Since Eric Maskin was awarded the Nobel Prize in Economic Sciences last year, it became apparent that there were two kinds of economists.

The first, who clog television news shows, look backward and explaining why what they predicted yesterday is not happening today. Rich in wise and masterful inactivity, these pundits pinpoint past blame, and forecast how long we will be suffering this recession.

The second type of economist, like Maskin himself, takes a more active stance. Maskin and those like him, see the economy not as an occurrence, but as a human-created institution, which like all institutions will respond to various human stimuli. So the question becomes: Which stimuli are required to bootstrap us out of our current economic travail?

This is just one of the monetary Gordian knots Maskin will unsnarl in his Princeton Regional Chamber of Commerce luncheon meeting talk, “Financial Crises: Why They Occur and What to do About Them” on Thursday, January 8, at 11:30 a.m. at the Princeton Marriott Hotel, 100 College Road East. Cost: $50. Visit www.princetonchamber.org.

Maskin who currently serves as the Albert O. Hirschman professor of social science at the Institute for Advanced Study, has been labeled by peers as “one of the leading economic theorists of his generation.” Proof of this came on October 15, 2007, when he shared the esteemed Nobel Prize in Economic Sciences with Leonid Hurwicz from the University of Minnesota and Roger Myerson of the University of Chicago.

A Garden State native, Maskin grew up in Alpine, son of a physician father and musician mother. Maskin earned his bachelor’s in mathematics from Harvard in l972, remaining there to take his Ph.D. in applied mathematics. Upon completing his graduate work, he progressively became one of academe’s gentlemen of note. He was awarded a National Science Foundation Fellowship, then a succession of NSF grants, plus Guggenheim, Sloan, St. John’s College in Cambridge, and American Academy of Arts and Science fellowships. He has been awarded honorary degrees from Cambridge University, Monash University, Bard College, and Corvinus University in Budapest.

As a professor, Maskin has taught at Jesus College in Cambridge, Harvard, and MIT, and now serves as a full professor at Princeton University. He has authored more than 100 papers and several books, the most recent being “Planning, Shortage, and Transformation.” For the prophetically inclined, Maskin is the third Nobel Laureate to reside in the house at 110 Mercer Street in which Albert Einstein once lived.

In the political arena, it is often debated whether the president holds the reins of the economy or vice versa. Maskin believes that we hold sway over our economic future and that we can logically control it.

Mechanism design. It was for his innovative work on the Mechanism Design Theory of economics that Maskin received his Nobel Prize. Instead of studying past economic outcomes to predict future ones, Maskin says he takes a somewhat reverse view. As he puts it, “We look at our goals — where we economically want to be. Then we ask ourselves, ‘What mechanisms, what institutions, regulations, procedures would lead us, as a society, toward that goal?’ We then design those social and economic events necessary to move us forward.” Such mechanical stimulus might entail dealing with banks, brokers and financial houses, government bureaus, exchanges, even individuals and groups.

This third part of Maskin’ design theory is the most perceptive — and difficult. After you have designed your goal and set a strategy of action, you then must realize that the job is too large for anyone alone. Everybody plays a part in our economy; they must all be involved in its solution. Thus, the final step entails building enticements that will lead society to act in its own best interest. Unlike American economic philosopher John Stuart Mill, who insisted that people seeing the long-term benefit would naturally forgo immediate pleasures, Maskin believes people will only work toward a goal that rewards all along the way.

Rich vs. poor. At the outset of the current financial dilemma, government went for the knee-jerk fixes with plans to heap hemorrhage-stanching cash into the wounds of the largest institutions. This rather resentfully begged the question of why? Why does our culture consider it an anathema to give money to those who need it the most, but a vital necessity to those who have the most?

“Giving to the needy is a very humanitarian thing to do,” responds Maskin. “Giving money to those running large institutions is an economic reaction. It is not that we should be giving money to the rich per se. But the fact is they control the institutions that need fixing, so the money must pass through them. It is helping us all.

“Actually I personally favor funding from both ends. And under our new President Obama, I think we will see just such a plan of action.”

History lessons. Maskin makes it perfectly clear that we are not headed for a 1929-style depression. But government can learn lessons of timeliness and direction from past failures. Such factors as the Dust Bowl farming devastation made the Great Depression almost inevitable. But much of the escalation may be placed at the feet of the federal government, which reacted far too slowly and, Maskin feels, with the wrong measures.

Immediately after the 1929 market crash, the Hoover administration went into a long period of denial. “When markets fall, the necessary goal is to encourage spending,” notes Maskin. “Money should be relaxed, interest rates should be dropped. Hoover and the 1929 legislature did exactly the opposite.”

Responding to this latest crash, we seemed to have learned the looser-monetary lesson, but the timeliness again swept right by our legislators. “If the federal government had not allowed sub-prime lending, this entire current financial crisis might have been greatly avoided,” says Maskin.

Unlike much of the vox populi, Maskin does not fully blame the banks. “The banks were operating in their own best interest,” he says. A lender might loan to a homeowner, knowing that he cannot possibly pay back the loan, but the bank also knows that the value of his house is climbing. Either the homeowner or the foreclosing bank can sell it for an increased value beyond the loan. The loan remains productive; the bank comes out in the black.

“While this is fine for the individual bank, it is disastrous for the banking community and the overall economy,” says Maskin. As soon as the prices stop rising, the party stops and everyone must scramble for a chair. And downward we have plunged.

Critics may well whiff some cynicism here. It seems as if Maskin is saying that no blame should go to the thieves who broke into my house, but rather that it’s the fault of the police for not guarding the house well enough. To this Maskin responds, “but it is against the law to rob from your house, and it should have been against the law to make sub-prime loans on homes.”

From here, where? Obviously, the very first duty of the new president will be to deal with this recession. And for Obama, Maskin’s advice is to learn to distinguish between those who call for government intervention and those who do not. “Credit has nearly halted at this point,” he says. “Credit comes from banks; they need infusions of money to get them lending again and to get money circulating around our economy.”

How much money? How often? Maskin doesn’t really know to the dollar, but he does know where the balance lies. “There must be bailouts to get the necessary financial institutions loaning again, but to develop a bailout policy encourages imprudent loans, and the same reckless lending that brought us to this pass, “ he says.

Thus increased loan capital must be offered with the strings of appropriate regulations. Making it against the law to make a loan without some tangible proof that the borrower can pay it back, might be a good start, Maskin suggests. “The world is filled with greedy bankers and greedy consumers,” says Maskin. “You cannot stem that tide, but you can channel their greed into economically constructive directions. Regulation can actually become an enticement to do social good.”

Yet, it will take more than credit reinvigoration, Maskin warns. “Government must stimulate demand, put money in the hands of the public,” he insists. Tax cuts, mortgage relief, and enlarging the social safety net are only starting points. The government must make major investments in its own funded projects. Such direct spending, if coordinated with well-regulated and encouraged financial markets, might just lead us into daylight.

Forecasters are saying that the current economic plight will last at minimum a year or two. Maskin sees no quick solution either. But like any good business plan, if you take the right vision, then outline your steps, then entice and empower the involved individuals, your odds of reaching the goal vastly improve.

If it works for the very human institutions of business, shouldn’t work for the much larger human institution of the economy?

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