On a warm Tuesday afternoon, the 19th of March, Eric Maskin gave a lecture in celebration of the 25th anniver- sary of the magistère. As an introduction, Jean Tirole, who wrote his thesis at MIT under the direction of Maskin, gave a brief history of the Magistère programme and paid tribute to Jean-Jacques Laffont, one of the Magistère’s creators. Then Tirole provided the audience with some background information on Maskin and his work. Maskin received his PhD at Harvard in the 1970's and is currently a professor at Harvard University. He has received many awards, most notably the 2007 Sveriges Riksbank Prize in Economic Sciences in Mem- ory of Alfred Nobe for his research in the area of mechanism design. He is currently a member of the TSE Scientific Council. Maskin justified his choice of the conference topic by referring to one of Jean-Jacques Laffont’s main fields of research: de- velopment economics. The goal of the lecture was to pres- ent a model which explains why global markets have not reduced inequalities, particularly in poor countries. Over the past few decades, globalization has changed the face of the world; Maskin made specific note of increases in foreign exchange of goods and services, larger diversity of goods available in markets, and an internationalization of production processes. He cited declines in transportation costs, communication costs and the removal of trade barriers as the main causes of this phenomenon. Proponents of glo-balization often argue that it has allowed some countries to experience rapid economic growth (for instance China and India) and should decrease inequalities in these countries, but empirically, this is not the case. Maskin briefly reviewed David Ricardo’s theory of comparative advantage. He argued that this model worked well to explain international trade and global exchanges during the 19th and 20th centuries, however, since globalization’s onset, the model has struggled to describe reality. Indeed, according to Ricardo’s theory, inequalities should have been reduced within poor countries. Maskin illustrated this through an example of Heckscher and Ohlin’s modern form of the theory. First, according to this the- ory, differences in production patterns are due to different endowments in labour and capital inputs. Let’s suppose that there are two countries, one rich and another poor,and two types of workers, low-skilled and high-skilled. The rich country is wealthier than the poor country due to its human capital advantage. As a result, the poor country has a comparative advantage for producing labour-inten- sive goods (for example, rice) whereas the rich country has a comparative advantage for producing capital-intensive goods which require higher worker skill levels (for example, software). In the first scenario, the trade is not possible. In order to respond to the demand for both rice and software, the two countries themselves have to produce the two kinds of goods. However, the poor country is more suited to pro- duce rice and the rich country is more suited to produce software. In the poor country, the demand for low-skilled workers decreases due to the software sector’s need for high- skilled workers. Consequently, the wages of low-skilled workers are artificially low. In the second situation, let’s suppose that now trade is pos- sible between the two countries. The poor country specializes in rice production and the rich country in software produc- tion. In the poorer country, the level of wages of low-skilled workers will increase as a result of the higher demand for their labour, whereas the level of the salaries of the high- skilled workers will fall from decreasing demand. Thus, the model predicts that inequalities in wages should decrease due to trade in poor countries. This theory also predicts that countries which have completely different skill advantages should increase trade between themselves to decrease inequality. But as mentioned, this theory does not seem to hold true, one only needs to look at the relatively low levels of trade between Africa and Europe. In order to move past this difficulty and explain the recent globalization, Maskin introduced an alternative model (a sim- plified version by Michael Kremer) which focuses on labor rather than on capital. His goal was to show that the Ricardian theory’s predictions about the cut in inequalities cannot be proven right in real life. The main point is to focus on the internationalization of the production process. Let’s suppose now that we have four levels of skills for work- ers (A, B, C, D, the skill level declining from A to D) and the output is defined by the following production equation: Y = M2 S. Here, M is the level of managerial skills which are more important in the output process and S is the skill level of low- skilled workers, which proves less important for the final out- put level. The rich country is composed of solely A and B-workers, while the poor country is composed of solely C and D-workers. We have different possibilities of matching the workers. Let's say that we have two C-workers and two D-workers. There is the crossing pattern (a matching of different-skill workers) and the homogeneous pattern (a matching of same-skill work- ers). A maximization of output level determines the pattern the firm will choose. In general, the cross-matching pattern is better because managerial skills have more influence on output level than the low skills. However, if the differences in skills are too big, the homogeneous pattern can be shown to be more suitable for the situation. Maskin intended to compare the situation before and after globalization became possible. Initially, it is not possible for companies to hire workers from foreign countries. The A and B-workers remain in the rich country and C and D-workers in the poor country. Thus, to produce maximum output, workers would be cross-matched patterns in the pre-globalization scenario. In the post-globalization era, the situation has changed. The A-workers and D-workers will homogeneously be matched whereas B-workers and C-workers will be cross-matched. The productivity of high skilled workers increases the productivity of low skilled workers. Consequently, the wages of Co-workers will rise whereas the D-workers will find their salaries stagnate or even fall which in the end will enlarge the gap between the two types of poor country workers. One of the solutions to solve this problem is to develop educa- tion and training of the lowest-skilled workers. Nevertheless, it has a cost and we have to ask ourselves who will pay. Maskin suggested that ideally, companies could pay, but questioned this idea’s practicality, as firms have no real incentives to be- have like this. Indeed, if they invest in training programmes for their workers, firms will have to pay higher wages to the better educated workers. Another mentioned solution would be to ask A-workers to share the benefits of the globalization with the D-workers. Here, we have to be careful. As a matter of fact, even if glo-balization has not reduced inequalities in poor countries, it has increased the average income in these countries. There- fore, Maskin sees the responsibility for education lying in the hands of governments and organizations like the UN which have stronger incentives to train the workers.
