This summer I got my hands on a great book, Robert J. Shiller's "Finance and the Good Society." It cleared up a couple of the frustrated, economic-related thunderstorms in my brain, and continues to do so. The basic premise of the book, that finance is sort of beautiful and can be a force for good, might not be the most popular message at the moment, but you really don't have to agree with it to read the book. In fact, it might be a bit better if you don't.
I mention the book today because among the two winners of this year's Nobel Prize winners in economics is Alvin Roth. He gets strong mention in Shiller's book as a model of how financial engineers can be a force for good. Roth employed economic theory in developing a system that improves matching people who need kidney transplants with those who are willing to donate a kidney.
From the book:
Market designers, sometimes called mechanism designers, start with a problem—the need for a market solution to some real human quandary—and then design a market and associated contracts to solve the problem. They are using financial and economic theory to create "trades" that leave people better off.
The problem has been that few people would volunteer to donate a kidney: the operation is painful and the result may pose complications. The only people willing to donate would usually be close relatives or a spouse. But these people usually do not have the right genetic match.
So there's the problem. It's a big problem, and one that's easy to understand.
For example, a husband in Boston may need a kidney, and his wife is willing to donate one of hers but she is not a match. Across the country there is a couple in the same position, and it turns out that the wives are a match for the husbands in the opposite couple. In this simple case, the two couples essentially barter their kidneys: wife A gives her kidney to husband B, and wife B gives her kidney to husband A. Two patients who might not have otherwise found a generous donor are saved.
It is rare that two couples will serendipitously match each other’s kidney donation needs this way, and there are often more pairs of donor-recipients involved. The longest chain of kidney recipients and donors involved 60 people, or 30 pairs.
But hospitals prefer to limit, if possible, the number of pairs involved in organ exchanges, since they cannot handle an infinite number of transplants simultaneously. Mr. Roth’s system helps find the most efficient exchange of organs so that the most patients can be saved with the fewest number of pairs involved in a given trade.
Just a cool way to think about economics and "trading" on a Monday.