of clean environments & diminishing returns so 'vote with your feet & join a club of your choice' with an access subscription; a pollution tax.

'Know how' from an abundance of innovative ideas & increasing returns from software technology leads to investment in 'education & compound interest' within interactive free cities; discovery & accumuation.

Paul Romer & Bill Nordhuas Endogenous Growth Theory - 'know how' evolves. How the market economy interacts with nature and 'know how'. Economic tools to address the fundamental question of how to ensure sustainable long-run economic growth — with a huge impact on policymaking and the environment.
People are capable of amazing things, we can make substantial progress towards growth & protection — the potential for technology to help is enormous. But good ideas & good behaviour are not manna from heaven, progress is not free & not luck. Conditional optimism is 'conditional' on hard work, honesty & thrift. Commercial company surpluses reward hard work, honesty & thrift. But politics can trump economics during the election and policy schemes must be alternatively funded by tax, borrowing or printing.
'If I get some wood and nails and persuade some other kids to help do the work, we can end up with something really cool'. Nobel Laureate Francis Arnold 'What I do is copy nature’s design process'

2017 - Richard Thaler - Behavioural Economics - Mental Accounting leads to focus on 'narrow impact' rather than 'overall effect'. Behavioural Economics and 'Nudge' 2008 has been widely used for shaping public policy ... no heavy handed impositions from Brussels or Washington.

2016 Oliver Hart & Bengt Holmstrom - Contract Theory - the economics of contracts involves co-operation & synergies ... contracts are necessarily incomplete and always seem to involve conflicts of interest. Institutions need carefully designed contracts in areas like bankruptcy & constitutions, shareholders & executives, insurance companies & car owners, public authorities & suppliers.
Hart's research found that that privatizing government functions such as schools, hospitals and prisons could lead to a reduction in quality greater than the advantages of cost savings. Holmström's research focused on employment contracts, including between CEOs and shareholders.

2015 Angus Deaton - Micro Economic Growth - growth requires micro empirical studies to explain macro aggregates; famine, disease, poverty, inequality, happiness. It is real jobs that create income streams and trades. The key to greater wellbeing is to promote economic growth rather than to support consumption though western aid packages.
Development economics cannot be based solely on charity nor bailouts of bad government.

2014 Jean Tirole - Regulating Monopoly Power - political whims and market outcomes can both 'fail' but can regulation do better? Anti trust can't cope with 'natural monopolies'. Independent case by case reasoning from game theory & information assymetries. And what about 'patents'? And 'deserved' & 'licensed' monopolies? And 'rent seeking'?

2013 Robert J Shiller & Eugene F Fama & Lars Peter Hansen - Efficient Market Theory - empirical analysis of asset prices & rationality. Behavioural economics and institutional restrictive influence.

2012 Alvin E Roth & Lloyd S Shapley - Theory of Stable Allocations - practice of Market Design.

2011 Thomas J Sargent & Christopher A Sims - Macro Economic Cause & Effect - policy affects the economy, but the economy also affects policy. And expectations about policy affects expectations about the economy. Outcomes are emergent rather than cause & effect.

2010 Peter A Diamond & Dale T Mortensen & Christopher A Pissarides - Markets with Search Costs - benefit levels, unemployment insurance or rules in regard to hiring and firing impact on search costs.
Perhaps more generous unemployment benefits give rise to higher unemployment and longer search times.

2009 Oliver E Williamson & Elinor Ostrom - Tragedy of the Commons - problems of the commons can be alleviated by user associations and self organising cooperation. The Boundary of the Firm. Polycentric Systems. Leaders resolve conflicts within firms.
1) Clearly defined boundaries - club membership 2) Proportional equivalence between benefits & costs - no free riding 3) Collective choice arrangements - no imposition unanimous acceptance 4) Monitoring - measurement system 5) Graduated sanctions - oostracism 6) Fast & fair conflict resolution - umpire & club rules 7) Local autonomy - free to choose 8) Appropriate relations with other tiers of rule-making authority (polycentric governance) - private property.

2008 Paul Krugman - Trade & Globalisation - global trade patterns. Synergies of specialisation & scale.

2007 Leo Hurwicz - Moral Hazard - mechanism design, rent seeking & incentives to cheat. Not winner takes all but if you cut the pie, I choose which piece.

Roger Myerson – Liberal Democracy - democracy like all evolved institutional mechanisms cannot come by edict, politicos compete for the trust of voters.