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Introduction to the interview with Eric Maskin by Jean Tirole I’m very pleased that The TSEconomist chose to interview Eric Maskin, who in turn kindly accepted to participate. Eric Maskin is a role model for scholarship. There is no point reviewing here his breakthrough contributions to the economics of incentives; they are well-known and have been deservedly recognized by the Economics Nobel Prize Committee. Let me just say a few words about a slightly less well-known side of Eric. As all those who have met him will confirm, he is a very modest person; he is also a very good citizen and generous with his time. A superb advisor, he has mentored generations of students at MIT, Harvard and Princeton and has changed the path of their careers. I had the great opportunity to be one of his first students- along with my MIT classmate Drew Fudenberg. Extrapolating on our own experience, I can conjecture that his extraordinary track record with students is due to three factors. First, he never insists on his students embarking on his own research topics. He is intellectually curious and will get interested even in subjects lying clearly outside his area of expertise (at least when the student starts working on them- quickly Eric becomes an expert...). If a research path will in his opinion lead to a dead-end or to an unambitious outcome, he will say so. But otherwise he will be strongly supportive, regardless of the topic. As he rightly argues in his TSEconomist interview: “I think the most important element in producing a successful Ph.D. dissertation is being really interested in the questions you are trying to answer. If you truly care about the subject, you have the incentive to immerse yourself in it – and that’s what leads to a good dissertation. In fact, this is probably the most important element in producing good research more generally.” By being supportive of the student’s own interests, Eric makes it more likely that the student succeeds in his/her dissertation and start of career. I should mention two other factors, both related to the personal traits mentioned above. First, he is very generous with his time. I still fondly remember the tutorials Drew Fudenberg and I had with Eric Maskin in his MIT office. He would discuss with us the yet unpublished papers of now classic work by for instance Myerson, Myerson-Satterthwaite, Green-Laffont, Milgrom-Roberts, Kreps- Wilson and (as we asked him) his own work by himself or with Jean-Jacques Laffont, John Riley, Peter Diamond or Partha Dasgupta. This was just extraordinary; we just saw the field of economics change in real time and were getting insights as to what the shortages of the new approaches (game theory, information economics) and areas for future research were. This is what my TSE colleagues try to emulate today by covering recent developments in an enthusiastic manner. Eric’s second trait that makes the PhD process under his supervision both enjoyable and productive is his graciousness. Working on a PhD thesis generates anxiety; regardless of previously demonstrated talent, performing research is for most PhD students a jump into the unknown and there are always many moments of doubt, when one wonders if one is able to fulfill expectations. Self-confidence is with passion a key to delivering good research; but unlike passion, self-confidence is fragile and does not come by easily. Eric has always been a gentle supervisor. While he clearly indicates to the student unpromising research paths or wrong reasoning, he always does so in a soft, constructive manner. Let me give you an anecdote, which probably Eric does not recall (and that I almost successfully repressed myself). In my second year of the PhD program, I had the great opportunity to work on a joint paper with him on Keynesian equilibria – this was the beginning of a long collaboration (indeed in the following year, while I was still an MIT student, we started working on the various papers on Markov perfect equilibria – the pure game – theory piece as well as the three IO applications). One day, while he was away at a conference, I added a proposition to the paper. Alas, this proof of the proposition contained a fateful mistake. When returning, Eric quickly figured out the mistake, but very graciously and in a soft-spoken way tried to find redeeming features (honestly, there were none, the mistake was rather stupid), and went on to provide an alternative proof. While embarrassing for me, this episode certainly taught me a lesson. Research is a complex alchemy, in which sheer analytical power is just one of many ingredients. Another ingredient is the ability to alternate between two opposite advocacy roles: wishful thinking- hoping that a proof or idea will work, sometimes against all odds, and not hesitating to take shortcuts before writing things more carefully – and critical examination – submitting the outcome to the toughest refereeing process possible. Yet another absolutely key factor is passion, as described in the interview. And finally there is a large payoff to being in the right place with the right people. Eric Maskin is certainly one of these scholars who always make the investigation intellectually challenging and at the same time much fun, as it should! Interview with Eric S. Maskin: Questions by TSE students Eric Maskin is Adams University Professor at Harvard. He received the 2007 Nobel Memorial Prize in Economics (with L. Hurwicz and R. Myerson) for laying the foundations of mechanism design theory. He also has made contributions to game theory, contract theory, social choice theory, political economy, and other areas of economics. He received his B.A. and Ph.D from Harvard and was a postdoctoral fellow at Jesus College, Cambridge University. He was a faculty member at MIT from 1977-1984, Harvard from 1985-2000, and the Institute for Advanced Study from 2000-2011. He rejoined the Harvard faculty in 2012. • Life and the Nobel Prize Why did you decide to become an economist given that you were trained as a mathematician? How much investment in math would you recommend to Ph.D. students interested in economic theory in general but without any math background? It’s true that my initial training was in mathematics. However, almost by accident, I happened to take a course from Kenneth Arrow on “Information Economics,” which was so inspiring that I decided to change direction. It seemed to me that economics