BrothersJudd Blog: MARKETS IN EVERYTHING:

April 4, 2011

MARKETS IN EVERYTHING:

The Matchmaker: The Harvard economist who stopped just studying the world and began trying to fix it (Leon Neyfakh, April 3, 2011, Boston Globe)

Better than anyone, Roth — who is now a professor in the Harvard economics department and at the Harvard Business School — was aware of how complicated the problem was. It was one thing to criticize what had been done, and another thing entirely to design a matchmaking system that would work smoothly in the real world, with all its messy details and practical constraints. He decided to do it anyway.

Together with a collaborator named Elliott Peranson, Roth came up with a new, sophisticated algorithm to solve the problem of married couples. As it turned out, it worked beautifully, and when the new system was implemented in 1998, the lives of young doctors all over the country were significantly improved. The experience was as illuminating to Roth as it was to some of the doctors who had been skeptical that an economist would have any clue how to help them.

“I don’t think people thought about the residency matching process as something an economist should think about,” said Robert Gibbons, an economist at the MIT Sloan School of Management. “Al sort of showed there was economics there.”

In the years since, Roth has emerged as a rare figure in the academic world: a theorist willing to dive into real-world problems and fix them. After helping the med students, he designed a better way to assign children to public schools — the system now used by both Boston and New York. He also helped invent a system for matching kidney donors with patients, dramatically increasing the number of donations that take place each year. More recently, he and one of his students have been talking with Teach for America about improving the system it uses to deploy volunteers around the country.

Academically speaking, Roth is a pioneer of so-called market design: finding situations where a market is failing — often, a place that most people wouldn’t even recognize as a market — and making it work better. Roth has influenced a cadre of young, energetic market designers, many of whom have taken up prominent positions at top universities. Inspired by Roth’s work, these rising economists are also setting their sights on real-world problems. Some are looking at dating websites; others are interested in how universities could do better at scheduling their students’ classes. Like Roth, all of them envision a world in which economists, as unlikely as it may seem, are recognized as society’s mechanics.

Sitting in his office last week, Roth talked about how it was time for economics, as a field, to turn a corner — how merely describing markets as they naturally occur was no longer enough. Instead, he said, economists have to make themselves useful by fixing broken systems in which people aren’t getting what they want.

“We’re starting to know enough about how some of these things work,” Roth said, “that in some cases, when you’ve got a market in trouble, and you think, ‘Who’re you gonna call?’ you could call an economist.”

When most people think of economics, they think of money — the study of how much things cost and why. Roth distinguishes himself by being more interested in situations where money plays little or no role — for instance, the process that determines who among the thousands of patients awaiting kidney transplants nationwide should receive the small number of organs that are available. As a society, we’ve decided we’re not comfortable with people selling their organs, so some other system — some other kind of market — is required. And a market, in Roth’s view, does not necessarily come down to prices, nor is it always ruled by simple principles like supply and demand: As long as people are competing with each other to get what they want, then resources are being allocated, and that means economists should be thinking about it.

The trouble is that when you can’t rely on prices to stand in for value, things get complicated. In typical markets, “Money finds the matches,” said Utku Ünver, an associate professor of economics at Boston College who has collaborated with Roth on projects. “But when there’s no money, there’s lots of friction, and there are lots of things that may cause these markets to fail and not function efficiently.”

When you can’t use prices to express how much something’s worth, in other words, figuring out who should get what becomes a complicated business. “That’ll kill your economics 101 market real quick,” said Gibbons. “Al comes along to help you with situations where you’re not allowed to use the price mechanism.”