Eric Maskin -

2006 Edmund Phelps – Short & Long term Trade Offs - the expectations augmented Phillips curve indicates low inflation today leads to expectations of low inflation in the future and informs policy. Long-run rate of unemployment depends on the functioning of the labour market. Short term/long term tradeoffs also influence investment decisions. By foregoing consumption for investment in physical as well as human capital, today's generation can raise the welfare of future generations, raising possible distributional conflicts between generations.

2005 Thomas Schelling & Robert Aumann – Conflict Resolution - the 'second strike' is not belligerence but tit for tat co-operation and retaliation. But did it work in Vietnam?

2004 Edward Prescott & Finn Kydland – Time Inconsistency - decisions are taken on today's numbers but when the time comes the numbers have changed.

People act today in a way that is consistent with what they expect to happen in the future. In a dynamic game a player's best plan for some future period will not be optimal when that future period arrives because of time inconsistencies. Economic policy should delegate decisions consistently to markets through independents central banks and privatisation. And interference in the business cycle is invariably counter productive.

2003 Robert Engle & Clive Granger – Time Series Extrapolations - take risks that are worthwhile. Volatility clustering and short/long term co-integration.

2002 Daniel Kahneman & Vernon Smith – Prospect Theory - instinctively risk averse when a benefit is involved, and risk seeking when a loss is involved. An irrational tendency to be less willing to gamble with hard earned profits than with losses ... utility functions depend on changes in the value rather than the absolute value. Put another way, utility comes from returns, not from the value of assets.
1. gut feel is honed by evolution and usually very efficient but reasoning skills, testing in the imagination is more difficult = bat + ball = $1.10, bat = $1, ball = 10 cents
2. risk averse = - £1,000 tails, + £1,500 heads? No way unless 2:1. 3. status quo = losses loom larger than gains.
4. endowment = hard won stamp collections are valued in excess of their market value.
5. negotiations = hard won customs and practices are valued in excess of their market value. Cultural Learning = recognise the bias, counterintuitive behaviour which secures economic benefits survive. Frank Field, work, thrift, honesty & Doha not apocalypse now, Armageddon, global warming, resource depletion, slavery, welfare states, collateral damage, AIDS, BSE, foot & mouth …

2001 George Akerlof – Adverse Selection - only lemons will be on sale.

Joseph Stiglitz – Monopolistic Competition - market equilibrium is not the norm.

Michael Spence - Contract Theory - under asymmetric information educational qualifications are a signal of competence in the jobs market.

Michael Spence chairs the Commission for Growth and Development 2008 which has reviewed World Bank policy based on the 'Washington Consensus' 1989. The benefits of 'globalisation' have been reconfirmed with the important qualification that policy is never 'one size fits all' but always context and time specific. Nurturing human capital and social institutions is essential for bottom up evolutionary growth based on increasing returns from specialisation and scale.

2000 James Heckman & Daniel McFadden – Selective Samples & Discrete Choice -

1999 Robert Mundell - Monetary & Fiscal Policy - different exchange rates.

1998 Amartya Sen – Welfare Economics - an ethical dimension to self interest. Is 'right' something that must be provided or something that simply cannot be taken away? Can individual values be aggregated into collective decisions? Can we allow a majority to suppress a minority? Arrow's 'impossibility theorem' seemed to be an insurmountable obstacle to progress in the normative branch of economics for a long time. Universal principles proposed by moral philosophy can evaluate different alternatives for society. £100 for the poor man is 'worth' more than £100 for the poor man.
Equal opportunity varies across individuals so capabilities of individuals constitute the principal dimension in which we should strive for equality but individuals make decisions which determine their capabilities at a later stage.
Education in a progressive culture.

1997 Robert Merton & Myron Scholes - Valuation of Derivatives - valuations are logical and there are opportunities to profit from information asymmetries and arbitrage. Long Term Capital Management exploited 'convergence trades' where Government Bond valuations tend to converge. But these trades are dependent on orderly markets and availability of buyers and sellers. In 1998 (and before) Governments defaulted! Flights to liquidity can destroy all 'schemes', even sophisticated computer schemes, Keynes was succinct, 'the markets can stay irrational longer than you can stay solvent'!

1996 James Mirrlees & William Vickrey - Optimal Taxation - incentives under asymmetric information and the complex interactions of tax, growth, poverty, state planning and individual choices.
Economic Growth = 20% flat taxes. 0% marginal rates. Tax consumption not production.
Tax 'someone else's money', 'the filthy rich' = less revenue, less production, more 'distorted' investment, more clones ?

