Games, that can save the economy: an interview with professor Eric Maskin

On 9th of July completed its work the Tenth International Conference "Game Theory and Management - GTM2016», held in Saint-Petersburg State University. The keynote speaker of the conference was the Nobel Prize winner, professor of Harvard University Eric Stark Maskin. 

The eminent economist, co-developer of the Mechanism design theory, answered the questions from GSOM SPbU researchers. The interview is conducted by Anastasia Ivakina, PhD student of the Operations Management Department, GSOM SPbU. 

 

 

 

Anastasia: Professor Maskin, could you please tell, what were you influenced by when developing your Theory? Were there any researchers, friends, politicians or probably life circumstances, studies, which stimulated you? 

 

Prof. Maskin: When I was an undergraduate at Harvard university, my major was Mathematics and almost accidently I decided to take an economic course of lectures from a very famous economist (I didn’t know how famous he was at that time) Kenneth Arrow. This was over forty years ago at the time when Mechanism design was just started and Professor Arrow devoted some of the classes to the Mechanism design. I thought it was fascinating! Largely because of those classes I have decided to change direction and start to work on Mechanism design. And I did so with Kenneth Arrow as my PhD supervisor.

 

Anastasia: Do you think it is possible to develop a universal mechanism, which can work in any situation? As a founder of the mechanism design theory, could you suggest such a mechanism, which would work in Russia?  

 

 

Prof. Maskin: No, I am afraid not. One important aspect of mechanism design is that a mechanism has to be designed, taking into account special circumstances of the application. It is hopeless to find a universal mechanism. That being said there are important principles which do apply universally that any good mechanism has to satisfy.

 

Anastasia: The society always expects a practical usage of any theory. What about mechanism design theory – can it predict and prevent economic crisis, for example? 

 

Prof. Maskin: I think it is impossible to prevent all the crises – that is asking for too much. But we can certainly take steps to reduce a probability of crisis. We are still suffering the effect of the financial crisis of 2008-2009. Many countries have still not fully recovered, including Russia. And in my view, that was a crisis which could have been prevented, if there had been better financial regulation.  One of the important reasons for this crisis was that financial institutions were allowed to behave in a very risky way, which might have been profitable for them, but was dangerous for the financial system as a whole. Part of mechanism design is the design of regulatory schemes which can reduce the probability of something like that happening again. I do not think it is realistic to stop crisis all together, but we can certainly make these crises less challenging than the one that we have just went through. 

 

Anastasia: So who should make the regulation in a crisis situation, which you have mentioned ? Government? 

 

Prof. Maskin: Financial markets do need to be regulated. But I think it is important to distinguish between markets where regulation is Important and those where it is not. In most markets governmental interference make things worse, and government should probably not get involved in most markets. But finance is something special because if a financial institution, if bank fails that affects not only that bank, but also many other banks too so you have this chain reaction of failures. It doesn’t happen in the potato market, for example, so we do not need to regulate the potato market, but we do need to regulate banking because of the possibility of chain reactions.

 

Anastasia: Is it possible to model a positive outcome from the Worlds economic crisis, and the effect of the sanctions, under which Russia is now?

 

Prof. Maskin: First, I think it is unfortunate that the Russian economy has been leaning so heavily on one particular market, mainly the oil market. Of course as Russia has oil, oil is important and of course any country wants to take advantage of a valuable resource like oil. But the dependence of the Russian economy on oil has been too heavy. And now the price of oil is so low, that is an important reason for the difficulties that Russia now has found itself. It is important that more incentive be given to developing other industries. This should not be impossible, because Russian public are very well educated and highly skilled people. There are lots of ways where they could be going, but it is a matter of providing incentives for moving out of wheel into these other areas. 

When it comes to sanctions, well, I think that the political conflict between Russia and the West – the US and Europe – has been very unfortunate: it is clearly unfortunate for Russia, but it also is unfortunate for the West. But I would like to see there is – using the French word rapproché – both sides move closer to each other. Both sides have so much to gain by cooperating. I do not agree with the idea that there are lots of fundamental difference between Russia and Europe. I think, there is so much to gain from peaceful cooperation, trade, from joint ventures… it is a tragedy that political relations are so bad at this point. But it is up to political leaders to do something about that.        

 

Anastasia: Three years ago in your interview you have mentioned mechanism design theory in regard to the transportation in Moscow. Can you now see other areas in Russia, which should be developed with the help of the Theory?  

 

Prof. Maskin: First, I am afraid that suggestions that we made on Moscow traffic were not adopted and traffic remains bad. Still it could be applied so there is still some hope (laughing). I should know that other cities have used the ideas from mechanism design successfully. One place for example where they worked quite well has been in London, where it used to have much worse traffic then it does now. And they are in a process of adopting these ideas in Beijing, where they had terrible traffic. They use mechanism design there too and I guess there is a chance of improvement. Where I particularly like to see mechanism design applied is on the subject that we were talking about a few minutes ago namely developing industries, precisely oil industry. The key to that happening is giving private investors, entrepreneurs the incentive to develop in other directions. It could be very helpful to Russian economy. 

 

Anastasia: In Russia we do have a strong economic and managemnet school. How do you think, what can be added for the educational programs development, so that Russian experts could compete at the international level?

 

Prof. Maskin: I agree that educational tradition in Russia is very strong and I have been very impressed by many of the students, I have met. But I think it would have been valuable if Russian students had an opportunity for greater contacts internationally. They are sometimes a little bit isolated. This is not just true for young researchers, but for older researchers. I think more international contact in a form of conferences like this [Game theory and Management (GTM) conference], in a form of international programs, in a form of international collaboration would be beneficial.