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A fascinating encounter with a Nobel Laureate
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Eric S. Maskin
Last Tuesday I attended the Oceanic Bank organised- breakfast meeting on the theme “Human Capital Development: Harnessing, Engaging and Wealth Creation.”
One of the major speakers at the event was Professor Eric S. Maskin, the current Albert O. Hirschman professor of social science, Institute for Advanced Study, and visiting lecturer in economics with the rank of professor, Princeton University. Last year, Maskin had won the Nobel Memorial Prize in Economic Sciences for having laid the foundations of “mechanism design theory”. Oceanic Bank had graciously asked me to interview him, and I was sure I could not miss it as the opportunity cost of not doing so was unimaginable. The interview will appear in BusinessDay later in the week.
Maskin and design theory
Maskin is an American economist and, to the envy of the world, one of the majority of Americans that had won the Nobel award for economics in the last 15 years. He was born in New York City on December 12 1950, meaning he was 57 years old when he picked his award. There are quite some interesting things about Maskin’s award that he collected alongside Leonid Hurwicz and Roger Myerson.
First, the award marks the continuation of giving the award in economics to those that their work and researches cover what is termed “microeconomic foundations”. Though the basis of their research centres on individual rationality and economic behaviour, the fact that it could be extended and has been used to analyse and solve macroeconomic problems as well means I can refer to their work as having microeconomic foundations of macroeconomics. The second aspect of the award they received last year is that it signals the continuous improvement in the importance of game theory in economics. Game theory is a branch of economics where mathematics is used in capturing the interactive dependences in choices in economics, politics and some other subjects. The basis of game theory has been used tremendously in explaining and analysing economic behaviour and design mechanism theory relies on this as well.
The third aspect is what I considered as the phenomenon that has impacted most on economics in the last thirty years. During this period, we have seen increasing numbers of economists with background in physics and mathematics, and some of them have gone on to win many awards in economics, including the Nobel Prize. Maskin received degrees in mathematics before teaching economics. He had obtained his degree in mathematics and his doctorate in applied mathematics. I would like to think that his doctorate in applied mathematics prepared the foundation for a successful career as an economic researcher and teacher.
The economics of procrastination
Before I discuss my interactions with Maskin and reiterate my view on the law of comparative advantage, let me discuss the other issue of procrastination that came up during the interview. Procrastination is understood as putting off to tomorrow what we should do today. If you are wondering, procrastination has a lot of economic dimensions, just as everything else.
Maskin explained his view of procrastination thus “I suggest that there may be an evolutionary reason why we tend to procastinate, that as many of our urges and inclinations are not particularly well designed for modern age but evolved over a period of many thousands, possibly millions of years. At the time when we were living in different circumstances and in those very different circumstances, there tended to be a great deal of uncertainty about when events either positive or negative events would occur. Under those circumstances it might actually be advantageous to wait and see what happens tomorrow before going ahead to do something today. Unfortunately, that urge to postpone may no longer serve us well in the circumstances we find ourselves today.”
At this very point while he was answering my questions on procrastination, I could not help but think of the many things we as a nation have been putting off to tomorrow. When I consider how long it will take us to realise there are certain basic ways of doing some things and we need to get on with them. If I use the power problems that we have as an example, I am a believer in the private sector been able to help resolve this issue, but some people may disagree.
While I try to understand why they disagree, their arguments generally collapse in the face of economic reasoning. The poor currently does not have light. That is a big enough problem. However, there are bigger problems. The opportunity cost of the poor not having light is much worse, including perpetuation of poverty, ignorance, both as a single family and, perhaps, a whole generation. While we can control or take primary economic decisions, there is no way to control the secondary consequences of those decisions. If the poor is made to pay for electricity provided by the private sector, the poor will be forced to make rational economic decisions that will improve his standard of living. Can we stop prevaricating, and move on with the extensive privatisation that we require in the energy sector?
Comparative advantage and inequality
In his presentation at the breakfast meeting and later during the interview, Maskin spoke about the failure of the law of comparative advantage to explain the global economic dynamics of the last 25 years. According to the law of comparative advantage, trade between a developing and a rich nation should cause inequality to go down, implying that the gap between the rich and poor should get smaller. This is expected because the international markets should allow developing countries to “specialise in goods that make heavy use of import of low skilled workers.”
