Economics of change: Ideas can do harm or make the world a better place

It is true that some ideas promulgated by economists have been destructive – such as the idea that turning people loose in free unregulated markets somehow turns out for the best.

Stanley Fischer with IMF Managing Director Christine Lagarde in Washington in November 2016. (photo credit: KEVIN LAMARQUE/REUTERS)
Stanley Fischer with IMF Managing Director Christine Lagarde in Washington in November 2016.
 AT THE onset of the New Year 5778, we scour the darker shadows of our souls and illuminate them with repentance. Personally, I am repenting for consistently reviling economists − even though I am one. It is time to be more even-handed and show how economists (many of them Jewish) have changed the world for the better and even saved lives.

The Nobel Prize in Economics (officially, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel) was launched in 1969. Since then 78 individuals have won the prize. Of those, 26, one in three, were Jewish or over 150 times the proportion that Jews comprise of the world’s population.

I’ve heard it said that economics is “Jewish engineering.” But Jewish chemists, biologists and physicists are no slouches either. Over a quarter of Nobel winners in medicine and physics have been Jewish and one-fifth of all winners in chemistry as well.

Eleven Israelis have won Nobels, including two for Economics (Aumann, Kahneman), three for Peace (Begin, Rabin, Peres), one for Literature (Agnon), and five for Chemistry (Shechtman, Hershko, Ciechanover, Warshel and Yonath).

Prof. David Leiser of Ben-Gurion University has just completed a book entitled “Misunderstanding Economics,” showing how ordinary people simply do not understand what economists say and write. All too often we economists do not explain our ideas clearly enough for non-economists to grasp and act on them.

But there are some major exceptions. Here are three of them.

Alvin Roth: Some economists do theoretical research. Others do applied research. Sometimes, the most impractical cerebral research becomes a breakthrough that millions use and love.

Take for example Weizmann Institute Prof. Adi Shamir, winner of the Israel Prize. He worked on the theory of prime numbers − numbers that cannot be divided by other numbers. What possible use could that have?

That research surprisingly became the foundation of a method used all over the world for encrypting and transmitting sensitive data securely over the Internet called PGP (Pretty Good Privacy). A person has two keys, one private and one public (known to everyone), and the whole method is based on the product of two very large prime numbers.

Al Roth, a professor at Stanford University and Nobel winner in 2012, spoke at the Technion in August about his field, market design – ways to optimally match people who need something with people who have it, without the usual price mechanism, by designing and creating markets where none now exist.

Roth’s early research was on game theory – highly abstract mathematics invented by John von Neumann and understood by a relative handful. Using game theory, Roth began to study “matching” – for instance, how to match medical residency applicants with positions in hospitals, taking into account their preferences and the fact that many residents are married to other residents, hence they need to be close to one another. In 1999 Roth’s proposed algorithm (set of rules) was successfully put into practice in the US.

Most countries including Israel forbid the sale of human organs. So some mechanism other than price is needed to match those who want to provide a kidney with those who need one. Before legislation enacted in 2009 banned the sale of organs in Israel, kidneys were selling for as much as $150,000. In his Technion talk, Roth explained the problematic issue with great clarity and without using any math.

In 2003, Roth helped design the method for matching New York City public school students with their ranked choice of high schools, in a way that was “incentivecompatible,” i.e. it did not pay for their parents to strategically hide their true preferences. A similar system was implemented in Boston.

But Roth’s most dramatic invention was in kidney exchange.

Suppose a wife needs a kidney transplant and the husband wants to donate one of his. But their blood types do not match. What then? The surgeon could find another couple, so that Husband A donates to Wife B, and Husband B to Wife A. But such exchanges were rare and hard to find within one hospital.

With two co-authors, Roth published an article in 2004 proposing a centralized kidney exchange. The idea is, the donor in one patient-donor pair gives a kidney to the next pair. The donor in that pair gives one to the next pair, and so on, until the circle is closed and a set of matches is complete. You need a “thick” market, that is, a lot of pairs of donors and patients, to get perfect matches.

