THINK OUTSIDE THE (EDGEWORTH) BOX.

Word reaches Cold Spring Shops of the passing of University of Chicago economist Lester Telser.

I stumbled upon a footnote in a technical journal that cited Lester Telser and his work in what is called economic core theory. In effect, core theory describes how cooperation can be just as important as competition. It can thereby tell us how well a market is actually functioning, compared to more traditional approaches of economics that merely assume how markets work.

Lester did a fantastic job of linking economic science back to its more modern origins in the late 19th century, complete with a robust analysis of specific industries including railroads, steel, airlines and more. As he stated in Competition, Collusion and Game Theory, “Why is it that economists paid so little attention to the foundation of their discipline? One can find much attention given to questions of monopoly, cartel and competition, but virtually all this literature takes for granted some of the intrinsic properties of markets and competition without properly understanding them.”

As you might expect, this position did not sit well with many of Lester’s modern colleagues. Core theory was often casually dismissed as obsolescent in the face of the increasingly narrow interests of academic economics.

In part, that might have been because there were explanations for collusive behavior among railroads, steel, and airlines that could be handled using more conventional tools.  In part, that's because contemplating a strategic situation with no noncooperative equilbrium (such as the Nash equilibrium) is hard.  "To be precise, swabbies, it's a market so vast that the Lyapunov attractor is the core is the competitive equilibrium."  What happens, though, if the market is not that vast, and there are discontinuities in the industry-wide marginal cost curve?

“Businessmen complaining of excessive or chaotic competition are sometimes in situations that an impartial observer would describe as an empty core. It is hard for many economists to accept the proposition that competition may be excessive because received theory regards competition as always good, and the more there is, the better.” By an “empty core,” he was referring to the “core of the market” and whether the participants in that market, both companies and customers, were generally satisfied, as well as whether the buying and selling resulted in a stable, fairly reliable process.

Note: "generally satisfied" is not the same thing as "in equilibrium."  That's worth thinking about, if not earth-shattering.  "[T]he lure of the nagging small problems, and the insights gleaned from working them through, contribute greatly to the development of economics."

Fair winds.  R. I. P.