The Dull Compulsion of the Economic (#10)

by Dollars and Sense

A series of blog entries by D&S collective member Larry Peterson.

The Nobel Prize in economics was awarded Monday to three Americans (one Russian-born) for their work on "Mechanism-Design Theory." The three, Leonid Hurwicz, Eric Maskin and Roger Myerson, developed sophisticated mathematical models derived from game theory in an attempt to reveal rules and conditions under which scarce resources can be optimally put to use or divided when each person bidding for a share has an incentive to conceal how much s/he is actually willing to pay for that share, (by concealing this price, other bidders will be misled about the actual demand, and tend to make their own bids lower in turn, resulting in lower sale prices). Accordingly, the actual costs of employing the resource will have to fall on others. Mechanism-Design theory is, then, an attempt to articulate what types of rules will rectify this mismatch. Although set in the context of an auction, many claim the theory’s insights can be used to design econmic policies and even innovations: for example, it can suggest ways liberalization of labor markets may be countered by re-distributive tax policies favoring the less-well off to get those benefiting from either exclusively to negotiate and compromise; and eBay seems to be a business innovation, with its clever bargaining checks and balances, that looks a lot like Mechanism-Design theory. Democratic elections themselves, according to proponents of the theory, may sometimes fall within the theory’s explanatory power.

What are we on the left to think of all this? Personally, I had never heard of any of the three (and I follow these things as much as any layman can) before the announcement, and I have no doubt that the mathematics involved are way, way beyond my capacity to remotely understand, never mind evaluate. Still, I think there are three points for non-specialists to ponder. First and foremost, the theory doesn’t seem to offer room for any capacity for participants to change their own preferences, or even process of preference-formation as their participation in the decision-making process deepens (and they learn more about the other participants, and what their common interests might be). All the participants seem forever bound by the incentive to conceal their estimates of worth in attempts to get a bargain; no other motivations matter, or emerge from the nature of the interaction itself. This may be the case when we’re talking about auctions; but it tells us little—in most cases, one hopes—when we try to construct a democratic workplace, say.

On a more positive note, the eldest of the three, Hurwicz, was influenced by the socialist-calculation debate of the mid-twentieth century, and, influenced by Friedrich von Hayek and Ludwig von Mises, provided criticisms of Oskar Lange and others on the socialist side. What’s important here is for us to recall that socialism in its "actually-existing" form all too readily pursued the abolition of scarcity by wastefully and even dangerously employing limited resources, especially of the natural and environmental, but also of the human variety. Within this context, maybe we could revisit the debate in attempts to reimagine how socialist production could--and must—become environmentally sustainable, and what the most pressing problems in this quest might turn out to be.

Finally, it is interesting to juxtapose the work of the three with Naomi Klein’s new book The Shock Doctrine: The Rise of Disaster Capitalism (which I haven’t read yet, but I have read several reviews, and I saw Klein speak recently). Klein states that neoliberal reforms championed by another Nobel laureate, Milton Friedman (1976), have often been adopted under circumstances in which visible—often overwhelming—opposition to them is rendered ineffective by some sort of catastrophe: a war, a military coup, an economic panic, even a natural disaster. Only with the opposition shocked into silence will elites be able to impose such unpopular reforms, whose costs tend to be borne overwhelmingly by the less-well-off majority. The three laureates, as we have seen, tend to finesse this issue somewhat: they claim that they want to reveal ways whereby optimal solutions emerge from markets and democratic elections, not after the latter have failed; they want to keep all sides negotiating, rather than simply forcing the will of one faction on the other(s). But it’s hard to see how a theory that is so complicated that, as one practitioner (Hans-Peter Gruener of the German weekly Der Spiegel, whose interview provided me with most of the background for this blog entry) put it, it requires two full lectures for economics students to begin to understand it, can allay the fears of the sort of actual hard-hitting impositions of neoliberal policies that have actually come to pass, as Klein documents.

Labels: Disaster Capitalism, Eric Maskin, Leonid Hurwicz, Mechanism-Design Theory, Naomi Klein, Nobel Prize in economics, Roger Myerson, Shock Doctrine

 

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10/17/2007 10:37:00 PM