But there is a complication. Courts will not enforce contracts for promised future delivery of organs. Donor A might provide a kidney, and then Donor C could renege. So all the transplants have to be done simultaneously.

Roth found that, usually, when enough couples sign up, transplants can be accomplished with no more than three patientdonor pairs. But there have been cases of six or even eight pairs of donor-patient exchanges.

Roth sent his paper to Frank Delmonico, then chief of renal transplantation at Massachusetts General Hospital. Out of that came the New England Program for Kidney Exchange. The system is spreading throughout the US and the world. Many lives have been saved and many have been liberated from dialysis as a result.

“Kidney exchange is an example of a smart market,” Roth wrote. “By running through every possible combination of donors and patients, the computer can arrange the highest possible number of transplants.”

I wish such a kidney exchange system could be established in Israel, because the waiting list for kidney transplants is very long. Several years ago, The New York Times reported that shady operators in “Israel’s irrepressible underground kidney market… have pocketed enormous sums for arranging overseas transplants.” The World Health Organization claims that the supply of transplantable kidneys is only a tenth of the real need.

Perhaps, if Roth’s algorithm could leap from the dusty pages of an academic journal to the real world, with powerful impact, other economic research can do the same.

Stanley Fischer: Ezra, our youngest grandson, is 5. When he visits, he likes to curl up on my lap and watch a TV program called “Fireman Sam” (Sami HaKabai) with me. When I watch Fireman Sam in action, fearlessly dousing flames, I think of Stan Fischer (see “Stan, our go-to man,” April 26, 2010).

Fischer was born in Mazabuka, Northern Rhodesia (now Zambia). He became a leading neo-Keynesian economist who made the case for strong pro-active government policy.

From 1994 through 2001, Fischer was First Deputy Managing Director of the International Monetary Fund, serving as Fireman Stan and visiting countries that overspent and over-borrowed to help extinguish their financial crises. It was a tough, thankless job.

Fisher did it exceedingly well. Fisher served as governor of the Bank of Israel for nearly two terms, from 2005 through 2013. During that time he deftly navigated Israel through the 2008 global financial crisis. With his vast experience in managing crises, Israel was fortunate to have him.

In 2009, he was the first governor of a central bank in the developed world to raise interest rates – a strong signal of confidence, and in 2010 the Bank of Israel was ranked first in the world for efficient functioning. The financial magazine Euromoney named Fischer Central Bank Governor of the Year.

In a Haaretz opinion poll in 2010, Fischer tied then chief of staff Lt.-Gen. Gabi Ashkenazi for top approval rating – almost unprecedented for a central banker, in a country that reveres its generals.

This was not the first time Fireman Stan rescued Israel. In 1985, as an economics professor at MIT, he was part of a team that built an effective stabilization plan to extinguish Israel’s raging 450 percent inflation. Indirectly, Fischer can also claim to have helped douse America’s financial fires. While at MIT, Fischer directed the PhD thesis of a young student named Ben Bernanke, on the Great Depression of the 1930s. Bernanke went on to become Governor of the US Federal Reserve Bank for two terms, from 2006 to 2014.

During that time, Bernanke acted aggressively to deal with the 2008 financial crash by rapidly expanding the money supply. Bernanke clearly had learned, under Fischer, how financial crises could lead to depressions, in the absence of strong monetary policy, and his policies helped avert disaster.

In 2014, President Barack Obama appointed Fischer vice-chair of the Federal Reserve, America’s Central Bank. In a recent interview with Sam Fleming, of the Financial Times, Fischer spoke out strongly against the Trump Administration’s plans to weaken financial regulations implemented in the wake of a wave of bankruptcies involving major financial institutions, calling it “extremely dangerous and shortsighted.”

