Sunday, December 23, 2012

Stable pairing

The Gale-Shapely algorithm that showed stable and optimal pairing in a multi-period game was the basis of this year’s Nobel Prize in Economics.  This demonstrates that experiments and thought processes based on market economics is the best way to advance knowledge. Market design and game theory have much to offer for better policy-making as well. Corrupting theory with such artifacts, however, is a dangerous but necessary game.

The current stalemate in Washington, over an artificial and over-articulated fiscal cliff is the case in point. Although policy-makers are not equipped with a level of competence that will make the game possible, what is needed here are better auctions. Mechanisms have to be designed for auctions of policy priorities within the policy-makers’ sphere of influence and the country at large. What is at stake is a trade-off, a transfer of wealth across generations and uncertainty in growth patterns that can be influenced by allocation of capital among private and public users. A market price of policy alternatives has to be revealed and a pragmatic auction process needs to be designed to move toward better outcomes.

Leaving complex policy choices to a handful of idiots in the nation’s capital is neither optimal nor practical.