Author Info
Beth Allen

Abstract

The question of what constitutes good economic theory is analyzed. Current good and bad aspects of its methodologies are discussed. Interdisciplinary work that goes beyond the social sciences is advocated. The future predictions are presented concerning research in game theory and the economics of information. Finally, the importance of technology and the need for microeconomists to understand it better are argued.

About the paper

Beth Allen is the Carlson Professor of Economics, University of Minnesota, and Adjunct Consultant to the Research Department, Federal Bank of Minneapolis, both in Minneapolis, Minnesota. Her current research includes economics of information and uncertainty, game theory, engineering design theory and manufacturing.

Two main topics illustrated in the paper

Beth Allen focuses her attentions on two main topics about microeconomic theory: game theory and economics of information, and forecasts some predictable predictions on them.

Game theory

Game theory is a branch of applied mathematics that is used in the social sciences (most notably economics), biology, political science, and philosophy. The introduction of game theory into economics has a long and bumpy history, starting with Cournot in the 19th century.

A large and sometimes technical literature developed in the 1960s and 1970s, which was based on cooperative games, centering on the search for strategic foundations for competitive equilibrium. By the 1980s, the focus had shifted to noncooperation game theoretic models of strategic behavior, which were then advocated as the only part of game theory that could be valuable in economics.

Economics of information

Information economics or the economics of information is a branch of microeconomic theory that studies how information affects an economy and economic decisions. Beth Allen pays her attention on one of the filed of economics of information: information asymmetric.

Information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance in power in transactions which can sometimes cause the transactions to go awry. Examples of this problem are Adverse Selection and Moral Hazard. There are two primary solutions to this problem, signaling and screening.

About this area, Beth Allen’s point is that economics of information and uncertainty is important in the study of incentive compatibility constraints and incorporate information is a fully endogenous way into microeconomics theory and game theory.

Other topics

In this paper, Beth Allen also expresses her opinion about Mathematization of Economics.

Over the last decades, a range of criticisms has been leveled at the Mathematization of Economics. A considerable source of criticism was written in the 1940's and 1950's by philosopher Karl Popper. He argued that the fundamental problem with mathematical economics was that it was tautological. In other words, once economics became a mathematical discipline, it would cease to rely on empirical truth and instead rely on axiomatic proof. This meant that an economic model could either have verifiable assumptions and produce no new information or have unverifiable assumptions and sacrifice formalism for scope. Milton Friedman responded to this by announcing that "all assumptions are unrealistic". By this he meant that economic models should be judged on how well the theory predicts reality, not how well the assumptions accord with reality.

But Beth Allen agrees on Mathematization of Economics. She says that “Needed techniques cannot be criticized as ‘too much’.” In economics profession, it is justified in using whatever mathematics is necessary to formulate and solve a worthwhile problem effectively. Mathematics allows formulation and derivation of key relationships in the theory with clarity, generality, rigor, and simplicity. Mathematics allows economists to form meaningful, testable propositions about wide-ranging and complex subjects which could not be adequately expressed informally. Beth Allen thinks highly of mathematics’ advantage in economics. “Without mathematics, without rigor, the economist and the reader simply cannot evaluate whether a result is right or wrong.

My opinion

In 1994,Nash, Selten and Harsanyi became Economics Nobel Laureates for their contributions to economic game theory. In 2005, game theorists Thomas Schelling and Robert Aumann followed Nash, Selten and Harsanyi as Nobel Laureates. In 2007, Roger Myerson, together with Leonid Hurwicz and Eric Maskin, was awarded of the Nobel Prize in Economics "for having laid the foundations of mechanism design theory."

In 2001, the Nobel Prize in economics was awarded to George Akerlof, Michael Spence, and Joseph E. Stiglitz "for their analyses of markets with asymmetric information."

According to the allocation of Nobel Prize in economics, we know that game theory and economics of information are more and more important in the study of microeconomics from indirect side. Although uniform framework has been constructed in the paradigm of Walrasian general equilibrium for microeconomic theory, its foundation is not firm and its logical paradigm not imperfect. There will be many new branch fo microeconomic theory,such as game theory and economics fo information, to perfect the microeconomics.

As to Mathematization of Economics, I think it is good for the development of economics as long as we do not abuse or misuse mathematics because the language of mathematics allows us to make clear, specific, positive claims about controversial or contentious subjects that would be impossible without mathematics.