Robert Aumann on incentives and competition
On Barely A Blog, Ilana Mercer reports on Robert Aumann’s recent inaugural lecture of the Center for the Study of Judaism and Economics at the Jerusalem Institute for Market Studies. Robert Aumann, who won the 2005 Nobel prize in economics with Thomas Schelling, is known for his work on repeated games and the role of reputation and making credible threats to achieve cooperation and avoid war.
In his Nobel lecture Aumann stresses that “economics is all about incentives,” a theme that is further illustrated with examples from the Torah and the Talmud in his 2008 lecture:
As one example of fundamental market-oriented principles inherent in Judaism, Professor Aumman cites the support in the Talmud for unfettered price competition. He notes that the Talmud precedes Adam Smith’s groundbreaking ideas on price competition by hundreds of years. In the Talmud, there is absolutely no room for price fixing; only support for ensuring the use of honest weights and measures. In a competitive market economy, the firm selling at the highest price will either go out of business or be forced to decrease its price in order to survive…Professor Aumann also talked about the many discussions of the moral hazard problem in the Torah and Talmud, and how moral hazard is currently at the heart of the faulty proposals currently being offered to solve the current financial crisis.
As most of the current debate on the bailout is dominated by the short term objectives of public policy makers and economists who want to be public policy makers, it is a welcome development that individuals with a strong background in studying strategic human interaction weigh in on “the issues.”
