Panel Discussion (2014) - How Useful is Economics - How is Economics Useful? Panelists Diamond, Merton, Roth

A very good morning. We have been gathered here for the final panel of the meeting. How Useful is Economics and How is Economics Useful. Whoever made up that title, I certainly didn't, probably had in mind that economic research can be useful by providing input, useful input in practical decisions, be that in government, or in the private sector. Of course, this kind of question entails some general issues, and we may not cover all of them, but I hope we can shed light on some of them. But we'll try to do that through the lens of some specific, concrete, substantive policy issues. In any case, we have three very qualified panellists, Peter Diamond, Al Roth and Bob Merton, and in addition to their scientific breakthroughs that brought them here, they also have a great deal of practical experience. So we'll organise this panel in three segments. The first be a round of opening statements by each of the laureates. Then we'll have a round or two of discussion here on stage. And then there'll be a segment which starts with questions from the floor, or from the grass. So, start thinking about your best questions already when you hear people speak, you may be able to post them. Okay, so without further ado, let us get going, and for lack of a better principal, we will do the opening remarks in alphabetical order, so Diamond, Merton, Roth. Give the word to you, Peter. I want to start, having been alerted to the fact that I would go first, with the over-generalization about what makes economists different from other people, other social scientists, other policy analysts, other laypeople, who think about some of the same things we do. And there are a number of elements that stand out. Perhaps, first, is attention to incentives. Economists believe incentives matter, and obviously economists particularly pay attention to financial incentives, but as illustrated, for example, in the terrific book... Oh dear... Steve Levitt's book, Freakonomics. Thank you, thank you. Economists also recognise lots of other incentives, but the focus is, you want to think about what's happening. Incentives matter. The second thing economists are trained to look at, is the feedback elements, which I might have described as the constraints coming from equilibrium. But equilibrium means too many things. So if someone has a budget constraint, if they're spending more on something, they're spending less on something else. That's got to be part of the story, and we know if a business changes a price, quantities are going to change, other businesses are going to respond. There are feedbacks that matter. And the third, we're highly sensitised to the difference between correlation and causation. And that's something, I think, was brought out beautifully in the Freakonomics book. And for us, the central element that makes particularly analyses of whole industries and whole economies, or the world economy difficult, is you're comparing outcomes which you can observe with a counterfactual of what you think would have happened if your policy hadn't been followed, but something else happened. For the general public, thinking in terms of counterfactuals is not a natural response. So, when the Obama administration said the stimulus plan will restore the economy and it didn't, the general reaction is the stimulus plan failed. People who engage in modelling how the economy plays out and would play out with different policies, have concluded overwhelmingly that the stimulus plan had a huge impact on the level of unemployment, and was, by and large, while definitely not perfect, a success. Part of the concern here is that the impact economists have flows through the perceptions and understanding of non-economists, both politicians, business executives, voters, and individuals making their own decisions. We work with formal models. We work with formal rules of estimation, and the idea of that is to have consistency in both recognising the roles of the incentives and the feedbacks, and in doing the measurements as best we can for the element. What I'm going to talk about is issues around retirement income. I started working on that, consulting to the U.S. Congress on social security in 1974. So when Torsten said I had a little bit of practical experience, unless you think consulting for a government isn't practical, goes way back. What's going on, I'll focus on, primarily, but not completely on the U.S., today, is a lot of attention is being paid to the fact that a significant fraction of Americans are simply not doing adequate saving for their own retirements. Adequate defined in terms of a sense of what makes sense to have after retirement compared to what you had before. And the response of economists has been significant investment in financial education, and explaining both how compound interest affects your ability to provide retirement income at the cost of some consumption. And we'll also focusing in on the institutions that shape how individuals do their savings plans, individual retirement accounts, employer set up 401ks, and trying to influence how they are organised, as trying to help people do better. Beyond the saving level issue, there's the question "how do you invest?" Investing is inherently complex, and it's very clear from the behavioural finance studies that lots of people make a mess of it. Back when the U.S. was debating having mandatory individual accounts or voluntary individual accounts, rather than social security, Arthur Levitt, then the head of the SEC, opined that from surveys, he thought half of Americans didn't know the difference between a bond and a stock. That must complicate doing your investment planning. So, there's a role here for economists. Not that Bob's models of the stock market have it exactly nailed, but we have a number of principles that are pretty robust about diversification, about attention to fees, about the way compounding works, how risks interact, that are instructive for people who haven't been exposed to that. On the firms' side, still staying within pensions, managements think about how the pension system affects their ability to have and manage their labour force. And the incentives around joining the firm, the incentives around retirement, these are big deals. What's the role of the government? Well, there are two roles for the government, here. One is government regulations of the environment in which this happens. So it's the information that mutual funds have to provide. There's the ERISA law, affecting what corporations are allowed to do. And there are tax-favouring rules designed to encourage people to save more. And all you have to do is look into earlier history. What firms did which sometimes abused their workers, sometimes were paternalistic and successful, but sometimes very much not. What shocks came out of the absence of rules? And generally, when I think about regulation, the difficulty of doing it well, I'm drawn again to looking at what the world looked like in 19th century America without it. I find the general public debate - more or less regulation - to be fundamentally misplaced. What we need is more good regulations, fewer bad regulations. There are trade-offs that are always there. The other thing the government does is mandate. Paying taxes, contributions for a mandatory programme providing income for workers. The government does it as an employer for public employees, but I want to focus on the national system. The world is complex. The issues that government is facing in design are responding to lots of different pressures around lobbyists and financial contributions, but also the understanding and the perspective of the voters who are going to be affected by it. And when you look at the early history of pension design, what's very striking is how many of them were badly designed from the perspective of economists. What happened with a lot of systems is the incentives were overwhelming that everyone would retire at the same age. And that age was not adjusting for the changing economic environment, and the benefit you got was triggered by certain elements in your history. The worst case example might be your income in your last year before you retired, a common private practise, but not for national systems, but national systems often looked at more, but not nearly enough. If I were to cite an example, I hope, Your Majesty, you excuse me: It's the poor design in Sweden before the reform of 1995. There, the benefits were based on your best 16 years. Think of that? If you're outside that, you're paying taxes, but you're not getting any benefits for it. Does that affect how hard you'll work to earn? When you're in that period, are you going to design things to boost the relevant measure of earnings, whether it's by working harder than would make sense, if it was just your pay, but also by trying to manipulate, to move income into that time period, and then we got people piling up. Sweden had, it is to my mind, the prime example, an outstanding reform, in the mid '90s. And what I want to touch upon is the role of economists in bringing around that and many other reforms. Here, it's important to recognise, economists play two roles. Governments employ economists, and economists inside the government can be placed where economists outside the government will, as a result, have more influence in the process. And secondly, analysts outside have been measuring the extent to which the incentives had costs, and the ways of designing a system that would be more adaptive to a changing world, and also provide adequate benefit levels for what could be, what the system as a whole is willing to finance, and secondly, do it around incentives. What we have seen in the period not just in Sweden, but a number of other countries, but not the U.S., is a trend toward reforms that give much more flexibility, recognising that different people want to retire at different ages for good reason, and incentivizing them to all quit at a certain age, whether it's what underlying economics would make sense