“… economic friction is a large term. It covers a lot of scope”
Transcript of the telephone interview with Dale T. Mortensen recorded immediately following the announcement of The 2010 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, 11 October 2010. The interviewer is Adam Smith, Editor-in-Chief of Nobelprize.org.
[Adam Smith] Professor Mortensen, hello. This is Adam Smith, calling from the Nobel Prize website in Stockholm.
[Dale T. Mortensen] Ok, you do call! I had just heard from Ed Phelps what happens …
[AS] Right, yeah! I’m glad it’s all working as it should. Grand, well, my congratulations on the award of the Prize.
[DM] Thank you.
[AS] We catch you in Denmark now, is that right?
[DM] Yeah, I’m in Denmark for another week. I’m half-time here and half-time in the US.
[AS] And, what were you doing when you received the call that told you?
[DM] What was I doing? I was having lunch with some of my colleagues. We have a seminar this afternoon.
[AS] And, I think I detect in your voice that it’s slightly disconcerting news?
[DM] It’s what?
[AS] It’s slightly disconcerting news?
[DM] [Laughs] No, I know that there’s less than a positive side as well as a positive side. No, it’s very good news, thank you.
[AS] It is indeed. So, the models for which you’re being awarded the Prize, that you’ve developed, have provided a framework for studying real-world transactions. Is that correct?
[DM] In the labour market.
[AS] In the labour market, yes. And applicable to other markets as well?
[DM] It has been applied to other markets as well, although mostly by other people.
[AS] And, the models in particular incorporate this concept of economic friction. Can you tell me what’s special about the models?
[DM] Well, economic friction is a large term. It covers a lot of scope. This particular model covers friction having to do with, having to gather price information and job location information. Any sort of deviations from so-called ‘perfect markets’ – which is just an ideal, right? – is called a friction. And, one of the assumptions of perfect markets is perfect information. So, one form of perfect information is information about what all the prices are and where you can make transactions. So, our model, really simply, relaxes that assumption. And that’s the sense in which it deals with friction. There are a lot of other frictions, like [line cuts out], that you can talk about, ok? Asymmetric information is another one.
[AS] Right, right, yes, where one side knows and the other doesn’t, yes. In particular for the labour market then, what insights have these models provided?
[DM] One of the early insights was to focus on the point that, with friction of this kind … You know this is obvious to everybody; that’s the problem with economics, right? It takes time to match workers and employers. All right, so you would expect people to spend some time unemployed before they find a job. And, even after they find a job, to look for maybe something better, alright? So, it focuses on those – on that sort of time-consuming aspect of information gathering. And, as a consequence, you can apply it to data, such as we have here in Denmark and in Sweden, which records the length of time people spend in unemployment, the length of time they spend in a particular job before they transfer to another – or move to another job, etcetera.
[AS] Mm hmm.
[DM] Is that clear?
[AS] Yeah, no, that’s clear! I wanted to ask you, just, you mentioned there that it’s, you know, economics is obvious to everyone. When one describes what these models have incorporated, it is what we all know. It takes time to find a job, for instance.
[DM] Yes, that’s the bottom line.
[AS] So it … I guess it must be a difficulty to sell to those who don’t, who aren’t engaged in economic theory, what one is doing?
[DM] Yes, it is. It’s hard to express it particularly when, of course, you go beyond that to try to talk about how do prices and quantities get determined, when it takes time.
[AS] And, so how do you normally do it? If one knows nothing at all, what do you say?
[DM] Ah, one knows nothing, well I try to start where I am now! And [Laughs] usually the people’s eyes glass over quickly and I don’t have to go too far. But, you know, where one would go from there is one of the implications of the setting is that there’s room to negotiate over wages, something else that people know, right! [Laughs] And so, when you talk about how wages are determined, you have to also deal with the bargaining aspect, and the part of the bargaining aspect that has to do with having to wait. For example, in a bargaining problem, what is your outside option, what is your alternative to make a deal, right? – is important. And, in the labour market, what your outside option is, if you’re unemployed, is finding another job opportunity, alright? You know, so there’s some wage that you wouldn’t accept because you’d rather go find another opportunity.
[AS] And, so part of the importance of having these models is that it helps people incorporate this sort of thinking into policy?
[DM] That’s right. That’s the point of the models, is to allow you to focus on aspects maybe that even you have a sense of, alright, but it allows you to focus on policy. Then the issue of how wages are determined is related to this information problem.
[AS] Hmm, ok.
[DM] And how many workers you want to hire is related to this information problem.
[AS] Hmm. Thank you, thank you. So, just lastly, you know Christopher Pissarides very well, I imagine. You’ve worked together …
[DM] Yeah, we’re co-authors and have known each other for a long time. I’ve known Peter Diamond also for a long time.
[DM] We’re more or less contemporaries.
[AS] But you haven’t spoken yet? [Laughs]
[DM] No, I haven’t! [Laughs]
[AS] Ok, well, any idea what’s going to happen right now?
[DM] What, right this … Oh you know, for me?
[DM] I know I’ve been warned a bit by some of my friends who this has happened to …
[AS] What, that you’re …
[DM] But, I don’t know the details, no!
[AS] But, you’re just about to lose control of the day, I imagine?
[DM] Yeah, I imagine. I’ve already told my secretary to worry about it for a while! [Laughs]
[AS] Good, it pays to have some watch dogs, I suppose. Good.
[AS] Ok, well I wish you a very pleasant day …
[DM] Alright, thank you.
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