Tuesday, October 10, 2006

Market failures

Over at Enviornmental and Urban Economics, Matt Kahn wonders if there are Too few prizes in academic economics?

I am by no means a fee market fundamentalist. There are many externalities that need to be corrected and quite a few products that are undervalued relative to the market. Neverthless, Matt completely loses me with this statement:
In other academic areas such as biological research, one can become a billionare if one discovers something valuable. Academic economists don't have such possibilities.

First of all, I don't remember seeing many billionaire biologists on my last trip to St Tropez. Maybe they just have their yachts anchored offshore, but somehow I doubt it.

Second, if Matt wants to criticize economists for declining marginal production, then wouldn't eliminating tenure be a better place to start?

Finally, if the problem is more specifically the lack of "big breakthroughs" then I would argue that the market is particularly well suited to allocate this outcome. The problem is lack of rigor for most economic "proofs". Black-Scholes pricing has been accepted because it works, but not many other Nobel Prize winning ideas have had the same consensus or staying power. The market, in comparison, is great at recognizing new value. So we see Billy Beane arbitraging away the value of statistical analysis in baseball, Wal-Mart leading the way to more efficient retail supply chains, and Google proving the value of the Long Tail. Even for non-business oriented fields of economics we see governments (on a local and int'l level) competing to improve environmental management, labor market regulation, ideal levels of taxation, etc. Race to the bottom or race to the top depends on your perspective, but being able to actually apply insights from academic economics is rewarded. Same as biology.


Post a Comment

<< Home