Greg Ip

Articles by The Economist’s U.S. Economics Editor

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Understanding economics: Priceless

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Oct 18th 2012, 19:49 by G.I. | WASHINGTON

[Greg Ip] WHAT is economics concerned with? A layman taking in the raging debates over financial stability, inflation, economic growth, and budget deficits, would say it’s about money. That, of course, is not right. Money matters only insofar as it is a proxy for welfare. Money is a handy way of denominating prices and economists love prices because they are so efficient at allocating supply and demand so as to maximise welfare. Yet markets do not have to have money or prices to serve that welfare-maximising function. That distinction lies at the heart of the work that won this year’s Nobel Prize in economics, the subject of this week’s Free Exchange column.

Lloyd Shapley of UCLA and Alvin Roth of Stanford University got the prize for studying the barriers to welfare maximisation in markets without prices: examples including matching college applicants to colleges, kidney donors to recipients, and even husbands to wives.  Mr Shapley and David Gale (now deceased) devised an algorithm 50 years ago that would maximise the satisfaction of such multi-sided matching games. Read the column to learn more about  how the theory works and its applications. I want to focus here on a more philosophical implication of their work. Read the rest of this entry »


Written by gregip

October 18, 2012 at 9:57 am