43rd Nobel Prize in Economics honors combination of theory and practice

BY By Chen Yefeng | 08-01-2013
(Chinese Social Sciences Today)
 
Students are in an Experimental Economics class
 
 
This year’s Nobel Prize in Economics went to Lloyd Shapley and Alvin Roth, the former of whom is on the eve of his 89th birthday, making this the largest age gap among co-recipients of the prize (Roth is 60). However, it is likely this span of more than a generation which contributed to the strength of the pair’s research, as Roth developed and applied ideas published by Shapley fifty years ago. This year’s Nobel Prize in Economics marks a new direction for the prestigious award, as it has generally been awarded on the strength of theoretical contributions to economics, while the combination of Shapley’s innovations in game theory and Roth’s application thereof are notable in their real-world results and future potential.
 
In 1962, Shapley and co-author David Gale made a huge contribution to game theory with their Gale-Shapely Algorithm, which solved the Stable Marriage Problem in mathematics and economics. In layman’s terms, The Stable Marriage Problem is the problem of matching entities from two sets to their first choice from the other set, given that each has a unique preference and that preference is reciprocal. However, Shapley’s research was largely dependent on math theoretical modeling.  Roth not only applied Shapley’s theoretical innovations in a real-world setting, but optimized and extended the algorithm.  
This year’s Nobel Prize in Economics was regarded as a victory for game theory yet again. However, the difference between this year and years prior is in the emphasis on practical applicability. Economics is no longer simply a normative affirmative of ideal market tendency, but actually a vehicle for enacting social change. In turn, this could have ramifications for human ethics. 
 
Based on this year’s prize, experimental economics won the academia’s recognition.  Under the complex and realistic economy, experimental methods are very helpful for better understanding macroeconomic realities and lay the foundation for people to change the world. From the proposal of market stable matching theory to the improvement of the market mechanism, advantages of experimental methods come into people’s eyes.  Handbook of Experimental Economics, edited by Roth, is considered as experimental economists’ Bible. Roth’s great contribution to the popularity and development of experimental economics is significant and irreplaceable.
 
Because of the on-going financial crisis, people realize that it is necessary to bring economics down to earth from an ivory tower discipline of theory and complex mathematics. The hope inspired by market mechanism designs is in its offer of potential solutions when both the market and government are out of control. Market mechanism design is closely bound up with people’s daily life and is related to people’s economic welfare. Thus, before implementing any kinds of market design in the realistic world, we should examine its feasibility within a more confined system and assess its results. As Roth has argued, the purpose of experimental economics is to verify economic theories or evaluate policy system.
 
Chen Yefeng is from School of Economics, Zhejiang University
 
Chinese Social Sciences Today, No. 369, Oct. 22nd, 2012
                                                                                                                            
Translated by Zhang Mengying
                                                                                                                             Revised by Charles Horne