The Nobel Prize in Economics was not awarded to our two favorite candidates Shiller and Thaler, and to some extent we understand the Nobel Prize Committee. Biased by our background in Investments we concentrated on scientists with a background in that field. But this is not the time to award the Prize to scholars with that type of background probably. I know, this is so incredibly subjective and wrong. But just like the Committee liked to make a statement by awarding the Peace Prize to a Chinese activist there is probably also a human factor involved when awarding other Prizes: what makes sense in which year?
2. Labor Economics and 'search costs'
That is definitely not to say that the three chosen scholars Peter Diamond of MIT, Dale Mortensen of Northwestern University and Chris Pissarides of the London School of Economics did not deserve it. It is just that their field of study was a safer choice in a post-crisis period. The three scientists were awarded the Prize for their work on 'search costs' in supply-demand models. That is: a Prize awarded to Micro Economics specialists. Their work helps us understand why - in times of depression - labor markets do not adjust quicker than they do. Why do we see in those periods or immediately after a crisis industries that seem to have terrible issues finding workers next to those that don't seem to struggle at all? It also helps us understand why wages don't drop more than they actually do in times of crisis so as to help re-establish equilibrium in the labor market.
The three laureates of the 2010 Nobel Prize in Economics
The work of Diamond, Mortensen and Pissarides shows that in markets in which there are a lot of factors at stake that are not directly visible, those 'hidden' elements will translate into 'search costs'. And those search costs - be they on the side of supply or on the side of demand - will translate into friction and slow adjustment.
The work of the authors has led to numerous models that are used by governments, research institutions and others interested in the field of Labor Economics. It helped create better forecasts of labor market adjustment. And since labor market adjustment is what is needed at the moment in the Western world not just because of cyclical factors related to the Crisis but also because of structural change in the world (with Emerging Market countries now gaining tremendously in importance and demographics working against the productive capabilities of Western nations), we do acknowledge that there is nothing wrong wrong with awarding the Prize to Diamond, Mortensen and Pissarides.
3. Diamond in the FED?
Peter Diamond was also in the news in another way than just because of his Labor Economics work. President Obama did nominate him for a seat in the board of the Federal Reserve earlier this year (April 2010). The Senate surprisingly blocked Diamond's nomination, because it was felt that he was a theoretician without practical experience. One senator: 'We don't want a candidate who will learn on the job, but want someone who already knows'. Knowing Peter Diamond as a very bright man, with numerous ties with and experience in other pragmatic fields (e.g. Social Security and Insurance issues), we believed that this was an outrage. As if the average senator has so much knowledge (be it academically or professionally!). Also: do not forget that the more abstract and top-down a professional job, the more important it is to have someone there that knows how to separate details from the broader picture. And be sure: that is something which Peter Diamond will be able to do better than almost anyone else. We do therefore support President Obama's insistence: after the summer recess he again suggested to the Senate to appoint Diamond. We do not expect a filibuster from the Senate to block Diamond once again and assume that he will be awarded his FED seat now. In the FED he will then work with and for a former student of his: Ben Bernanke.
4. The surprising applicability of 'search costs' work outside Labor Economics
And to finish this article a bit lighter: the work of the three can also be used quite well for the creation of dating and relationships search algorithms. A field that has become an industry of itself due to the development of online social networks. But we are sure that both the scholars and the Nobel Prize Committee did not take into account applicability in this growth market!
Disclosure: not relevant