1995 Robert Lucas – Rational Expectations -

1994 John Nash & John Harsani & Reinhard Selten - Game Theory - equilibrium in non cooperative games.

1993 Douglass North & Robert Fogel – Economic History - theories of economic & institutional change.

1992 Gary Becker - Economic Human Behaviour - micro economic explanations of human interactions.

1991 Ronald Coase – Social Costs - theories of transaction costs and property rights. From Socialism to Classical Liberalism. Regulation generally makes things worse.

1990 Harry Markowitz & Merton Miller & William Sharpe - Financial Economics - risk/reward sweet spot, portfolio investment diversity ... but was it probabilities or emergence? ... confusing risk with uncertainty?

1989 Trygve Haavelmo - Econometrics and Probability Theory -

1988 Maurice Allais - The Golden Rule - 'do unto future generations as you would hope previous generation did unto us'.

1987 Robert Solow – Growth Accounting - technological change & 'total factor productivity'.

1986 James Buchanan - Public Choice - economics and political decision making.

1985 Franco Modigliani - Capital Structure Irrelevance Principle - a higher debt/equity ratio leads to a higher required return on equity, because of the higher risk involved for equity holders in a company with debt.

1984 Richard Stone - National Accounts -

1983 Gerard Debreu - General Equilibrium - 'New Analysis'

1982 George Stigler - Regulation & 'Capture -

1981 James Tobin – Share Valuations - 'know how' ... expenditure, employment, production & prices.

Tobin defined q as the ratio of share value to net worth, q values are historically high. Is this because shares overvalued or because returns are dependent on 'know how' not on tangible assets? 'Know how' = technological & institutional innovation = understanding and useful practice.

1980 Lawrence Klein - Econometrics - fluctuations and models.

1979 Theodore Schultz & Sir Arthur Lewis - Developing Countries - Agriculture, Human Capital and IMF & World Bank.

1978 Herbert Simon – Decision Making - 'Satisficing'.

1977 Bertil Ohlin & James Meade - International Trade & Capital Flows -

1976 Milton Friedman – Monetarism - monetary history and the complexity of stabilisation policy.

1975 Leonid Kantorovich & Tjalling Koopmans - Interconnectedness - industrial input/output, economic efficiency & prices. Mathematical models for the 'optimal' use of resources, activity analysis. Is it possible for a benevolent central planner somehow to co-ordinate the production & consumption which is the modern economy, thus bypassing the greed & waste of the market with a more rational system?

Kantorovich developed Linear Programming and put his simultaneous equations into an electronic computer and the solution was available in less than a second. The market process was old-fashioned.

Kantorovich shifted from observation of economic processes to system control (Gosplan & Cybersyn). The USSR provided evidence of improvement in the economy; the successful solution to the industrialization problem, state defence before & during the Second World War, the postwar reconstruction and further development. But it was obvious that improvements were needed which led to the idea of quantitative mathematical methods.

'I discovered that a whole range of problems of the most diverse character relating to the scientiﬁc organization of production. I have succeeded in ﬁnding a comparatively simple general method of solving this group of problems which is applicable to all and is sufﬁciently simple and effective for their solution to be made completely achievable under practical conditions. Socialist economies have to be concerned about trade offs and therefore must employ interest rates & prices just like the capitalists'.

But Hayek, Nobel Laureate from a year earlier, suggested 'fixed' prices always produced gluts & queues. But only market prices & private property 'optimised' the supply & demand trade off. 'Gosplan' & 'Cybersyn' were logically impossible, the maths was non linear ...

'We are ignorant of what it is we do not know'.

Even 'Big Data' becomes immediately out of date as human emotions flip flop between excitement & fear, love & hate with change, complexity, conflict & scarcity.

1974 Friedrich Hayek – Fatal Conceit - the calculation problem. Complexity cannot be managed. Evolutionary descriptions of diverse & dispersed knowledge.

Gunnar Myrdal - Interdependence - economic, social & political and inherent cycles.

1973 Wassily Leontief - Empirical Analysis - input/output.

1972 Kenneth Arrow – Impossibility Theorem - from 'socialism to pragmatism' and general equilibrium maths. Mathematical proof that there is no method, majority voting or otherwise, for constructing social preferences from arbitrary individual preferences. No system can be both rational and egalitarian.

John Hicks - Savings & Investment - IS (savings & investment)/LM (liquidity preferences) model of Keynes general equilibrium & welfare theory.

1971 Simon Kuznets - Empirical Interpretations - GNP growth & population growth.

Later the Kuznets Curve suggested inequality increased then decreased as industrialisation progressed.

1970 Paul Samuelson - Theoretical Analysis - he wrote the text books.

1969 Ragnar Frisch & Jan Tinbergen - Econometrics - macroeconomics empirical mathematical planning models.

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