Focusing on inequality within a nation, statutorily in developing economies, the law of comparative advantage implies that as a developing country opens up its markets to international trade, inequality should drop. That is, it should cause the gap between the rich and the poor to get smaller. The reason for that is that these international markets allow the developing countries to specialise in goods that make heavy use of the import of low skill workers and that enables the low skill wages to rise. According to Maskin, it is the inadequacies in the theory of comparative advantage to explain the dynamics of the global economy in the last 25 years that prompted him and another colleague to develop an alternative theory.
In my opinion, while the theory of comparative advantage may have explained international trade reasonably well until recently, and provided a basis for advancing economies, and increasing production at the time, it fails to explain the dynamics of modern and prosperous economies of the last century. It has failed to explain how countries developed by emulation. Countries have developed and become rich on the back of dynamic elements of technological change rather than static specialisation. As stated earlier, it is not possible to control the secondary consequences of our economic actions, but economic training and experience certainly help in predicting the likely outcomes.
Ricardian economics and the theory of comparative advantage, by eliminating from economic theory a qualitative understanding of economic change and dynamics, have created an economic theory that makes it possible for a nation to specialise in being poor. Maskin did not say this much during his presentation and interview later but by agreeing that it is possible for a country to change and create its own comparative advantage, he admits that it is possible for a country to pursue policies that will make it rich by been competitive and trade on the basis of that competitiveness. Brazil has recently done it with agriculture and we will have to identify ways and areas of our economy we can become competitive in.
I have used this analogy before, and I think it makes sense again to conclude with it. If what I have been discussing is perhaps still too technical for some of my readers, I will use my personal example to buttress my point. For anyone that cares to listen, I often boast that what I know best to do is drive. I like to think I am an excellent driver. I passed my driving test at first attempt in the UK, a rare fit. One of the most memorable of my experiences is driving from Manchester to Edinburgh and back, a 12-hour round trip. I believe I can drive better than my driver. And I believe I am a better driver than an economist. According to the comparative advantage, I should leave the economics profession, and concentrate on driving. Unfortunately, driving will not pay my bills. I also believe driving was a natural talent from God whereas to pick up my degrees in economics, I have had to work really hard over many years to develop the economic talent God deposited in me. Finally, what a privilege to talk to a Nobel Laureate one on one, thank you Oceanic Bank. Towards Economic National Development .
Maskin and design theory
Maskin is an American economist and, to the envy of the world, one of the majority of Americans that had won the Nobel award for economics in the last 15 years. He was born in New York City on December 12 1950, meaning he was 57 years old when he picked his award. There are quite some interesting things about Maskin’s award that he collected alongside Leonid Hurwicz and Roger Myerson.
First, the award marks the continuation of giving the award in economics to those that their work and researches cover what is termed “microeconomic foundations”. Though the basis of their research centres on individual rationality and economic behaviour, the fact that it could be extended and has been used to analyse and solve macroeconomic problems as well means I can refer to their work as having microeconomic foundations of macroeconomics. The second aspect of the award they received last year is that it signals the continuous improvement in the importance of game theory in economics. Game theory is a branch of economics where mathematics is used in capturing the interactive dependences in choices in economics, politics and some other subjects. The basis of game theory has been used tremendously in explaining and analysing economic behaviour and design mechanism theory relies on this as well.
The third aspect is what I considered as the phenomenon that has impacted most on economics in the last thirty years. During this period, we have seen increasing numbers of economists with background in physics and mathematics, and some of them have gone on to win many awards in economics, including the Nobel Prize. Maskin received degrees in mathematics before teaching economics. He had obtained his degree in mathematics and his doctorate in applied mathematics. I would like to think that his doctorate in applied mathematics prepared the foundation for a successful career as an economic researcher and teacher.
The economics of procrastination
Before I discuss my interactions with Maskin and reiterate my view on the law of comparative advantage, let me discuss the other issue of procrastination that came up during the interview. Procrastination is understood as putting off to tomorrow what we should do today. If you are wondering, procrastination has a lot of economic dimensions, just as everything else.
Maskin explained his view of procrastination thus “I suggest that there may be an evolutionary reason why we tend to procastinate, that as many of our urges and inclinations are not particularly well designed for modern age but evolved over a period of many thousands, possibly millions of years. At the time when we were living in different circumstances and in those very different circumstances, there tended to be a great deal of uncertainty about when events either positive or negative events would occur. Under those circumstances it might actually be advantageous to wait and see what happens tomorrow before going ahead to do something today. Unfortunately, that urge to postpone may no longer serve us well in the circumstances we find ourselves today.”
