Peter Diamond on the Nobel Prize in Economics

When I met with him, he simply said there was no point in reading any more once a bad assumption has been made. That’s not the way I think of the world, so that simple offhand comment he made twenty years ago has always stuck with me.

Academic economists are far more adept at poking holes in other people’s arguments than in constructing solutions, at least on the fly. But somehow Diamond was able to work out in his head complex models that would take others days or weeks and reams of paper to solve.

One thing economists just don’t understand are people’s preferences.

http://freakonomics.blogs.nytimes.com/2010/10/11/congratulations-to-peter-diamond-on-winning-the-nobel-prize-in-economics/

On the one hand, I like the approach. You may recall the "game" I describe (in my expert failure piece, for example), in which there are two decks of cards, one with a list of workers and one with a list of jobs.

On the other hand, it fails to capture some important dynamics about the problem of creating patterns of sustainable specialization and trade. In the real world, the jobs are not just sitting out there, looking for workers. Some job openings are like that. However, a lot of jobs first appear when (a) entrepreneurs start new firms or (b) existing businesses launch new projects or seek new capabilities. Not surprisingly, most of the increases in employment come from fast-growing firms, not from stable firms.

http://econlog.econlib.org/archives/2010/10/the_latest_econ.html

On April 29, 2010, Diamond was announced by Barack Obama as one of three nominees to fill the three vacancies then present on the Federal Reserve Board, ... On August 5 the Senate returned Diamond's nomination to the White House, effectively rejecting his nomination. Ben Bernanke, the current Chairman of the Fed, was once a student of Diamond.

The relationship to the current day U.S. is striking. One point he stresses is that subsidization of production can make sense and also that there can be real costs of converging to the lowest possible rate of unemployment too quickly. This remains an important "framework" paper for analyzing the interaction of search and aggregate demand. His other 1982 search paper implies that labor mobility will be less than is socially optimal. This paper on search theory shows that unemployment compensation can lead to better job matches, by limiting crowding externalities in the job market.

http://www.marginalrevolution.com/marginalrevolution/2010/10/peter-a-diamond.html