or not, was a bad idea. We've seen country after country adopting good things, and no single outside economist could say, "I wrote that, "and that's why that happened." In part, you're always working in the hopes something good happens, and in the awareness you'll probably never know. The inside people are more likely to recognise their role and how it worked. But I think it's also important to recognise that there are splits among economists. And in the eyes of some economists, the other economists were giving bad advice, and sometimes, successfully giving bad advice. So within this realm, I want to talk about, I'm sorry Mario Vargas Llosa isn't here, the privatisation of social security that he talked about, which is something that the World Bank urged on many countries as their main system. Sweden made it a small part of the system, and designed it very well. Chile initiated that, and put great resources into implementation, and it has worked reasonably well. Many of the countries that followed on, designed it badly, did it badly, and it didn't accomplish what the World Bank designers had in mind, so this has been an ongoing debate. And I think we need to recognise, not only do we not have a perfect record, there are pluses and minuses. That's an open invitation for you young scientists to spot places where you want to argue with other economists, particularly economists who are older than you are. Thank you. Bob, you want to go next? I'll start by saying, I went into economics because I observed that if you could do just a little bit good for a very large number of people over a long period, that would be huge. And the prospect of being able to do that, just the prospect, you may not see that, was sort of overwhelming, when you combined it with the intellectual challenges, and, you know, just plain interesting. I am coming down on the side that are economists are useful and economics is useful. I'll take the cut Peter, mainly it's what Peter said I agree with, so I don't have to repeat it. He chose retirement. That, of course, took about somewhat I might talk about, because I've been spending the last nine years working on trying to address the design of the next generation type retirement system, and implement it. Move on from that and talk about my field of financial economics, which is a small part of the total economist, if you like, barnyard. But it's a good, I think, strategic research site for examining the question at issue. Over the last 40 years, now, my field, the sort of most advanced academic research has found its way, in some cases quite rapidly, into the direct mainstream of finance practise. Both in the private sector, the public sector, and on a global basis. Finance is definitely a global subject. It's a global thing, and becoming more so. It's high tech, and there's a lot of change due to financial technology improvements, technological improvements that go with it. The good part is that, I think, and I think we economists, you could use this as many case studies of how issues of risk transfer, payment systems, a variety of financial functions are much better served today than they were in the past. What goes with that, however, is also, if you're very close to real practise, you have to be very careful about the negatives, or the dysfunctional aspects of, whether it's financial innovation or new ideas being implemented. And you have a greater responsibility, and the public and the press and all of you do your part to make sure that we're all aware of that. And so, if you're looking at the impact of economists, the closer you get to having a direct effect on practise, the more responsibility you have. And, you know, you'll have to take that to go with it. I won't go in in my ten minutes to all the improvements that have been made in risk transfer, the impacts on ultimately economic development and growth that came from these kinds of research. But I will mention that a critical part, in addition to the new research, new ideas, is also the transmission of those ideas, and there are two parts to that. One is conveying the ideas through papers, and others, and the other is in education and training. And the education in training, what I have in mind, of course, many of you, are going on for PhDs in research, and you're going to be the ones to do the innovations and the new solutions of the future. But there's also in my field, particularly, a very large professional group that are taught. They don't go out to do research in the academic world, but they go to do practise. And that's a very critical part of the contribution from economists in this area, because as the tools, like every other part of innovation and technology become more complex, then the training and understanding needed to implement, maintain, oversee and sustain these new innovations and improvements goes way up. And if you don't match that, then the very tools that are very efficient at things like risk transfer and the other, can be either misused, sometimes because of bad incentives. Those are the naives, we call them, but also, because people don't really know how to use them properly, or to oversee them properly. And we might call them the fools, but where there are fools or naives, the end result can be negative impact on this financial system and the economy. The reality is that financial innovation in every domain increases risk. You can't get it for nothing. But, as you also know, it provides benefit. The trick, and the challenge is how you balance those two. Sure, if you had a train, a brand new train that go 360 kilometres an hour, but your track was only capable of handling 120, you'd be insane to let them run at that speed. If, on the other hand, you always constrain the speed forever to be 120, then you get none of the benefits of the innovation. So like most of the interesting parts of economic, and I say, this is what economists also teach people, all the interesting problems, challenges, implementations, improvements, protections, are all about trade-offs. All the dominant strategies have either been done, if they are good, or gotten rid of if they're bad. That's, so, you know, I think it was, was it President Truman, said he wanted a one-arm economist. The former U.S. president was frustrated with economists, you know, on the one hand and on the other. He said, "I wish I had a one-arm economist, so I just get what I'm supposed to do." But I would actually say that the proper role, generally for economists, is to say, "On the one hand, and on the other," in the form of trade-offs. You bring your expertise to bear to create the most efficient, that you know how, trade-offs there are. In the end, however, the decision of where, on that trade-off to choose, is not clear to me at all. Should be made by economists, but may be made by politicians reflecting people or by the people themselves, or some other group. And sometimes, economists get confused between their expertise in setting the trade-offs and their personal choices of where they would pick on the trade-off, and we have to be careful about that if we're going to be effective. Finally, going back to education, and that's a very big part of it. In my own case, we are trying to develop very big programmes, global programmes, for training people in really, really, very well in economics and financial economics, because wherever the science is, wherever the regularity is, if you're doing models, or if you're thinking of which models to use, it involves abstraction. And that's an art. You can't write down a formula of what's the proper abstractions for a good model or a bad one or for good advice or a bad one to justify it. To do that, you have to develop, you have to have just some skills, but you also have to develop your intuition, your understanding, so that you can make good abstractions. If you don't know the empirical reality, if you don't know that, you don't have the judgement to make that, and sometimes we forget that. And we forget that the models or abstractions from complex reality, not the realities themselves. It's those points that we can sometimes have trouble. What I want to say on my opening remarks, and on a very positive, excited note: I think that the impact, in my field, but I think in economics more generally, has had on economies and their efficiencies and development has been extraordinary. But looking forward, the combination of the development of economics, ideas, but also, data collection, the technology, the tools that allow you to do analyses that weren't even conceivable ten years ago, open up a world of opportunity for those of you in economics to do things, improve things, that make what's happened in the last 40 years look like just the beginning. And because it's global, even if it's a little quiet where you're living, there's not much in terms of, what do you call it, use, advice and so forth, there's always places in the world where there's something going on where your skillsets, mindset, and advice can be used - so it's a great profession. It's a profession that can have profound effect on society, but it's one that also carries with it great responsibility. and it's useful in different ways for different uses. It's useful for policy advice, it's useful for designing new financial products. My colleagues and I have been working in market design, which is an engineering kind of economics that's concerned with the rules by which markets are organised. And market design, of course, is an ancient human activity. People have been designing markets since before the beginning of agriculture, but, as we learn more about what marketplaces have to do to help markets work well, economists are starting to be able to contribute to this in an intentional way. Often we think of markets the way we think of language. Markets are obviously human artefacts, the way language is a human artefact, but we don't think about changing the language. We inherit the language, and we use it to communicate with each other. And often we think of markets that way too, but, when we think of markets as human artefacts, we realise that we can change