combined the best of both worlds: the rigor of mathematics with the immediate relevance of a social science. As for how much math I would recommend, I’d say that basic analysis, including measure theory, is certainly very useful. Also, linear algebra and stochastic processes always helps. But beyond that, I don’t think a huge mathematical investment is necessary to do economic theory unless you are planning to work in an extremely technical area. What were your immediate reactions and thoughts when you were informed that you won the Nobel Prize? How did being a Nobel laureate affect your life? My first reaction was great surprise and a sense of unreality – but also pleasure, especially from the fact that Leo Hurwicz and Roger Myerson were being recognized too. For the most part, the prize hasn’t changed my life a great deal, but it has given me the opportunity to visit some places I wouldn’t have otherwise seen and meet some people I wouldn’t have otherwise come across. It has also given me the chance to speak to a much broader audience. What was the feeling of living in the Princeton house in which Albert Einstein spent the last 19 years of his life? What do you think is the most remarkable element of his work and his legacy? It was certainly a thrill to live in Einstein’s old house; he has always been one of my heroes. For me, his most remarkable accomplishment is to show how far we can go in understanding the world through pure thought alone. You come from a musical family: your mother taught at Juilliard and your brother is a professional oboist. As a matter of fact, you turn out to be a first-rate musician yourself. You play the piano as well as the clarinet, and perform regularly in concerts, mainly classical music, but also jazz. Did your involvement with music affect your research life? Did you ever regret that you did not follow the family tradition in the choice of your profession? Music has helped provide some balance to my life. I love doing research, but must acknowledge that writing an economics paper does not allow me to express my emotions very much. Playing music, by contrast, gives me a rich emotional outlet, which is very satisfying. I don’t regret not becoming a professional musician. As it is, I have the best of both worlds – I can do economics and play music on the side (perhaps not as often as I’d like, but still quite a bit). It would be very hard for a professional musician to do economics on the side. • About Crises and Economic Theory The recent financial crisis revealed that markets do not work so perfectly as some policy makers had thought. What were the main reasons for which policy makers and politicians were so confident about the performance of financial markets and rejected the call for more stringent regulation? Can such behavior be justified by realistic economic theoretical models? What do you think are the main lessons that we should keep in mind for the future? I don’t really understand why politicians and policy makers had such faith in the self-regulation of financial markets – perhaps ideology had something to do with it. Certainly, such faith was not based on a good understanding of economic theory, which shows very clearly how financial markets can fail because of serious externalities. I hope that we remember going forward that financial stability depends on correcting these externalities, and that a good way of doing so is regulation – especially, regulation of leverage. How do you comment on the recent policy decisions of the EU, like the outright monetary transactions of the ECB, the austerity packages implemented in many European countries and the intensive discussions around the issue of Eurobonds? Do you believe that the currently applied rescue plans in these countries are incentive compatible or they leave room for misbehavior? I think the ECB’s accommodating monetary policy has been helpful, but I’m afraid that austerity programs have largely proved to be counterproductive; they were implemented at time when economies were still fragile, and have tended to make things worse. I applaud the idea of Eurobonds and other moves to integrate Europe’s fiscal side. Of course, rescue plans create a moral hazard problem, which is why the fiscal consolidation of Europe (including the power of a central authority to constrain member countries’ domestic spending) is so important. Do you think that the Euro as currency can survive the exit of one of the small and peripheral countries from the Eurozone (say Greece for example)? Could it survive the exit of Germany? Can the consequences of such events be really predicted? I’m no expert on European politics, but I’d guess that the Euro might survive the exit of Greece, but not the exit of France or Germany. The honest answer, though, is that these are just wild guesses. I suspect that even experts on the subject can’t do much better than guess. • Patent Protection and Innovation Your opinion that patents can inhibit innovation in particular in industries like the software industry seems at first sight to contradict the conventional wisdom that patent protection leads to more innovations. Do you think that we should weaken the patent protection in particular industries in order to improve social welfare? There are indeed industries in which relaxing patent protection might be good for innovation and society. This is true especially of industries – like software – in which invention is highly sequential; where instead of there being one big discovery, there are lots of little discoveries, each building on what has been done before. In such industries, patents can block critical follow-on innovation. You may want to build on a discovery I’ve made. But if I hold a patent on that discovery, I am apt – as a monopolist – to set a high license fee, which may well deter you from innovating. • Our final question: You have contented yourself with your research, but have been a fantastic advisor as well. What do you think are the main ingredients of a successful Ph.D. dissertation? I think the most important element in producing a successful Ph.D. dissertation is being really interested in the questions you are trying to answer. If you truly care about the subject, you have the incentive to immerse yourself in it – and that’s what leads to a good dissertation. In fact, this is probably the most important element in producing good research more generally. |
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