At this very point while he was answering my questions on procrastination, I could not help but think of the many things we as a nation have been putting off to tomorrow. When I consider how long it will take us to realise there are certain basic ways of doing some things and we need to get on with them. If I use the power problems that we have as an example, I am a believer in the private sector been able to help resolve this issue, but some people may disagree.
While I try to understand why they disagree, their arguments generally collapse in the face of economic reasoning. The poor currently does not have light. That is a big enough problem. However, there are bigger problems. The opportunity cost of the poor not having light is much worse, including perpetuation of poverty, ignorance, both as a single family and, perhaps, a whole generation. While we can control or take primary economic decisions, there is no way to control the secondary consequences of those decisions. If the poor is made to pay for electricity provided by the private sector, the poor will be forced to make rational economic decisions that will improve his standard of living. Can we stop prevaricating, and move on with the extensive privatisation that we require in the energy sector?
Comparative advantage and inequality
In his presentation at the breakfast meeting and later during the interview, Maskin spoke about the failure of the law of comparative advantage to explain the global economic dynamics of the last 25 years. According to the law of comparative advantage, trade between a developing and a rich nation should cause inequality to go down, implying that the gap between the rich and poor should get smaller. This is expected because the international markets should allow developing countries to “specialise in goods that make heavy use of import of low skilled workers.”
Focusing on inequality within a nation, statutorily in developing economies, the law of comparative advantage implies that as a developing country opens up its markets to international trade, inequality should drop. That is, it should cause the gap between the rich and the poor to get smaller. The reason for that is that these international markets allow the developing countries to specialise in goods that make heavy use of the import of low skill workers and that enables the low skill wages to rise. According to Maskin, it is the inadequacies in the theory of comparative advantage to explain the dynamics of the global economy in the last 25 years that prompted him and another colleague to develop an alternative theory.
In my opinion, while the theory of comparative advantage may have explained international trade reasonably well until recently, and provided a basis for advancing economies, and increasing production at the time, it fails to explain the dynamics of modern and prosperous economies of the last century. It has failed to explain how countries developed by emulation. Countries have developed and become rich on the back of dynamic elements of technological change rather than static specialisation. As stated earlier, it is not possible to control the secondary consequences of our economic actions, but economic training and experience certainly help in predicting the likely outcomes.
Ricardian economics and the theory of comparative advantage, by eliminating from economic theory a qualitative understanding of economic change and dynamics, have created an economic theory that makes it possible for a nation to specialise in being poor. Maskin did not say this much during his presentation and interview later but by agreeing that it is possible for a country to change and create its own comparative advantage, he admits that it is possible for a country to pursue policies that will make it rich by been competitive and trade on the basis of that competitiveness. Brazil has recently done it with agriculture and we will have to identify ways and areas of our economy we can become competitive in.
I have used this analogy before, and I think it makes sense again to conclude with it. If what I have been discussing is perhaps still too technical for some of my readers, I will use my personal example to buttress my point. For anyone that cares to listen, I often boast that what I know best to do is drive. I like to think I am an excellent driver. I passed my driving test at first attempt in the UK, a rare fit. One of the most memorable of my experiences is driving from Manchester to Edinburgh and back, a 12-hour round trip. I believe I can drive better than my driver. And I believe I am a better driver than an economist. According to the comparative advantage, I should leave the economics profession, and concentrate on driving. Unfortunately, driving will not pay my bills. I also believe driving was a natural talent from God whereas to pick up my degrees in economics, I have had to work really hard over many years to develop the economic talent God deposited in me. Finally, what a privilege to talk to a Nobel Laureate one on one, thank you Oceanic Bank. Towards Economic National Development .
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Comments (1 posted):
I, as a fervent believer in the theory, do not believe it explains every foreign trade issue we face today but I believe no other theory so far known by economists can do a better job!
The kind of inferences many economists draw from Ricardo's theories are by themselves wrong. For example, Ricardo never implied that poor countries could engage in 'labor intensive' goods. On the contrary, he believed that every country that has an advantage either in technology, natural resource, human resource etc, can accumulate such advantages by concentrating on their constant use. Again China, India and Brazil are good examples. And the amazing thing is that these countries are accumulating a great deal of technology in those fields!
Lastly, you seem to confuse "Comparative" and "Absolute" advantages, Ricardo would not advise you to only drive and forget completely about economics(Adam Smith would). He would rather tell you to consecrate more time to driving than to practicing economics which is only logical since by your own admission you're very talented at it! The example is poorly chosen as driving and economics are very strange bed fellows.
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