how they work, and we can fix them when they're broken. And we can make new ones when they're not available. And when we're successful, we can see our work in very concrete ways, so some of the markets that my colleagues and I have designed have contributed to the way transplants are done in the United States and increasingly around the world, and to the way certain labour markets work. Most American doctors get their first jobs through a clearinghouse that my colleagues and I have helped design. And many, many schoolchildren in big cities in the United States now get assigned to schools in ways that reflect the preferences of their families in ways that they didn't used to. And all of these engineering applications of economics are cases where, to be successful, it's not that economists come with a lot of knowledge and explain it slowly and loudly to people who should learn from us. What we do is we form design teams. There's a lot to learn about those markets before you can give advice about them. Markets have lots of details, and the details are in what the markets have to accomplish. And so, I think that there are no really successful market design applications that don't involve finding some internal champion, some kidney surgeons, or some educators, or some medical employers who understand the problem, and can talk to the economist, and help us understand the details of the problem so that we can together come up with a solution. So I think that the way to think about market design is to think about economists collaborating with people who are trying to deal with the marketplace that may not be working as well as it should be. And the same can be said about methods. There are, sometimes when you ask an economist what he does, he answers with a method. I'm a theorist. I'm an econometrician. But, by and large, none of our methods are adequate for the full task of market design, so we find ourselves using combined arms. We have some theory that's helpful. We need to study a lot about the existing markets, so we have to do empirical work, sometimes of a conventional sort, sometimes of unconventional sorts. I should mention that a lot of the empirical work that economists do focuses on numerical data. But market design is about the rules of a market, and so for game theorists, and many of us in many ways, many economists are game theorists these days, to some degree or another. For a game theorist, rules are data, and it's important to understand what the rules, the existing rules are, and what the possible new rules are, and what the constraints are, in order to design marketplaces that will work well. And the other thing to understand about engineering knowledge that's different from say, economic theory, is that it changes over time. We think about ordinary engineering, engineering of the physical world. People have been building boats for a long time, and the physical principals that make a boat float haven't changed since the first boat was built. But the boat that we just came here on, on Lake Constance was very different from the first boats. The physical principals by which bridges are built haven't changed since the Romans built bridges, but the bridges that we build today are very different, and that's for a couple of reasons. One is that other knowledge has accumulated. We have new materials to build boats and bridges from. The other is that when you build a bridge, you change people's behaviour. More traffic starts to come across the bridge, so soon you need bigger roads, and when you have bigger roads, that makes even more people want to come, so you need bigger bridges. And we see the same kind of thing in markets. Markets change people's behaviour, and consequently, market design has to monitor markets. Markets are living things. They have to change as the behaviour of the participants evolves. So a lot of my work today in kidney exchange is keeping up with the changes in the market, the changes in the medical technology, the changes in the strategies that the big players use to do their part of the healthcare business. And so, so this should change over time. When you prove a theorem, it's true forever. Pythagoras's theorem is true for right triangles, ancient and modern, and for all right triangles, but bridges are not the same, ancient and modern, and neither is economics. The economy changes. The things that were important, that we captured in our early models, may no longer be the most important things, and we may have to capture new things in newer models. One of the ways that economics is useful in market design is in constantly maintaining the markets that have been built. So I think, we'll probably get to talk more about this in the course of the discussion, but, I guess what I'd say is, for the kind of engineering economics that I get to do, we have to be eclectic in our methods. We have to be prepared to learn from everyone. One of the nice things about economics is it's about everything that people do, and so we're in a position to learn from everyone. Economists are well-positioned to learn from other people about the business that we're going to give them advice about. I think that we have to keep in mind that economics is a young science. There are things we would like to know that we don't yet know, so your generation of economists will be even more useful than our generation. Well, so now we heard about some practical experience in retirement systems, in financial markets, and also market design, and it's hard to summarise it all, and I won't try. But there were a few themes I think that came out that were kind of common. One was the importance of the economist can be useful as an educator, and is not only of the government, but it's the public, it's the consumers, it's firms, and of course educating new generations of economists. The second point is this idea that the transmission of knowledge is very important. Peter mentioned economists on different sides of the government providing a link whereby new ideas might be more effectively transposed into public policy, and Al mentioned how economists can transmit our understanding of how markets works in collaboration with the people of other specialties. That's another common theme. Then, I guess, overlaying all of this is this idea about the economist as an engineer, as help improve the system on the margin, as circumstances change, and you drew the parallel with engineering. I think it's even a notch worse for us, right? Because it's a good working assumptions that molecules are essentially behaving the same way, wherever they are and in whatever time span, at least to start with. That makes sense, but economists, they cannot make that assumptions about human beings, because human beings are adaptable. They are forward-looking and they try to adjust to the environment, which make the challenge even more stark, so there are many, many things to think about. Now, I'd like to invite you to react to what other people on the panel said. Are there more examples you want to bring? Are there some general lessons you want to try to bring out? Anything you can think of. I didn't hear single word from either of my co-panellists that I want to disagree with. I was hoping there'd be something we could tune this up, so let's turn to the element in the description in the programme of what we're supposed to be talking about. And that's really the interaction between economists and politicians, and I don't think you can think about that without thinking of the interaction between the politicians and the public. Both the lobbyists and contribution-making public, and the voting public. And the complications in getting better policies is in part what Bob talked about, that he and I might agree on the scientific part. What are the trade-offs? And he might think this part of the trade-off is much more important than that part of the trade-off, and I might say, "No, it's the other way around." And a large part of what goes on in the U.S., and the struggle between parties, is, I think, weighting different elements, and then thinking about how the policies impact differently on different groups. The second thing that goes on is a tendency to choose a policy first, and then say, "Can we defend it?" And if you like the policy, you're perfectly happy to participate in that. If you don't, you might do it anyway. Some people do for various reasons. And that, inherently, is going to limit the impact of economists. And part of the problem, we disagree on things out of weights, and that in turn unquestionably, empirically, sociologically, leads us to end up designing different trade-offs. It's not that we're doing it deliberately, but the sub-conscious is so powerful. And so if you look at estimates of the elasticity of the impact on increasing the minimum wage in the U.S. on the level of employment, the numbers are all over the place. And if you looked at the numbers relative to people's politics, you'll find some correlation. Not perfect, happily. And I think the process here is complex because the political side is inherently complex. I was struck, as I was browsing online, that European Commission president-designated Jean-Claude Juncker, once said, quote, "We all know what to do. We just don't know how to get re-elected after we've done it." I don't believe either of those parts. I think there are lots of things where lots of people don't know what to do. I've looked at things that in history, pictures become pretty clear. We have had financial panics. I guess the Reinhart-Rogoff book says 800 years, and they've had impacts on economies, and we have some sense of things that were tried repeatedly and didn't work. That doesn't mean they never work in the context of other things you do, and obviously, as many of you have guessed, I have austerity in mind. I have the chancellor's remarks in mind, but let's not go too far in that direction. But, the point here, is it's not the case that anyone definitely knows what to do. When the financial crisis hit, the Fed, Ben Bernanke, the Treasury, were trying to figure out what to do. They couldn't open the existing