Interview transcript

[Peter Diamond] Hello?

[Adam Smith] Hello, Professor Diamond, this is Adam Smith calling from the Nobel Prize website in Stockholm.

[PD] Mm hmm.

[AS] My congratulations on the award of the Prize.

[PD] Thank you.

[AS] So, may I start by asking where you were when the news broke?

[PD] I was on a red-eye from San Francisco to Boston, the last leg of a trip that started in New Zealand. So, when I got off the plane at seven in the morning, I knew nothing about it. My wife picked me up, wife and son picked me up, at the airport. And, they hadn’t yet mentioned it when my cell phone rang. And, it was my good friend Nick Stern calling from London to congratulate me! And, that was the first way I learned about it.

[AS] Well, these first days of Laureate-hood are notoriously busy, so what an extraordinarily sort of tiring start to such a busy day.

[PD] Yes! [Laughs] I’m certainly feeling it already. And, there’s quite a bit of the day stretching out ahead of me.

[AS] I bet! Are you the sort of person who enjoys the publicity this garners?

[PD] Um, yes and no. It’s fun. It is an opportunity to get out some messages. It does block doing the kinds of things I normally do, which I will of course need to get back to at some point.

[AS] At some point, yes. You mentioned messages. Is there any message in particular that you’ve been using the opportunity to promote?

[PD] Well, the press conference that happened here included questions about the fiscal stimulus in the US, the bail out of the big banks, and I think it’s important – and that’s not tightly connected with what the Prize recognized, but it’s in the general ball park – and I think it’s important that the American public realize that if we hadn’t bailed out the banks, unemployment would be a great deal higher than it is now. If we hadn’t had fiscal stimulus, unemployment would be a lot higher than it is now. And so [phone rings in the background], when I was asked those questions, I was glad to have the opportunity to say that.

[AS] Yes, indeed. Now, you’ve worked previously with other Economics Laureates, for instance James Mirrlees.

[PD] Yes, we first met at an Econometrics Society meeting in Zurich in 1964. And we became friends – good friends – when I spent 1965/6 in Cambridge at Churchill College. And then we started collaborating in the summer of 1967, when I returned to Cambridge with my wife, having just married over that year. And we had both been thinking about optimal taxation and we started working together. We liked working together. We’re still working together! There hasn’t been a time from then to now where there wasn’t a paper in process.

[AS] [Laughs] That’s a good collaboration indeed.

[PD] Yes.

[AS] The work for which you’ve been awarded is essentially the development of models, which incorporate real-world inefficiencies into the study of market transactions.

[PD] Real-world frictions is what’s being incorporated, and they can lead to inefficiencies. I mean, I think that the slight difference in my wording from yours, I think matters for the sense of the underlying methodology.

[AS] Right.

[PD] The target isn’t ‘let’s stick in an inefficiency’. The target is ‘let’s stick in some realistic frictions and find out what that implies for how the markets work’.

[AS] Mm hmm. And, can you give me just one example of the sort of insight that such models provide?

[PD] The work I did with Olivier Blanchard on the relationship – the Beveridge curve – the relationship between vacancies and unemployment, and the fact that it is really a process that has a dynamic to it. And so one doesn’t jump to instant conclusions from a current snap shot. One has to recognize that this is a process that has hysteresis in it, has significant legs. And one has to think through stimulating the economy around the idea that you’re working through a process. And a process where expectations matter a great deal.

While the bulk of the work, and what the citation referred to, was labour market work, there was also reference made to a related paper I did on the role of aggregate demand. And the point here is that you can have – just looking at rational expectations – you can have multiple equilibria. So, you have to look beyond that to get a determinant of what would actually be happening. And doing that is an underpinning for thinking about how the economy can be, at times, fragile. Because there are two different ways where it’s sensible for people to go if they believe other people are doing something. A bank run is the obvious example, but that’s primarily the work of Douglas Diamond, no relative!

[AS] And have you worked closely with Christopher Pissarides and Dale Mortensen as well?

[PD] Ah, no, I have not. I mean, I’ve certainly known them for a long time and admired their work. And, as I’ve mentioned in the press conference here at MIT, one of the key steps for me in developing my work was reading one of Dale Mortensen’s papers, back before he was collaborating with Chris, where he used Poisson processes in a way that I realized was an enormously valuable tool for exploring the kind of dynamics I had in mind. So, I have frequently cited that paper of his as a very stimulating one for me.

[AS] Ok, well thank you very much indeed. Have you been able to make any plans for celebrations for later in the day?

[PD] [Laughs] Sleep is, I think, the prime celebration I’ll be having! At some point the brain will shut down and the body will collapse and tomorrow we’ll think of actually having enough energy to celebrate.

[AS] Well, I wish you luck in finding sleep with lots of people like me trying to get you.

[PD] Thank you.

[AS] Thank you for speaking to us. Thank you, bye bye.

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