THE FREE MARKET AND ECONOMISTS

I like this article because it shows that economists understand there are free market failures and that they often need a top-down review to fix them.


Economists Learn Matchmaker Role
By Mark Whitehouse
From The Wall Street Journal Online
January 12, 2007

At this past weekend's annual meeting of the American Economic Association, which hosts a vast job market for aspiring professors, academics tested a technique -- borrowed from online dating -- to more efficiently match job candidates and potential employers. It is called "signaling," and it is designed to reduce the time and cost of hiring professors by weeding out those who aren't serious prospects and homing in on those who are.

Signaling depends on a centralized system through which each job seeker sends signals -- essentially electronic pings -- to two potential employers. With a limited number of signals to send, the logic goes, candidates will send them only to schools where they really want to work.

Every year, about 1,000 soon-to-be doctoral graduates converge on the site of the AEA meetings, creating traffic jams at elevators and squeezing as many as 30 job interviews into three or four days. Time and space constraints get so severe that candidates often find themselves sitting on hotel beds as they pitch themselves -- sometimes to five or six interviewers, who typically are male and might include Nobel Prize winners and heads of economics departments.

This year, 2,300 new jobs were listed at the AEA. Amid the noise and rush, potential employers make a lot of mistakes in allotting their attention. Some lower-tier schools, for fear of being spurned, avoid interviewing graduates of top-tier programs, thus missing some who might have had a special reason to choose them due to location, family or hobby considerations. Others set their sights too high, inviting candidates who would never accept their advances, leaving better matches feeling unappreciated and unwanted. As a result, many qualified candidates fall through the cracks.

Profs. Roth and Niederle belong to a growing field of economics known as market design, which is rooted in the idea that markets, if left to develop on their own, often get into trouble and need to be fixed. Market design's most notable achievements include federal auctions for radio spectrum, which have earned the government billions of dollars in revenue, and the National Resident Matching Program, an automated clearinghouse that successfully matches hospitals to new doctors based on preferences each side feeds into the system.

If the signaling experiment works for economists, it could lead the way to meaningful improvements in a broad range of markets, from college admissions to placement of freshly minted business graduates and lawyers. "We want to make markets work more efficiently," Prof. Roth says. "That would result in more people being happy with their jobs, in more firms being happy with their employees and presumably society being more productive."

Whatever the outcome, some have doubts that economists would ever willingly submit to a fully efficient market, such as the one that assigns doctors to hospitals. "The academic job market is a thing that could be enormously rationalized," says Prof. Colander, who has proposed an automated clearinghouse for economists. "But that doesn't mean that economists want to have their lives structured by a market."