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November 14, 2007

The Nobel Economics Prize

Tom McLaughlin

Setting my brain from its usual position of reverse to forward, I elected to try to unravel the Nobel Prize in Economics. This was awarded to three Americans “for having laid the foundation of mechanism design theory.”

“The theory allows us to distinguish situations in which markets work well from those in which they do not,” according to the Nobel Web site. This no brainer is obvious to me. The airline industry does not work while Viagra does. Put them together and you have the boomer mile high club.

“What institutions, or allocation mechanisms, are best suited to minimize the economic losses generated by private information” is another question solved by this brain trust.

For example, in California during the recent fires it was frantically announced that the avocado trees were burned to a crisp. Some newscasters actually led with this story as fireballs plumed skyward consuming an entire neighborhood. They informed us that it would be an economic disaster to the nation and cripple California for years as we await the newly planted seedlings to bear fruit. Of course, the stock market reacted by dropping a billion points.

The theory works like this: Upon receiving the news of the great Avocado Disaster, fraught housewives or house husbands (being politically correct) are desperate to make the great American meal of guacamole. One person has a friend at the unloading dock at Giant Food. Therefore, that person, or group, will corner the market because of private information. The loss generated will result from the wrath of customer’s rioting in front of the store demanding their fair share of the fruit. This private information is called insider trading, a great American institution protected by the Constitution.

To make things even clearer, this theory has devised the following formula for an auction, p-x+y-p=y-x. (This scenario and formula are true.) They have also added a graph, impossible to reproduce here. Now if buyer “p” wants to buy an object at auction and seller “y” wants to sell it, you apply the equation.

X? He is the shill bidding up the price for the auctioneer.

Continuing my quest in advanced economics, I have danced around Alan Greenspan's (Mr. Mumbo Jumbo, a moniker given to him by the press) “The Age of Tumescence,” but so far I have only read the reviews. The first part tells about his youth, “a saxophone-playing math dweeb who became not just powerful but glamorous while remaining a dweeb” (NYT Book Review). He also said people misunderstood what he said about tax cuts.

Nobody, I mean nobody, from the caveman living in West Virginia to the most rocket brain scientist at NASA ever misunderstands the phrase “tax cuts.” It is imbedded in our gray matter like the word castration. No male even begins to misunderstand that.

Another revelation from the book, as if handed down from the mountain, is that the war in Iraq is about oil. The news media reported this as a great revelation unknown to the masses. Pearls of wisdom from the great saxophone playing dweeb married to the sexy newscaster, expounding the obvious.

This ends my economics column for the year. My next great Nobel ponder will be the perplexity of Al Gore and the Peace Price.

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