Six Breakthrough Ideas in Economics (?)

In the opinion of The Economist, they are:

1. Akerlof’s Market for Lemons
2. Minsky’s Financial Cycle
3. The Stolper-Samuelson Theorem (Wikipedia explanation).
4. The Keynesian multiplier
5. The Nash equilibrium
6. The Mundell-Fleming trilemma (Wikipedia explanation).

Pointer from Greg Mankiw.

In Specialization and Trade, I discuss many of these ideas.

I mention (1) as an example of economists finding a theoretical market failure for which markets have found solutions. Used cars are sold with guarantees, or with information provided by third parties, or by reputable dealers.

I endorse something like (2), although I offer a different mechanism for the financial cycle. Minsky describes it in terms of the risk proclivities of capitalists. I describe it in terms of the trust that people place in financial intermediaries.

I do not discuss (3) specifically, but I do say that the “two-by-two” model of international trade is an example of economic modeling that is more misleading than insightful. In any case, of all of the Heckscher-Ohlin-Samuelson results, I would have picked factor-price equalization over Stolper-Samuelson.

I explain why (4) is a terrible idea.

I do not mention (5) by name, but I do describe the maintenance of cultural norms from a game-theoretic perspective.

I do not discuss (6), but I argue against monetarism, and thus I implicitly discount the trilemma.

2 thoughts on “Six Breakthrough Ideas in Economics (?)

  1. The trilemma is a straightforward application of the analysis of monopoly from microeconomics. A firm selling a monopoly good is unlikely to have such astute judgment that the market will clear if the firm sets the price, quantity, and quality of the good rather than letting the market determine at least one of those dimensions. Although the idea is today most frequently associated with Robert Mundell, a few previous economists had more or less the same idea — for instance, William Adams Brown, Jr., in the last pages of his 1940 book The International Gold Standard Reinterpreted, 1914-1934.

  2. No Coase and transaction costs?

    Count how many Nobel memorial Laureates in economics since Coase have their key work based on transaction costs. It is instructive.

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