The predictions of this year's Nobel Prize winners were off again. None of the most frequently mentioned candidates for the prize in economics, such as U.S. economists Richard Thaler and Robert Schiller, Paul Romer from Stanford University and Eugene Fama from the University of Chicago, won the prize.
This year's laureates are U.S. economists Peter Diamond from the Massachusetts Institute of Technology (MIT) and Dale Mortensen from Northwestern University, and Christopher Pissarides from the London School of Economics and Political Science. They shared the prize "for their analysis of markets with search frictions."
The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was established in 1968, long after Alfred Nobel's 1895 will, which instituted the original Nobel Prizes in literature, physics, chemistry, peace, and physiology or medicine. It is considered one of the most controversial Nobel categories, as many claim economics is not a science at all, or at least that it is not on the same level as the hard sciences. It's also difficult to assess the practical contribution of economic theories, and no theory has offered an effective way to prevent depressions, the main problem of the market economy.
The global economic downturn, which began in 2008, has breathed new life into this criticism of economics. Economists have not found a way to prevent crises and, worse still, most of them did not see the current crisis coming, as the bulk of economic models presume market stability and do not even allow for the possibility of such a large-scale downturn.
No economist has escaped the shame heaped on their profession - not the advocates of a self-regulating free market or the believers in government interventions. But the latter can at least celebrate a minor victory, as government bailouts prevented the crisis from escalating further.
For the past few years, the most widely discussed economic issues have been the roots of the crisis, possible crisis development scenarios and solutions. However, the prizewinners' "analysis of markets with search frictions" has very little to do with the crisis. Diamond analyzed markets where buyers and sellers have difficulty finding each other, while Mortensen and Pissarides applied his theory to the labor market.
It's understandable that economists want to avoid the topic of the crisis and the recession altogether; it is the best way to keep economists from each other's throats, which is just the case with Nobel Prize winner Paul Krugman and Eugene Fama, the father of the efficient-market hypothesis and a rumored frontrunner for this year's prize.
As Krugman has repeatedly noted, economists from the Chicago school, to which Fama belongs, claimed several years before the crisis that the problem of depressions had been solved. We saw in 2008 just how effective the solution was. But monetarists have not been chastened by their past failure; now they are trying to debunk the generally accepted theories on the causes and mechanisms of the crisis.
Worse still, nobody can identify what stage of the crisis we are in now. Some brave souls have made precise forecasts about the onset of a new recession and are even trying to predict which sector will be the first casualty.
Researching markets where buyers and sellers - or employers and employees - have difficulty finding each other is a good choice for economists who want to avoid making tough decisions. But the new winners' research does shed light on one of the most interesting features of the labor market - the coexistence of unemployment and job vacancies. The employer is searching for employees who are simultaneously looking for jobs, but the process is difficult and time-consuming for both parties. This creates problems ("search frictions") on the market, and as a result employers and prospective employees simply cannot find each other.
Some say the work of this year's laureates will help governments to better understand the influence of labor market regulations and economic policy on the level of unemployment. One of their conclusions will certainly be welcomed by officials in many countries, as it says that generous unemployment benefits cause unemployment to rise and prolong the search period.
It is true that people who have no other income will take any job for any salary. In fact, this was the foundation of early capitalism.
The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.
