How useful is economics -- how is economics useful?

August 13, 2014

What insights do the models, experiments and econometric regressions of scientific research provide about the economy - and why and under what conditions are they useful in dealing with real-world problems? This question will be overarching the discussions among 17 Nobel Laureates in Economic Sciences and approximately 450 aspiring young economists from more than 80 countries in Lindau, Germany, next week. The 5th Lindau Meeting on Economic Sciences will bring them together for a unique dialogue across generations, cultures and scientific backgrounds. The meeting will open on 20 August with a keynote address by the German Chancellor Angela Merkel, and will also feature "a panoramic view on the situation and prospects in Latin America" by Mario Vargas Llosa, the 2010 Nobel Laureate in Literature.

From 20 to 23 August, the participating laureates and the young economists will have plenty of opportunity for an intensive exchange of ideas. The numerous lectures, discussions, master classes and panel discussions of the programme will address central fields of the discipline, ranging from econometrics, game theory, and neo-classical growth theory to mechanism design and systemic risk measurement. The question "How useful is economics - how is economics useful?" will be debated by the three economics Nobel laureates Peter Diamond, Robert Merton and Alvin Roth on Mainau Island on Saturday, 23 August. The panel will be chaired by Torsten Persson of Stockholm University, who serves on the prize committee for the Alfred Nobel Memorial Prize in Economic Sciences. As a special guest of honour, Queen Silvia of Sweden will attend the concluding events that day.

Economics is often abstract. Economic models are formulated in general terms, without reference to any particular economy. Theorising involves assumptions that are patently unrealistic. Laboratory experiments involve artificial environments that may be quite different from real-world situations. Econometric studies often exploit specific data sets that allow the researcher to identify certain effects. The concluding panel will discuss why and under what conditions the insights gained from these models, experiments and econometric regressions can be used outside their narrow domains and how they contribute to dealing with real-world problems.

Earlier at the Lindau Meeting already, several plenary lectures by Nobel laureates will illustrate some of the ways in which economics can be useful for dealing with real-world problems.

Alvin Roth: "Matching kidney donors and recipients"

Almost every country in the world has laws against paying for kidneys. This is an example of a "repugnant market", where any benefits of matching demand and supply need to be achieved without monetary transactions. Alvin Roth, who will deliver a lecture on repugnant markets, set up the New England Program for Kidney Exchange, using an algorithm based on game theory to match donor-recipient pairs.

The exchange works like this: if, for example, a wife wants to donate a kidney to her ill husband but is not a genetic match, the system will find a couple in a similar predicament to arrange a compatible swap. Ideally the system is designed for two couples to reduce the need to coordinate surgeries across the country, but it has worked for chains of up to six couples.

Peter Diamond: "US unemployment"

The US economy is experiencing a higher level of unemployment than before the crisis for the same level of the vacancy rate. This shift in the Beveridge curve - the relationship between the unemployment and vacancy rates - suggests a deterioration in the matching/hiring process in the economy. It is tempting to interpret this decline as a structural change in the way that the labour market works.

This interpretation has an obvious policy implication: however useful aggregate stabilisation policies are while unemployment is very high, they are likely to fail in lowering the unemployment rate all the way to the levels that prevailed before the recession since the labour market is now structurally less efficient in creating successful matches. Peter Diamond's lecture will review theory, evidence and policy debates on the US labour market.

Robert Merton: "Systemic risk measurement and management"

Systemic risk is an enormous issue for both governments and large asset pools. The increasing globalisation of the financial system, while surely a positive for economic development and growth, does increase the potential impact of systemic risk propagation across borders, making its control and repairing the damage caused a more complex and longer process.

In his lecture, Robert Merton will develop a model of systemic risk propagation among financial institutions and sovereigns. This model can be refreshed almost continuously with "forward-looking" data at low cost and therefore, may be more effective in identifying dynamic changes in connectedness more rapidly than the traditional models.

While this research is still in progress, the basic approach and the empirical findings are encouraging and it would seem that at a minimum, this approach will provide "good" questions, if not always their answers, so that overseers and policy-makers know better where to look and devote resources to discovery among the myriad of places within the global financial system.
The Lindau Meetings

From their beginning in 1951 as a European initiative of post-war reconciliation, the Lindau Nobel Laureate Meetings have evolved into a unique forum for unconstrained scientific exchange among physiologists, physicists, and chemists. The Lindau Meetings are designed to educate, inspire, and connect. Every year esteemed Nobel laureates and aspiring young scientists from all over the world come together at Lindau to engage in an open dialogue across generations and cultures. Regular meetings on economic sciences were enacted in 2004. Here some of the world's most dedicated young economists have the opportunity to pose the questions and discuss the issues they are most concerned about or interested in.

Lindau Nobel Laureate Meetings

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