Monday, October 10, 2016

In Praise of Economists

The Nobel Memorial Prize was awarded today to Oliver Hart and Bengt Holmstrohm for their work on contract theory.
The Nobel committee describes contract theory:
"Contracts are essential to the functioning of modern societies. Oliver Hart’s and Bengt Holmström’s research sheds light on how contracts help us deal with conflicting interests. Contracts help us to be cooperative and trusting when we may otherwise be disobliging and distrusting. ... One important reason for drawing up a contract is to regulate future actions."

Much of our important social theory is recent even though advanced research tools are not needed, in contrast with the natural sciences. The fact that, as a society, we are a little behind in our development of social models is evident in the political sphere. Trump exploited weaknesses in our system of contracts to stiff service providers. He took advantage of tax loopholes and flaws to the max. He pushed laws restricting charitable foundation disbursements to their limits, relying in part on weaknesses in enforcement mechanisms. He also took advantage of a Republican Party primary system that relied on "nudge, nudge, wink, wink" shading of reality to appeal to an otherwise unlikely coalition of wealthy individuals and working class. The functioning of our society depends in large part upon the good faith of individual actors. When individuals are willing to act beyond the limits of social norms, they can achieve short term success at the expense of social institutions. This year, we are experiencing a break down in party politics even as the previously accepted journalistic standard of "balance" continues to be stretched beyond its limits and no longer functions.  The reasoning that economists use to build their models is analogous to the reasoning needed to develop solutions to the current system - to rebuild the models for social choice and the standard for objective political journalism. Criticism of the NYT political reporting has been harsh this year, but you can not expect people who vie for Pulitzer Prizes - in writing - to correctly identify their own problem. For that, we need Nobel Prize winners - preferably in economics. Or just replace "fair and balanced" with truth in context.

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