Stanford’s alumni association magazine has a good article on recent economics Nobelist Al Roth. Several things about the article will trigger resistance among some free market readers, beginning with the title (“The Visible Hand”) and the subhead (A new breed of economist, Alvin Roth brings an engineering sensibility to fixing markets.). Deep into the article, this too: “Thanks to guys like Al Roth and powerful software … we were able to put all our incompatible pairs in there and just hit a button and the computer would spit out the answer.”
In fact just this morning I was just re-reading James Buchanan’s remarks about differences between economics as a science of allocation versus economics as a science of exchange – Buchanan was definitely in the exchange camp – and perhaps Buchanan would wonder whether or not these game-theoretic algorithms constituted a kind of applied economics or perhaps were something more akin to mere logistics tools. But in that article (“General Implications of Subjectivism in Economics”) Buchanan does suggest that game theory, in that it can frame situations from the point of view of economic agents, might constitute a valuable tool for understanding economics as a science of exchange.
But it is clear enough from the Stanford Magazine article that more than logistics is going on in Roth’s efforts. In all of the matching schemes Roth has helped develop, the incentives created for participants are a key constraint. It isn’t a mere matter of minimizing fuels costs for a delivery fleet, Roth is using economics to meddle with the rules of particular kinds of economic systems in order to bring about better arrangements as valued by the participants themselves. These efforts are not about imposing allocations, they are about enabling better exchanges in complex environments.
[HT to Daniel Cole, who draws attention to the dwarf-tossing issues raised at the end of the article.]