set of background documents and have the answer. And secondly, I think it's fairly clear that it's not the case that every politician understands everything that the economists understand. And as to getting re-elected, that's really an education process. That is, to my mind, the job of politicians. If something really is a better policy, trying to get the public to understand that, and proceed is part of it. So I think one of the things that I think is useful in an ongoing role for economists, is increased understanding of the political process, and the role of economists in it. I wanted to come back to when Peter was mentioning about re-design, and I wanted to touch again on things that are happening as a consequence of technology. As a matter of necessity, when you design big systems like pension systems, and Peter mentioned, you know, everybody at the same age, everybody the same thing, the rationale for that often is: yes, we understand that people are different. But in the real world, how do you take a millions of millions of person's system, and customise it. It's just not practical. And clearly, at times in the past, it wasn't practical, because it may well be a system was fine for the time, but what happens with technology is things that you couldn't do, you now can do. For example, in the retirement area, it is feasible today to build a large-scale system that operates at very reasonable, actually below-cost, you mentioned, expenses, of what the typical plans do. They can be largely customised in very major ways to every individual in that system, and it can be done with operational things. That wasn't doable not that long ago, but it is, and it's again a combination of finance or economic technology improvements, and technological, telecommunications, communications, data and so forth, that allow that to happen. So these are things that... It wasn't that the past was doing it wrong. They couldn't do it. So, it's little bit like saying, "Why didn't Hannibal use F-15s rather than elephants." He didn't have the technology. In a retirement system which is largely agrarian, the principal institutions for that were the family. You passed the farm on, and it worked just fine, but then, as you have in China, and other parts of Asia, as well as many other places in the world, when the economy changes from agrarian to being more industrial, that won't work anymore. Not because it was wrong. Not because of bad design. It's just that economic conditions have then changed. You have to consider both changes and what's happened in the economy, and changes in technology that allow you to do things. There's always a tendency to want to look to the past. During the crisis, we had people who would be viewed in the general public as quite credible, saying things, that the answer is to go back to Glass-Steagall, a 1930s legislation, and we might have some disagreements. I don't know. We can talk about it. But, if your best answer in 2010, '12, or '14, is to go back to a set of legislations that were in place in a time that was so very different that it's almost unrecognisable to today, I don't even know how you could really give that credibility. But yet this was said by serious people, and echoed the politicians or whoever are doing it. I think the other things following up, Peter emphasised the interchange with politicians, representing the public. But there is another opportunity that all of you would have if you want to have impact on practise, which is the opportunity through technology, again, you can actually take your ideas, let's say to the private sector, or you can have students of yours do that, but you could do it. You have a dream. You have an idea. You think you have a better mousetrap, and you can actually get an audience, and then, if you present a sufficient amount, convince them that this might well be a solution, they'll actually try to implement it. They'll do it. So, if you get tired of trying to convince people who have agendas or lack of communication, that's not the only channel for having an impact on practise. You can run through the private sector. You mentioned engineering, so forth. It doesn't always have to go through there. Yes, you always have to include government and the public sector as part of the solution. A solution, by the way, is not a set of equations and data, and a model. You have to come up with the design that works, first of all, the objective function, the functions of this thing. You have to figure out how you would market it. Marketing and education are really very similar. There's bad marketing and there's good marketing. There's bad education, good education. You have to figure out after you create demand and everything, and have the great design, who we're going to provide the resources on a reliable basis that may allow you to run it. So you have to come up with the supply side. And you have to design it within the realities of what can be done, but the opportunity to do that has never been greater for a kind of entrepreneurial, going around to change this thing. And that, to me, is very exciting. In that, you have the ways to get these things done. And, if you can show it works some place in the world that's significant, then that becomes the base for going back to those who were, let's say sceptical, or had other agendas, to eventually convince them too. You need not to take the path of most resistance to get things done. And so that's again the kind of opportunity that I just wanted to underscore for you as you're going forward. Arrow-Debreu, as those of you have all studied of 1953: Beautiful piece of work in understanding markets, but if you look at it, totally impractical. Uncountable numbers of securities you never trade. It's a beautifully elegant piece to understand, totally impractical. Today, in the operating financial systems mainstream around the world, both regulators as well as producers of products are using Arrow's securities for different reasons, but they're actually being done. Some things that look like they aren't practical or feasible, through technology in a different way of transmitting that knowledge, can end up being mainstream implementations. One of the ways, is it's putting us all in closer contact with markets more and more of the time. A lot of us have markets in our pockets. If you get tired of listening to us, you could make an aeroplane reservation, you could buy a pair of shoes and have it shipped to your home, you could pay for it with a credit card, so markets are more ubiquitous than they ever were. They are in your pocket. They're on the internet. You can transact without leaving your seat. That also makes them more connected than they used to be. When you buy things on the internet, you are less anonymous than you might like to believe. If you buy that pair of shoes while you're listening to me talk, and have it shipped to your house, the next time you look at the New York Times, there's a good chance you'll see an ad for shoes on the front page of the New York Times as you look at it on your phone. That's because your browser contained a cookie that showed that you looked at that ad, and, when you next look at the New York Times, there's an option that's connected, as you look, that determines what ad is placed on the front page of the New York Times as you look on it. And if you buy on Amazon, Amazon knows from your cookies, who you are, and what you've left in your shopping cart on Amazon. They might show you an ad again, to remind you that you have some purchases you'd like to complete. That makes markets more useful, but it also makes them more interconnected. It used to be that when you looked at the New York Times, the New York Times didn't know who you were, and now it does. So, while markets are going to increase in scope, they're going to change the way they work. For instance, questions of privacy might come up. We might want to make our markets know less about us and rather than more about us, because of course, in a world where your purchases can be linked to other databases that tell us other things about you, we could learn a great deal about you from your purchases. This is why national intelligence agencies like to look at the metadata of phone calls, for instance. You can learn a lot about people by who they talk to. But at the same time, a lot of these computer-mediated markets make things possible that never used to be possible. The markets perform computations at great speed. So the fact that an auction can be conducted for your eyeballs, for what ads to show you, every time you look at a webpage, is something that involves even more customization than retirement plans. More auctions have been conducted in the last ten years than in the previous history of humankind, because every time you do a search on Google, an auction is conducted, and things like that. In the United States, many stores would like you to have something that identifies you so that you get a discount when you go through the checkout. But that allows your purchases to be linked to each other, so that marketers can model what you're purchasing, and when, and what your patterns of consumption are. And in many ways, those are good things that we should think hard about how to implement and make work for us. They may also be ways in which they are not such good things, and we should think about that, too, because markets are human artefacts, and when they're not working the way we want, we should make them work better. One theme here has been how technology evolves, and how that makes economists evolve their tools and try to adapt to that changing situation, and be useful. I guess there is also another dynamic of what drives young researchers, and that's what's going on inside the profession, which, has its own dynamics. And if I think back on when I started understanding what was going on in economics, which was probably sometime in the '80s, there has been really a sea change in the profession in several dimensions. At the time, many people were trying to do what we might call now basic research, whereas today, much of the research that