It is significant that Nobel prize in economics did not go to those economists who were closest to predicting or warning about the worst disaster for the capitalist economic system since the Great Depression. But then John Maynard Keynes never won a prize either.
The favourites for the prize had been Richard Thaler (http://faculty.chicagobooth.edu/richard.thaler/research/) and Robert Shiller, the leading proponents of ‘behavioural economics’, which argues that investors and economic agents are so irrational that speculation, ‘herding’ and uncertainty can lead to instability and economic crisis.
Robert Shiller, in particular (http://www.econ.yale.edu/~shiller/), put this theoretical approach to the test in arguing that the US housing market in the early 2000s was a bubble waiting to burst (see his book, Irrational exuberance, 2000 and later publications). Its subsequent collapse gave some validity to this school of economic behaviour (but see my view on behavioural economics in my paper, The causes of the Great Recession).
At least Shiller won the Deutsche Bank prize for financial economics, but Nobel has not recognised Thaler and Shiller. Instead, the Nobel powers- that-be awarded the prize to three economists whose contribution is much more obscure. Peter Diamond, Dale Mortensen and Christopher Pissarides have developed ‘search friction’ economics. Using erudite mathematical models, these economists have developed rigorous explanations for why supply does not always match demand in various capitalist markets, in particular, the market for labour.
Apparently, much of the unemployment we are presently experiencing in the post Great Recession world is not necessarily down to a collapse of the capitalist economy but due to inefficiencies in matching the jobless to job offers. It takes time and facilities for potential employers to find the right employees and for employees to change from previous job experiences into new ones. Thus unemployment can appear even when capitalism is working so well that there should be full employment. Such ‘frictions’ may appear to be common sense, but Diamond et al make mathematical models out of the mismatch, so policy makers can decide what to do. At least, that’s how I understand their contribution.
Well, their work is vaguely interesting, but it hardly contributes to the major issues facing the economic system. Indeed, Peter Diamond in an interview, said that he was not interested in macroeconomics (see An interview with Peter Diamond, 12 July 2006, Macroeconomic Dynamics). He is very much a mathematical model man.
That’s all fine. But these Nobel winners reveal the weakness of mainstream economists as exposed by the Great Recession. They did not predict or forecast it, they have no explanation for it and now their policy prescriptions point to improving the efficiency of ‘job search’. ‘Search friction’ economics offers a way out for the apologists of capitalism. It suggests that the unemployment problem is more of matching job seekers to job offerers and not the result of major collapse in capitalist investment and production (see my post, Jobless by choice, 31 August 2010).
I’m sure Peter Diamond does not hold to the extreme neoclassical view that denies a crisis of effective demand and sticks to Say’s law (see my post, Vulgar economics in despond, 28 May 2010). But it is certainly a possible implication of his and his fellow winners’ work.
For example, Diamond, like all mainstream economists, accepts that the so-called crisis in the US social security system (and other OECD state pension schemes) is because we are all getting older and using up the benefits faster than the contributions coming in (see Saving social security: The Diamond-Orszag plan, 2005). His answer is to make the retirement age later and to increase contributions (not to cut benefits). No wonder President Obama has used him as an adviser and wants him elected to Federal Reserve Board. His views are right in the middle of the stream. So are the Nobel people.