The Economic Nobel – II

The Economic Nobel – II
Social sciences approach to tackling dynamic problems might be a vicious cycle.
Almost a decade back on Dec 10, 1999, Professor Torsten Persson said “The advancement of science frequently relies on new methods that allow us to approach questions no one has been able to answer in the past. Scientific breakthroughs also occur when creative researchers ask new questions that no one was imaginative enough to formulate in the past. The ability to pose new questions is perhaps particularly important in economics and other social sciences. Society undergoes a constant transformation, due to changed institutions, behavior, and expectations. In other words, the social sciences necessarily attack moving targets”
Coming to look at it, the problem case is so dynamic that we have spent more than 250 years analyzing problems and offering solutions.  A few of the last 50 years Nobel Prize winning solutions are either already challenged or are counter arguments to answers offered  more than a 100 years ago.
Problems, solutions, new problems
1999 winner Robert A. Mundell formulated dynamic models to deal with the economy’s adjustment over time. He examined ways in which monetary and fiscal policy can be decentralized. He asked questions like how might instability in the economy be avoided over time? Mundell offered a solution to currency regime, which first came true as Bretton Woods failed. Now in the current context of currency wars it seems we have a bigger problem than the one already addressed by the social scientist in 1960.
2008 winner Paul Krugman offered a counter argument to Ricardo’s (1772) comparative advantage and gave a new free trade model. Being direct heirs of Bachelier’s model, Markowitz’s and Sharpe’s theories (1990 winners) inherited assumptions of mild Gaussian variations. Now we know that beta and standard deviations are far from the real work market risk.1997 winners Robert C. Merton, Myron S. Scholes also had Gaussian assumptions and we now know how sentimental option prices are.
Pareto Efficiency
Everytime an attempt is made to model complexity, new time brings in new uncertainties. At the heart of it, social sciences have been struggling to model the Adam Smith invisible hand uncertainties, while confronted everytime with Vilfredo Pareto efficiency pattern. 1994 winner John F. Nash work on Nash equilibrium is connected with Pareto efficiency. The aspect is witnessed and connects to almost every social aspect. This also is the reason why economics has found connections in behavior. 1992 winner Gary S. Becker extended the domain of microeconomic analysis to a wide range of human behavior and then in 2002 Daniel Kahneman connected psychology with economics.
Interdependence
Pareto efficiency is the reason social aspects are interconnected. Information is a common feature of market interactions (2001 George A. Akerlof, A. Michael Spence, Joseph E. Stiglitz). In 2007, Leonid Hurwicz, Eric S. Maskin, Roger B. Myerson suggested that economic institutions be conceived of as information systems. Pareto’s ideas are even valid when it came to measuring welfare. 1998 Amartya Sen’s work on poverty indices encompassed the Arrow’s paradox, which has Pareto efficiency as criteria. In 2000 James J. Heckman, Daniel L. McFadden. Heckman and Daniel McFadden made pioneering research contributions to micro-econometrics, an area between economics and statistics. Vilfredo Pareto was the first to quantify economics
Pareto order is also the reason why economic history, business cycles and aspects linked to time illustrate patterns. In 1993, Robert W. Fogel, Douglass C. North economic historians created cliometrics, the research that combines economic theory, quantitative methods to explain economic growth and decline.  In 1995, Robert E. Lucas Jr.’s application of the rational expectations hypothesis postulated an equilibrium theory of business cycles. In 2003, Robert F. Engle III, Clive W.J. Granger showcased the complex interplay among macroeconomic variables over time. The ARCH method to trace systematic variations in volatility over time was born. In 2004, Finn E. Kydland, Edward C. Prescott contributed to time consistency of economic policy and the driving forces behind business cycles. In 2005, Robert J. Aumann, Thomas C. Schelling laid the foundation for game theory analysis of long time relationships. In 2006, Edmund S. Phelps deepened our understanding of the relation between short time and long time effects of economic policy.
Implicit order and rules of nature
The Pareto order is so explicit that in 2009 Elinor Ostrom showed that self-governing user groups frequently establish regulations that enable them to manage resources like woods, lakes, pastures and groundwater remarkably well.
I tried hard to dissociate economists from Pareto. Peter Arthur Diamond 2010 winner’s work on matching theory mathematical function has a Cobb-Douglas form. This connects the work back with the Swedish Economist Wicksell who suggested that wealth created by growth would be distributed to those who had wealth in the first place, again a Praetorian idea.
Among economists, it is commonly accepted that outcomes that are not Pareto efficient are to be avoided, and therefore Pareto efficiency is an important criterion for evaluating economic systems and public policies. Now the real question to answer is what astounded Pareto himself when he exclaimed “something (some fundamental law) in nature of men”.