is done is much more applied. At the time, there was a certain emphasis on theoretical research. Nowadays, many more papers, many more dissertations are written on empirical subjects with new techniques. At the time, many people were doing macro, and now it seems to be drifting towards microeconomics. At the time, economics was a little bit isolated among the social scientists. Now, economists are reaching out to political scientists, psychologists, sociologists, anthropologists, and the other social sciences. This also seems to be a driving force towards more sort of hands-on engineering kind of approach. Can you reflect a little bit on the changes you see in the profession, and how that factors in to the usefulness of economics? Is that a good thing? Does it make economics more useful? and the principal is that the profession advances as young people form their judgments of what ought to be going on, and I think it's wrong for old people to tell young people what's going on and how they should react to it. Giving examples of what has worked is very different from saying, "This is what you should do." I'll also admit to being a bit out of touch. I got my PhD in 1974, and there's a way of counting that makes that 40 years ago. And in that time, a lot of things have changed in economics. Game theory has entered economics. It used to be that if someone said to you he's an economic theorist, he mostly meant that he did general equilibrium theory. And now, he mostly means that he does some kind of game theory. Experimental economics has entered economics. Market design is starting to enter economics. And those are just the parts that I work in. The day-to-day feeling is that change is very, very slow. That the process of convincing editors and referees that some new thing should be counted as economics, it day-to-day is a very slow process, but over the course of a career, it's very fast. I think there are a lot of scientific disciplines that fractionate, rather than incorporate new methods, in the way that economics has successfully done. And, of course, economics is also welcoming to people like me, who didn't study economics. All my education was in engineering, in operations research, and I studied game theory. And it wasn't clear in 1974 where game theory was going to find a home, but it found a home in economics. I think that's a healthy sign for economics, so, obviously old people shouldn't give advice to young people about what to do next, but keep your eyes open, because there'll be lots of things that economists need to know that are coming from places other than other economists. but that doesn't mean I can't talk about what I think are interesting directions that might happen. Not to tell you this is what you should do, but, if you find it intriguing, you might want to go there, and see if that's an interesting thought. And again, it's not surprising each of us thinks along certain lines, so we're all kind of coming back to our own theme, whether it's markets or so forth, and I've talked about innovation, and whole hosts of things. But when all of this innovation takes place and the change, and it's going on around the world, because every financial system, in fact every economy, but every financial system in response to these economies, has to have major revisions and changes. China, for instance, is not just a big country. If it's going to take a role as kind of a world entity, it's going to have to vastly up what its financial system can do, and it's not just making the RMB a convertible, but that's only one case. You know, there's all around going on. What does all of this technological change mean? It's not like, it's like his phone. Or your computers. Before you practically got it out of the box, it's already obsolete. Technology changes so rapidly, but that, in my view, is what's going on in the world. At least in finance, but since finance is not separated in the way I think of it from the rest of economics. I, again, only think of it as a strategic research site for insights. What does that mean? I would say that most of the time in economics, the perspective taken is what I would call an institutional one. The institutions are the anchors around which you describe economic activity. In my part, the institutions are banks or insurance companies or pension funds and so forth. And, in fact, the term shadow banking, which you've all heard. What is that? It says there are firms out there doing what we think banks do, and they're not banks. Well, the reason shadow banking has to even be described, is because we choose to regulate and so the implementation of the way we think is institutionally. You regulate banks. What is a bank? You define it as a legal entity with certain activities. One of the things I think you may find useful, is to consider using an alternative anchor, which is financial functions. If you do that, then the institutions can have a chance at becoming endogenous. That is to say, you can begin to have a theory of the dynamics of institutional change, rather than do it. You can never do that, in my view, if you use the institutions as the anchors. So, we were talking about retirement. I alluded to an agrarian system. In the agrarian system, the institutions are family. That can't be done anymore when you have these changes. If you use institutions, you're going to be walking around trying to figure out how you can fit into the institutional boxes you have used, the changes that are going on. If you know the retirement part of the life cycle is true for every country, it was true a hundred years ago when something had to be done, it'll be true a hundred years from now, it's highly stable. And that's what you usually want for primitives, so I would suggest the whole area that's all connected to the things you're seeing, the technology and change, is to do that. Now, in periods that the past. Peter was saying we're all influenced by our environment, how we think, no matter how we step out. In the past, there were vast periods, where financial systems didn't change very much at all. Banks were banks, and they did the same things, and so forth. In that case, you couldn't identify a difference between a functional or institutional because neither of them changed. That's not the world you're in, and I don't believe that's the world you're going to, you know, be in going forward, in a big way. Rather than tell you what to work on, what I'm saying, as an example: Try to step back and look at the way the world is, and see if you can get some thoughts about maybe looking at it differently, and don't take as given what the last generation specified as the primitives or the way you have to think about it. And that would be as close as I can come to saying where to go, without violating Peter's principal, which I agree with. And this seems to suggest that, maybe that's more valuable than doing basic research of a theoretical nature. But it is important to remember that sometimes serendipity, just your example, Bob, with the Arrow-Debreu doing the most abstractive things ending up being used to design actual securities many years later. Or, for that matter, when Gale and Shapley were writing 50 years ago on the differed acceptance algorithm. That was an exercise in mathematical logic, and little did they know that Al would make that come true through the design of actual market systems. So basic science has this wonderful property of sometimes unexpectedly, completely showing up to be very, very useful. Maybe this is a good time to ask people to come up with questions, and you can direct them to the panel at large, or to a member of the panel or however you'd like. And please, when I point at you, can you go to the mic? I saw you raising your hand. and your important and interesting insights you gave to us on this. I have a question especially to Professor Merton about something you mentioned about responsibility for the advice economists give to politicians, for example. On the one hand, you said that the closer you come to practise, be aware that the larger gets your responsibility for what your advice is. But on the other hand, you said economists who give advice should not be confused with the decision-makers who are in most cases then politicians. This could be a statement which could be understood as protecting oneself from responsibility, on the other hand, and so, I would like to, would be very thankful for the comments on this. When I said the distinction between using all of your technical skills to create the best set of trade-offs you know how, that's because that's what you do, and others don't do that as well. I happen to be of the belief that once you come up to those trade-offs, it's not clear that the person who did that should also be the decision-maker of what trade-off you should make. Where on that frontier. Just think of the simplest example of risk versus potential growth or return. Why should I make the decision for any large entities, let alone a country, on my preferences, what risk we should take, to get what grade of growth. That seems to me, if it can be communicated, belongs to a decision in some way about some representation of what people in the economy want in terms of their preferences and capability. That's what I was trying to say in my remarks. Not to say, "Oh, well, you know. Whatever they do with this is not my problem." It's rather to say it's very easy for me to say I think you ought to go for growth, and risk is going to be okay. Well, this collective might not agree with me. And we have other mechanisms. We talk about politicians and others, who are in one way or another, they're function, I think, is to try to represent and make decisions of those sort, at least as much as economists should decide. See, so that was the nature of that element. The other is, while you take responsibility, you can't take responsibility for what you don't control. And if you don't control the execution of a strategy, you're not allowed to, you really can't be held responsible for it. The one thing that's not reasonable is hold people responsible when they don't have control