This year’s Nobel Prize in Economics, was awarded to Thomas Sargent and Christopher Sims.
The Nobel jury said that one of the main reasons these two men won the award was for developing methods that answer “many … questions regarding the causal relationship between economic policy and different macroeconomic variables such as GDP, inflation, employment and investments … Today, the methods developed by Sargent and Sims are essential tools in macroeconomic analysis.”
In other words, Sargent and Sims made significant contributions to economic policy that are very similar to those of last year’s three winners.
The Diamond-Mortensen-Pissarides or “DMP” model created by last year’s winners can be used to predict length of unemployment, job vacancies, actual wages and other items based on unemployment factors such as the amount of unemployment benefits, actual interest rates, employment agency efficiency and the cost of hiring and firing. The model shows that since buyers and sellers in a market lack complete information, it is difficult or even impossible to find the perfect match.
According to the prize committee, “one conclusion [reached by the DMP model] is that more generous unemployment benefits give rise to higher unemployment and longer search times.”
In addition, public job-saving policies are often more of a hindrance than a help and might lead to idle workers.
This year’s two winners use a macroeconomic model that applies complex mathematics to analyze and examine government economic policies. Sargent made his name in the 1980s when the theory of rational expectations was popular. He enjoyed equal fame with Robert Lucas, the winner of the economics Nobel in 1995. Many experts were surprised and felt it unfair that he did not share the 1995 award with Lucas. However, as high unemployment has once again become a global problem, Sargent has now finally being honored.
In an interview in July 1982, Sargent said he had been very naive about what governments could achieve when he graduated from the University of California, Berkeley and Harvard University. He said his naivete was his own fault, because at the time he was strongly in favor of intervention, believing that governments should have a hand in all matters. However, by the time of the interview, Sargent had changed his mind drastically.
The insights from the interview show that Sargent originally came from the John Maynard Keynes school of thought, which advocates government intervention. However, after encountering the University of Chicago school of thought and its theories, Sargent threw his support behind the theory of rational expectations and neoclassical economics, eventually becoming one of its leaders. In the 1980s, the neoclassical school was said to be the economy of Lucas and Sargent.
Using the concept of rational expectations, Lucas and Sargent applied “dynamic equilibriums” to demonstrate the inefficacy of government interference. This theory showed that when a government policy changes, the civil sector changes its decisionmaking rules accordingly.
This is illustrates the basic tenets of optimization theory, a new view which developed out of the theory of rational expectations. Sargent emphasized that he, along with Lucas and Edward Prescott, the winner of the economics Nobel in 2004, were all once Keynesian economists who had drastically changed their views.
By Wu Hui-lin 吳惠林
SOURCE:Taipei Times