Search Theory

There is an obvious and a more nuanced response to this morning's news that Peter Diamond, one of Obama's nominees to the Federal Reserve Board (who is presently being blocked by Senator Shelby), has won a share of the Nobel Prize for Economics for his work in Search Theory.  Let me dispatch with the obvious attack vector:  Shelby's hold on Diamond was because of a lack of experience, which interpreted through a modern Republicanese translator means he's an egghead professor with no experience running a factory or a bank or a drug-fueled wrestling entertainment corporation.  Given how well field-tested Wall Street executives have guided the economy in recent years, between the banks themselves or the mutliple vassals of Goldman Sachs who've occupied advisory and oversight positions in the Executive branch for the past fifteen years, I'm not sure this is a terrible indictment.  But so to have this nominee, derided for lack of experience for this economic position, end up winning a Nobel Prize is quite a large volume of egg on Richard Shelby's face.  (This will also reignite the whole "The Econmics prize isn't a real Nobel Prize!" fiasco from Krugman's award.)

The more detailed examination is even more damning for Shelby.  Giving the senator the maximum possible leeway, his position could be interpreted as expressing concern for Diamond's economic focus on the economics of information (and the subsequent application of that research by his two co-winners to labor markets) instead of macroeconomic monetary policy (an important field nowadays with round two of Quantitative Easing nearing).  On its face, this is a fair criticism, if we were to assume this was Shelby's argument, which is dubious.  The truth is, naturally, less black and white.

I run into a large number of fallacious economic arguments on the internet, most commonly from college students/graduates who've taken a 101/102 economics course and suddenly think they have all the answers to the financial crisis.  These people are also almost always arguing the conservative position, because 101 econ teaches you a warped framework to understand the basic concepts of the field.  300+ level coursework begins to unravel the faulty assumptions and shows you just how nuanced and complicated economics can be.  I'd equate it to grade school history classes teaching you all about how the Pilgrims and Indians partied on Thanksgiving, Columbus was just a brave explorer, and we fought the British over their tea policies; you don't really get around to the slavery, war, religion, and socioeconomic issues for another few years.  So econ 101 is basically:  All information is perfect, free markets are awesome and regulate themselves to perfection, and regulation is inefficient.

The intellectual fight over free markets has waged for decades and isn't germane to this post.  Professor Diamond's research involved what happens when the assumptions of perfect information break down.  In 101 terms it means what happens when consumers are shielded from the knowledge of production costs and competition (because 101 reduces everything to a supply-demand curve).  In a broader sense, it touches upon just about every major macro- and microeconomic field of study you can imagine.  The specific work generated by the Nobel trio investigated how difficulties in the actual act of finding a job can cause stagnant employment growth, even when there are ample vacancies waiting to be filled.  The basic models created by Diamond's work can also be ported to, say, the housing market (to explain sagging home sales despite the vast quantity of houses available).  Nominally this field is known as the economics of Search Costs.  "Cost" here is applied in the economic sense, where a negative externality creates inefficiency in a given market.

But so here we have an economist who specializes in Search Costs, which have multitudes of applications to today's employment condition (putting aside the other economic uses), in a political climate most poisonous to Democrats due to slacking employment figures despite a recovering economy.  This is the definition of the guy we'd want involved in government right now.  His body of work literally addresses the problems our employment figures face today.

But he's not the right guy for Richard Shelby of Alabama.