or authority. That's how I would respond, pretty much, to your question. I don't know. If you had a certain refinement, I'm happy to elaborate. Thank you. for having wonderful insights and for the organising committee, thanks for having us here. I feel like this is a once-in-a-lifetime opportunity. I am going to ask as a controversial question as possible to add some spark underneath all you guys. When I was doing a PhD., I had a professor who has a theory that says: there is an optimum number of lawyers in an economy. There needs to be an optimum number of lawyers in an economy. The idea was, you need some lawyers to help malfunctioning legal system. But on the other hand, when you have more and more, at some point, they become a legal burden. They create more transaction cost to the economy, to function as efficient. The way that I interpreted this is if the legal system acquires a sort of market power, that would increase the surplus that goes to the legal system in terms of any economic activity, which, in turn, since the surplus is getting higher and higher, that would lure bright minds into that system, which then, are going to try to establish themselves in that system, make them indispensable to the workings of the economy. So they actually try to increase their market power, and they are smart. They are going to actually, they might possibly, they have a chance to do that, and that this is going to feed them to a vicious circle. Basically, you could draw very similar conclusions to the whole profession as economics as well, maybe more importantly in financial system. There are many similarities. I guess the basic thing that I kind of get confused in my mind, when we are teaching economics, we praise competition. You like competition. We don't like collusion, and we don't like market power, things like that that much. But what I observe in economies as a researcher or as a person that lives in an economy, even though the competition is good, when you leave them alone, every firm tries to increase their market power, and at the end, competition doesn't seem to be stable. At least for the part that we care the most. I'm going to bring that to the profession of economics, because, actually, the profession itself has some resources available to itself, legal resources to a certain extent available to itself, that increase the market power. Actually they are going to get the higher surplus from the system, which in turn becomes, to a certain extent, from an economist point of view, becomes as efficient. I could make practical observations in terms of financial systems, like there is huge critics about financial system, in terms of that, like the huge amount of pay without increasing much productivity. But I would like to just know what all of you think about this. Thank you. It seems that the question is: have we passed the optimal number of economists? Take your pick. about the town that was too small to support a lawyer, because it didn't have enough lawsuits, so the solution was to have two lawyers. It said we're plugged into the profession. Couldn't we do something like getting government rules that you're not allowed to be a highly-paid consultant unless you have a PhD? And then we could up tuition levels and the pay for economists. That was what you had in mind, right? I think it's interesting. He shook his head, no. I'm not surprised. I think it's interesting that many professions look for licencing under the cover of protecting people, and we certainly need some degree of licencing, and some degree of protection for people. But we economists, perhaps out of our education of the value of competition, have never gone down that road, and that's a good thing. which I presume you are planning to be, as you're here, you have to hold yourself, try to hold yourself, on important issues like this, to looking at the facts. Evaluating the facts using the theory and the empirical work, recognising there are dimensions of your narrowly-defined economics training that enter into the real world that are not reflected, and review it, but I want to underscore the facts. You made statements about productivity. You made statements about too high pay, all of which may be absolutely true. But I might ask you without asking you really, on what basis did you arrive at that as being something to quote, and if the answer is because, that's not the standard that's acceptable in our profession. We require a discipline. It's not we're any better than anybody else, but we require, if you want to carry, be a card-carrying economist, you have a discipline. And a discipline is, you have priors, you develop theory, you apply theory, and so forth. You look at the data, and you try to make an assessment of what the facts are as best you understand that are relevant, and then what is the conclusion. And you try as much as possibly to let the conclusion be what all of that gives, and nobody does that perfectly. But that's a very important thing, because there's a lot said, and I could give you many cases, repeated over and over, some by very eminent people, even some eminent economists, based on a stated fact that wasn't true, but when it's repeated enough... Well, if I heard three people say it, and of that stature, it must be true. Never check the data. But, going back to what Peter said on competition, if I'm thinking of my world, because you alluded to the financial world, it's probably after medicine, the most regulated industry out there. Maybe you'll find a better one. Maybe airlines, but I would say it's a good candidate. Is regulation bad or good? No, I'm just stating what I believe to be a fact, and one of the consequences of regulation may not be intended. In some cases, you alluded people with power would use this, because government is a very powerful tool for protecting your interest. If you can get government to do what you want, but one of the unintended, I hope unintended consequences, it raise costs. Regulations, legal things, all of these things that in the abstract sound very good and may well be, also impose costs, and those costs are disproportionately imposed on the new, the innovative, the ones who are trying to take over and compete away the established. We're always at that, again, trade-off, that we make those who are already there, that have the scale, you give them additional advantages whenever you create barriers of cost of entry. So, we need to analyse that. I'm not saying that's the reason this happened. I'm not even sure I agree with your facts, but if you presented them all, I would just suggest you have to look at the whole of these things, and recognise that every group is trying to have its influence or power for their interests. And I think that's part of the role of the political system is to, you know, trying to do that. I think it's very important, but I think that competition is pretty powerful. Take a look at all the large financial firms, or firms providing financial services. And look at the ones that were doing that 20 years ago, let alone 40 years ago. You'll find that very few of those are anywhere close to being important or influential in the past. Different countries, that's not, you know, it's different, but I'm thinking of let's say in the U.S. that I know best. If you think of companies, like General Electric and AT&T and so forth, and then you look at who are the companies that are not only the largest market cap but are having big influence, they didn't even exist 20 years ago. This image that somehow they got the power and that's it... If you have innovation or technology that enables a reason to be able to do things better, and you have relatively few barriers to entry. In finance, and I'll quit on this, I mentioned it's a global business. You have global competition. I can assure you, you can move things between Hong Kong, New York, London, anywhere you want. People speak English. They do it, and the universal language of finance is English, so if you're in there, you can do it. Companies can, through the modern technologies, Unibanco in Brazil, can compete in the equity markets in the United States against Citibank through the new technologies. And Citi Bank can compete with Unibanco, and Google could create certain financial services, provided the regulators would let them, that would likely, could drive several of these companies either out of business, or force them to change what they do. Competition, if it's allowed to do it, is about the best I know, way to do it. Hiring a benevolent dictator, and well-informed, so you have to be both benevolent... You have to be willing to do the right thing, and you have to know what the right thing is to do. We all know can be pretty efficient, but those adjectives are rarely satisfied. Hi, my name is Nadia. As today we are talking about how economics is useful, I want to provide you two numbers: However, only 8 people are currently working on an energy policy, sustainability, climate change. So was wondering, what do you think about that? And what do you think, if there is a role for economists in this field, why economics and economists are not really focusing on climate change, and sustainability, that actually is one of the most pressing issues, worldwide. And then I also wanted to recast: please use your knowledge, your expertise, and also your name to get more in touch on those topics. Thank you. Go ahead. I think there are more than eight people in the world working on that. Certainly add MIT. There's a large initiative. A lot of that, of course, is coming out of the science and engineering part, but at MIT, economists are integrated into lots of different issues. There is, in fact, an ongoing seminar: that's computer scientists and economists to interact with each other by having alternate weeks different speakers around the same kinds of issues. But, what you've raised is, we don't have a benevolent dictator saying, And you're suggesting, because it's important, there should be more people, and Bob would say, But the point is, it is decentralised, and merely the fact that the topic is important is not sufficient to know