“One cannot understand why grown intelligent people reach the conclusion to get rid of all the things you have put in place in the last 10 years,” Fischer said. “It took almost 80 years after 1930 to have another financial crisis of that magnitude. And now, after 10 years, everybody wants to go back to a status quo before the great financial crisis. I find that really extremely dangerous and shortsighted…. I had a picture of the world economy in which the United States was an anchor, not a source of volatility. This really changes things.”

Shortly after I wrote those words, CNN announced that Fischer had resigned “for personal reasons.” His replacement as vicechair of the Fed is a strong advocate for much weaker financial regulation.

President Donald Trump does not tolerate criticism and next year will likely not reappoint the current Federal Bank Governor Janet Yellen, who has been as outspoken as Fischer. Yellen’s replacement will probably be Gary Cohn, Trump’s chief economic adviser, who wants the job and who is pushing to reduce or remove financial regulation. Cohn was formerly President of Goldman Sachs.

Fischer will not be unemployed for long. A lot of institutions need and want a Fireman Stan – especially if and when the incendiary Trump administration rekindles the financial flames by turning loose the wolves of Wall Street.

Zvi Griliches: Israel makes much of its living, one way or another, from R&D (Research and Development). Some 300 R&D centers in Israel employ a quarter of the high-tech labor force and generate much of Israel’s innovation. Zvi Griliches was the economist who first showed the world the phenomenally high returns that R&D investment generates. Sadly, his huge contribution is inadequately regarded today.

Griliches was born in 1930 to a well-todo family in Kovno (Kaunas), Lithuania. In August 1941 the Nazis moved him, his sister and parents to the Kovno ghetto. The family hid for three years, until they were caught and deported to a forced labor camp.

At Dachau, Zvi’s father died, his mother was killed and young Zvi was liberated by Patton’s Army in the nick of time, in May 1945. He tried to emigrate to Israel, was interned by the British in Cyprus, and arrived in Palestine in 1947.

He fought in the War of Independence and in 1950 entered the Hebrew University, where he studied ancient history for a year in the old Terra Sancta building, leased by Hebrew University because the Mount Scopus campus was under Jordanian control.

Even though he had no formal education from age 11 to age 20, and was largely selftaught, Griliches was accepted to study on scholarship at the University of California, Berkeley, where he earned his BSc in agricultural economics – a field he felt was strategically useful for Israel.

Griliches’s 1957 research paper, based on his doctoral thesis, showed for the first time how a specific innovation is embraced, adopted and adapted. The innovation was hybrid corn – varieties of corn generated by cross-pollination, with each variety of corn adapted to local conditions and giving high yields as a result.

A year later, in 1958, Griliches published an astounding discovery – “at least 700 percent per year was being earned… on the average dollar invested in hybrid corn research.” That is, every dollar invested in developing hybrid corn returns seven dollars in profit. Griliches’s painstaking data collection made his findings more than sufficiently credible. The world learned how immensely productive R&D investment was.

That seminal research helped the world solve a riddle. MIT Prof. Robert Solow found in 1957 that 75 percent of the growth in US output per worker (productivity) came from “technical progress.” But as a macro-economist he could not say specifically what that “technical progress” was. Griliches knew. It was due largely to investment in technology and innovation, the key driver of economic growth.

Griliches’s research helped countries understand why they should invest in science and technology and in their innovative capabilities.

Solow won a Nobel Prize for his work. Griliches died prematurely, in 1999. Had he lived, he doubtless would have won a Nobel, too. As a leading Harvard University professor, he generated an amazing cohort of students who carry on his work.

It is true that some ideas promulgated by economists have been destructive – such as the idea that turning people loose in free unregulated markets somehow turns out for the best. It doesn’t. But other ideas have indeed changed the world for the better.

My advice to myself and my fellow economists is taken from the Bible: Choose life! Be like Roth, Fischer and Griliches.

The writer is senior research fellow at the S. Neaman Institute, Technion and blogs at