In an initial announcement Monday morning, the Nobel Foundation cited the three scholars in part "for their analysis of markets with search frictions." Among many other avenues of research he has pursued in his career, Diamond helped develop studies from the late 1970s onward that examined the ways markets function over a period of time. This aspect of economic research — “search theory” — has been frequently applied to labor markets in the years since, in an attempt to see how the needs of individuals and employers are met.
Diamond received his PhD from MIT in 1963 (his thesis adviser, Robert M. Solow, also won the Nobel Prize in Economic Sciences, in 1987). He returned to the Institute in 1966 and has remained a member of its faculty ever since.
“I am delighted and elated,” Diamond told MIT News in a phone call Monday morning. He found out the news while being driven home from the Boston airport an hour earlier by his wife and one of his two sons, having arrived on an overnight flight from San Francisco, the last leg of a long journey from New Zealand. “Fortunately, I was sitting down, and I wasn’t behind the wheel,” Diamond joked in a press conference on the MIT campus Monday.
Remarkably broad range of research
MIT President Susan Hockfield heralded Diamond’s accomplishments in introductory remarks at the press conference. “As a professional economist, Peter has embraced the role of public citizen, conducting highly influential research over five decades on a remarkably diverse range of subjects,” she said.
In addition to his work on markets, Diamond’s career has covered topics from public finance to taxation, Social Security, labor markets and behavior economics. By his own account, his career has had several phases. “I think of myself as finding something interesting and important to work on, and working on it until, if you’ll excuse my economist’s expression, diminishing returns sets it,” he said at the press conference. “Then I look for some other area where I have the possibility of working something out that would be useful.”
Diamond’s work modeling the uncertainties and imperfections (or “frictions”) of markets has been used in many ways, but his co-winners this year, Mortensen and Pissarides, are among the many economists who have applied it to labor markets, to see how individuals and prospective employers search for matches to their own needs.
The aim of his studies of markets, Diamond said, was “to pay much closer attention to how the economy plays out in real time than in the simplest abstractions of how markets work. In the labor market, it takes time for workers to find suitable jobs, it takes time for employers to find suitable workers, and that dynamic has a feedback into how wages are determined and how efficient the economy is.”
This subject, Diamond noted, is particularly relevant in the current economic situation. “It’s very important that people get back to work, because if they’re out of work too long, it breaks the connection to the labor market, and the economy functions more poorly thereafter,” he said at his press conference.
Diamond’s fellow economists at MIT were delighted about his selection. “It shows that sometimes the good guys do win,” said a beaming Solow after Diamond’s press conference, where he was one of many MIT economists who arrived on very short notice to attend the event.
“This is great day not only for Peter but for economics, and our department in particular,” said Ricardo Caballero, the head of MIT’s Department of Economics. “Peter is an economist’s economist. He was awarded the Nobel for his seminal work on search theory, the theory of the frictions and incentives involved in the process of matching, but he could have won it for his work on public debt and the overlapping generations model, or on optimal taxation with private information.”
One paper Diamond wrote in the 1960s, “National Debt in a Neoclassical Growth Model,” became a widely used model of public debt. In the early 1970s, Diamond published widely influential work on taxation, including a pair of 1971 papers on “Optimal Taxation and Public Production,” co-written with economist James Mirrlees that outlined what kind of tax regime leads to the highest production efficiency available in an economy. The research is part of a body of work that led to Mirrlees being awarded a 1996 Nobel Prize in economics.
By the late 1970s, Diamond had begun long-running research into Social Security, when he first served on a government panel analyzing the topic. Since then Diamond has written many papers on social insurance and co-authored a 2005 book, Saving Social Security: A Balanced Approach, with Peter Orszag, the Obama administration’s first director of the Office of Management and Budget. In Diamond’s analysis, Social Security is hardly rushing toward imminent insolvency, but will likely need some increased taxes and some reduced benefits to maintain stability a few decades down the road.
Diamond also refers to himself as “a card-carrying behavioral economist” and edited a recent book on the subject.
The economy, the Fed and policy
This spring, Diamond was nominated by President Barack Obama to serve on the Board of Governors of the Federal Reserve, the central bank of the United States. The nomination is still pending confirmation by the full U.S. Senate.
At his press conference this morning, Diamond reaffirmed his interest in serving as a Fed governor, and in response to media questions, allowed himself a few comments on the current economic situation. Diamond believes the current unemployment rate — more than 9 percent — is not necessarily due to long-term “structural” shifts in the economy, as some observers have suggested.
“To discover that something is indeed structural would take time,” Diamond said. “I don’t think that, with suitable macro policies, there’s any reason to think that in time we won’t go back to more normal levels of employment when the economy is doing well.”
Many of the policy actions of the current government, Diamond believes, have helped prevent a worse downturn. “We’re fortunate the Fed and the Treasury acted so dramatically to prevent our sliding into something as bad as the Great Depression,” he said. “The bailout of the large banks, as unpleasant as it is in contemplating, was absolutely essential for getting the economy going.” The economic stimulus package of 2009, he said, has also helped reduce unemployment levels.
Still, Diamond added, there are limits to the extent of necessary policy intervention. “I’m a believer in markets, I’m a believer in capitalism,” he said. “I think the economy is very adaptive. Workers and employers adapt to what will work to help the economy function.”
A math student turns to economics
After receiving his undergraduate degree from Yale, Diamond entered MIT as a graduate student in mathematics. He decided to switch to economics and completed his PhD thesis under the supervision of Solow. After beginning his teaching career at the University of California, Berkeley, Diamond returned to the MIT faculty in 1966 and has remained at the Institute ever since. He was promoted to full professor in 1970, and was named Institute Professor — the highest honor awarded by MIT's faculty and administration — in 1997.
“The MIT economics department has just been a perfect place for me,” said Diamond. “I stayed around … because I couldn’t imagine a better job.”
Diamond is held in high regard by other colleagues on campus. “Of course Peter is an incredibly distinguished economist,” said Deborah Fitzgerald, Kenan Sahin Dean of MIT’s School of Humanities, Arts, and Social Sciences. “But people should know he’s a dedicated member of the MIT community who has often worked behind the scenes to make this a better place.” Diamond served on the Institute-wide search committee that selected Hockfield, and has lent his expertise to committees analyzing topics such as the Institute’s employee retirement plan.
Diamond has received numerous awards and honors, including Guggenheim and Fulbright fellowships. He is a fellow of the National Academy of Arts and Sciences, and a member of the National Academy of Sciences. Diamond has been a visiting scholar at Cambridge University, Oxford University and Harvard University, among other institutions. Diamond has served as chair of MIT’s Department of Economics, and had a term as president of the American Economic Association in 2003.
Diamond is the fourth person to win the Nobel while a member of MIT’s Department of Economics. The others are Paul A. Samuelson (1970), Franco Modigliani (1985) and Solow.
Eight other scholars have won the Nobel Prize in Economics having received a degree from MIT, six of whom have received doctorates from MIT’s Department of Economics: George Akerlof PhD ’66; Robert Aumann Phd ’55 (in mathematics); Lawrence Klein PhD ’44; Paul Krugman PhD ’77; Robert Merton PhD ’69; Robert Mundell PhD ’56; Joseph Stiglitz PhD ’66; and Oliver Williamson ‘55.
An additional four people have gone on to win the Nobel in economics having previously taught at MIT: Robert Engle, Eric Maskin, Daniel McFadden and John Nash.