how much work economists should be doing at it. Because part of the question is: what can economists accomplish in the process of working on that? And, how much of that relates to the kind of research that young people have comparative advantage of doing, as opposed just to trot out an example. Nick Stern organised the British government report on climate change, drawing on scientists and economists. He was working for the government. He had a great deal of prestige, connections, and was in a place to put something on the agenda. A young researcher can't do that. A pension economist or macroeconomist saying, "This is important. This is important." That isn't where the action is. I think we have to ask the question, how do we find something both interesting, worthwhile and contributory for young researchers to do, and I think if you write a paper that people sit up and take notice of, other people will sit up and take notice of the opportunity. So, the burden's on you. I definitely agree that you can't judge how much effort should be put into a topic by its importance. Just as old people shouldn't tell young people what to do, by and large, we don't tell each other what to do, and we have the idea that people look for ways into problems, and that studying the most important problem directly, is not always the best way to make progress to solve the important problems. So to give a medical analogy: I don't know of anyone whose research agenda is to study how to prevent death. That's clearly an important medical problem, but the doctors and medical researchers I know all study smaller problems. How to do kidney surgery. How to fix broken bones. How to cure cancer. Some of those come closer to solving death than others, but it just doesn't make any sense to put in a grand proposal today that says, "My object is to solve death," because that's not the margin on which biologists and doctors can make the most progress right now. So what we do as economists is we look for the margins where we can make progress. There are vast areas that we don't know about, and some of those are very important, but it's not clear that, as Peter says, that those will have the highest payoff in the short term, in the lifetime of any given economist, to be the things that we should work on. Of course climate change is important, and, of course, we should think about how we can contribute to that, but the contribution that scientists make is often at the frontiers of knowledge. It's where we know something, and where we almost know something, and not where we know very little. What are the main and the best energy policy to support clean energy investment, so we are not seeing, "Oh, climate change is important." It's more about what we can do about that. For instance, I'm working on financing, financing clean energy, that's just one example on what we can do. So, but, thanks for that. Yes? In many countries, media can manipulate views of citizens on economic issues. This in turn can make that preference, this political preference, and so on. Academic journals usually are limited to students and researchers who have subscriptions to the journals. And I believe in academic journals, the conclusions are more objective than in media. My question. I wanted to say that there also people who are not in the industry, people who just have general interest in economic issues. They cannot access these journals, because of the high costs. I can understand that there are probably pro and cons of opening access of these journals to broader audience, and I would like to hear your opinion about this. Thank you. Someone want to speak to that? First of all, there is, and this came up particularly around JSTOR. There is a genuine cost to be covered of making information available, where we're talking about not, "Oh, I put something on my Facebook page" and "it was short enough for people to read." We're talking here about extensive material, which we need a process, we do peer reviews, we do circulation, we rely on editors to pick what we then browse on. There's a process there that has real costs. In part, there are, there is some willingness to finance greater access through some mechanisms, such as an open access journal. You can create one. There is also, and I think it's worth recognising, that while published things often have costs associated with them, the working papers are often readily available. Surely, you know, you don't keep up with what's happening in the profession by waiting until things are published. I think the issue of pricing, and the incentives for organisations to do things to make things more available, is important. The American Economic Association, and I played a small role in this process, added more journals, because as a non-profit, as an association interested in expanding the availability of economic analysis, they charge a lot less for journals than the commercial ones. And the charges significantly affect the extent to which things are in libraries. Many libraries are free access to lots of people, so I think we've got to recognise, there are multiple ways of communicating, multiple incentives for different groups. And I wouldn't pick out one, and say: "This is "just what we need, and then we don't have to worry about the rest." In part, because there's a real cost element, and in part, because there's the question of how you fill the other roles. The number of papers being published by economists are far more than any person can keep track of. We all use some kind of screening device, and some of it is somebody saying, posting on a webpage. Outside economics, I sign up for several, sometimes dailies, sometimes weekly emails of things that some group of people found interesting. And if I read some of them and find them interesting, I don't unsubscribe, which is one of my favourite activities on the internet. I think we've got to recognise diversity and, if you have a particular example in mind, yes, there may be a niche for it that would be useful. I'm very glad to be here. I'm so lucky. Rather than one question answered by all panellists, please allow me to address one question for each panellist. The first one, I address this question to Professor Diamond. Since I am working for the central bank: What do you think about one world, one central bank, one currency? It has been started with European Central Bank, and next year the ASEAN community will begin. It will have probably external influence to other countries, because exchange rate crises or exchange rate shocks will hurt a country. The second one, I address this question to Professor Roth. What do you think, what went wrong with the so-called neo-liberal economic theories, so that some people are just not happy with that? And the last question I address to Professor Merton. We have developed so many model theories in everything. And we have so many practise people in this world, and some of them are here. What is the role of laureates in the recent financial disasters? Thank you. I'll go very quickly. There is a sizable literature on optimum currency areas, and, I can say, I've never read that literature. And while it is common, and this is another example for a laureate to be asked all sorts of questions, about which he has no expertise, and it's perhaps too common to answer them anyway. I do some of that. Let me just say, I'm not answering. The question addressed to me was, what went wrong with neo-liberal economic theories. I don't understand the question. I'll have to pass. but I will, since you should get at least one question answered. If I heard it right. I wasn't quite. You weren't quite clear at the end. Is it my personal responsibility for the financial crisis? Wow. This reminds me of an Ayn Rand novel. The John Galt of the world. I don't think so. But to be serious in it, obviously the answer to that's very complicated. But I don't think you can attribute, and there's no basis for attributing it to simply models, because I could say lack of models, poorly designed models, or what's most important, and this I will say, because some of heard me talk, heard me say this before, the rest of you haven't. How many times do you hear people say it was bad models? That's not a well-defined thing in my view. To understand what's a good or bad model, you need a triplet, the model, the user of the model, and the application, and you cannot judge the model independently of the other two. For one application, the right model might be something like it's called a standard model; purely empirical, looking at high-frequency data. Because if you're making markets at that speed, all the structural models have no meaning. If you're designing a model, let's say for the expensing of stock options, because they are now, by accounting, have to redo it, the accuracy in terms of market price is secondary. What's really important is that it's auditable, meaning somebody can reproduce it, the number. That it's comparable, meaning the numbers are the same in these different balance sheets. That it's relatively cheap to do if you're going to impose it on everyone. In that case, the accountants chose to use a simple Black-Scholes formula, which is a very spatial case of for example the work that Myron Scholes, Fisher Black and I did, because everybody understands it, it's transparent. They had rules on how you computed the inputs, and so, when you see that number for Cisco, or if you see that number for Microsoft, they're comparable by the way they were computed. And anyone can reproduce them, because you know the rules. For an accounting application, that's far more important, than whether that's something you would ever pay to trade. I don't really, we'll take too much more time, but I'm saying to you, those are the kinds of things you've got to come to deal with before you even make this assertion. Because it sounded a little bit like say, you know, what's it like to be an axe murderer? Do you take responsibility for it? And there's a presumption in that sentence, which I don't quite agree with. Take the question from the first microphone. Economics, as you said, is a very welcoming discipline. We've taken in a lot of ideas or new fields, sometimes coming from other directions. And it's also a very proliferating field, so we've seen, for example, law and economics proliferating, or political science using a lot more economic methods. But sometimes the growth of economics in these other fields can crowd out methods which were already there. The growth of law and economics could crowd out legal reasoning. The growth of quantitative methods in political science may crowd out their qualitative methods. What do you see as the role of economists in these sort of proliferation of economic methods? Is it our role to incorporate some of their methods in return? Incorporating things like sociology or philosophy when studying things like repugnant markets, or is our role to educate others in better using the economist toolbox. Or finally, are there in fact some areas in which economics cannot be useful? So as Professor Merton said earlier, are there questions which, you know, we can lay out the trade-offs, but leave to someone else the aggregation of preferences? is to learn from everyone as much as we can so that we can study economics better, and economics is a very broad thing to study. Economics is what people do. It's all the ways that people cooperate and coordinate and compete, and organise themselves. So I think that there aren't natural disciplinary boundaries in what we study, although there may be disciplinary boundaries in how we study it. But our obligation as economists is to bring what we can from wherever we can to help us study the things that we study. But I don't think of behavioural economics, economics and psychology, say, as crowding out traditional economic methods. I think of it as supplementing them. I don't think of economic sociology or economic geography as crowding out traditional, other things that economists do. In the same way, I would imagine that it's the job of legal scholars to decide how useful they find thinking of the economic consequences of laws as their basis, as how useful are these compared to other kinds of legal scholarship. So I don't think we have a big role in policing the use of economics in other disciplines, but we should be very careful not to miss out on advances that are being made in other disciplines that we should know about. My name is Christopher. I'm from the Central Bank of Iceland. I only have one question. Well, actually, I was going to ask this question yesterday, but on the panel discussion yesterday, they ran out of time, so if you don't like the question, it's not my fault. On the first panel discussion, we were talking about big data, how useful is it, and what to avoid, and stuff like that. On yesterday's discussions, they were talking about mechanism designs. And they mentioned the name Hayek there, so a quote came to my mind. It's like, "The curious tasks of economics is to demonstrate to man how little they really know about what they imagine they can design." I was wondering if you could give your thoughts on what you think we can design, and respectfully, what we know about it. Thank you. and an extremely valuable concept and one that's hard to teach. Starting from that place, my initial reaction is that your question left out: what's the alternative? If we're looking at some allocation problem, and economists are going to analyse how it's going to be done, the question isn't: can you do it? The question is: can you do it better than it happens otherwise? If you'll excuse me, I reject your question. that if you ask three economists one question, you'll get at least four answers. I think we've heard a lot fewer than four answers for most of the questions today. But you mentioned a lot about the fact that despite journals are expensive, that quite a bit of our economic knowledge and our working papers are available for free. There has been this proliferation of free or nearly free economic scholarship, both with proliferation of economists, journals, availability of working papers, so much so that if I wanted to only read minimum wage papers that say that "minimum wages have devastating consequences for employment", I could do so. And never have time to read any other papers about anything. Which has led to, I think we saw this in the last political debate over the minimum wage, that CNN seemed to report that all scholarships said one thing and Fox News appeared to report that all scholarships said the opposite. What do you think about our responsibility as economists and the creators of this knowledge to portray it in ways in which we accept that there are differences of opinion and differences in methodology that lead to these different answers. So that when it's used by policy makers, that they can't sort of just go in one vein, and choose the pieces of scholarship that agree with them, rather than making an opinion based on the plethora of scholarship. Thank you. It's very difficult to... I can't think of any way to write a paper, even if you said in your paper, there's no way that the line in your abstract that supported somebody's position wouldn't be what they remembered from the paper. but this is a phenomenon that exists everywhere. For example in medicine, if you have a problem, some experts, top of the line experts, would say surgery is the best solution. Others say chemicals. The third says something else. All of them have data. At some point, either you have to hire someone who you think would make the best decision for you among those three, but you're sometimes asking for a convergence that is rare to find in any field. I'm just saying that is a generic issue. But I think the other thing you're exemplifying, and which economics would have told you, Peter had mentioned feedback: The less expensive you make it to have it, both for people who write, who want to get an audience, and for people who want to read, but don't want to pay for it... surprise, surprise, the amount of it produced gets much bigger when you reduce the costs. And therefore, you then found yourself with perhaps the unintended consequences. You say, if you had to go back to the root sources, you could spend your entire life reading on one subject. So then you go back to what Peter was alluding to earlier about journals. You would probably hire somebody to say, "Which of these papers should I read?" Well, you're now back to some form of editorials. It's also true, because of blogs, and because you can get them easily, you don't have to have one person. You can get a stream of those, but then you're probably going to have the blogger to tell you which of the bloggers. You know what I'm saying? I don't have an answer, but I would just point out to you that that's a feedback or instance of lowering the cost, and so in some sense, with respect to an earlier question, there's probably evidence that it's going in the right direction, at least making availability, if not practical availability. and the best survey papers are struggling as best they can for balance presentations. And we rely on things like the Journal of Economic Literature, the Journal of Economic Perspectives to try to get a balanced picture available. The issue of how to get the public more aware. I think the media references you gave us, are not of people who are unaware of the ability to acquire a balanced perception. I think we're really talking in the realm outside the education and research that I consider to have been my job, and I still do I guess, but rather, "gee, wouldn't it be nice if society were different?" And I can say "Yes" but I don't think that's going to help anything. So if you read Matt Gentzkow and Jesse Shapiro, people like that, they think there's a reason why Fox News presents one point of view and you can turn the channel and get a different point of view, and they think that that's filling a demand. So it has something to do with the kind of news we like to listen to, that we get the kind of reporting that we get. I think that's testimony to the success of this panel, but I get strong signals from the real power that we ought to stop. I'm not going to try to summarise this discussion, which was very interesting. If there is one idea that came out of it, it's this idea about the economist as an engineer, working on a gradual improvement of design of systems. And that comes pretty close to the views of Keynes. If I may remind you of the Essays in Persuasion written 83 years ago, when Keynes said, that would be splendid." And I guess what Keynes meant was that dentists, they work at only a small part of the body, but they can still remove a lot of pain. And with that, let's close the panel. Thanks to the panellists and thanks everyone for coming. for being a wonderful moderator for today's session, and I want to remind you that we see each other at a quarter past three in the castle courtyard for the farewell ceremony. And now I wish everybody a good lunch. See you later on.

Panel Discussion (2014)

How Useful is Economics - How is Economics Useful? Panelists Diamond, Merton, Roth

Panel Discussion (2014)

How Useful is Economics - How is Economics Useful? Panelists Diamond, Merton, Roth

Abstract

Economics is often abstract. Economic models are formulated in general terms, without reference to any particular economy. Theorizing involves assumptions that are patently unrealistic. Laboratory experiments involve artificial environments that may be quite different from real-world situations. Econometric studies often exploit specific data sets that allow the researcher to identify certain effects. But we are not interested in models, experiments, or econometric regressions for their own sake, but for the insights they provide about the economy at large and for the uses to which they may put in dealing with real-world problems. Relying on the experience of the participating laureates, the panel will discuss why and under what conditions the insights gained from models, experiments, or econometric regressions can be used outside these narrow domains and how they contribute to dealing with real-world problems.

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