Using Economics and Market Design to Solve Practical Problems

Design thinking is a methodological framework used to solve "wicked problems" (ill-defined problems with no existing solution or unknown problems) in various domains. I marry the design thinking approach with Al Roth's famous commission to be economists as if engineers to solve what I call deep wicked problems: wicked problems requiring intensive human capital and expertise to create new technologies, as opposed to wicked problems that one can feasibly solve with existing technology.

My conceptualization of design thinking economics (DTE) is relatively new, and I am still iterating through formulations of it. If you are interested in learning more, you will be able to visit the website soon. Below, you can read an excerpt for my article "Deep Wicked Problems: Using Applied Economic Theory for Real Solutions".

Deep Wicked Problems: Using Applied Economic Theory for Real Solutions

Islands of economic theory have shifted and swayed toward application over the past few decades. However, these applications, often from Market Design, sometimes still fail to see the light of day in real organizations. Why? I propose that it stems from a fundamental disconnect between the deep wicked problems raging in the shadows and the surface failures that the average economist observes from cursory interactions with organizations and misleading interactions with economic literature.

What is a deep wicked problem? Technological advances have enabled the average white collar worker to improve business functions, and human ingenuity has solved practical problems for all since antiquity. Think about a good Google spreadsheet to calculate profits and expenses or an automated Power Platform workflow. Nevertheless, many issues remain. Poor children in Africa starve. Moon colonies are nowhere near operational. Pandemics come and catch us unprepared. These large, serious problems are so complex that the knowledge base and skills of one human being are insufficient to invent a solution: that is a deep wicked problem. Wicked problems are tameable. Entire frameworks, like Design Thinking, exist to understand and decompose them. Deep wicked problems are not. The current information of our present technological age is a band aid on a first-degree burn. We need new ideas and developments to salve the wound.

In steps the academic with her or his big brain and cutting-edge insights. The academic has much potential; researchers can advance the frontier line to battle against the ignorance that opposes human flourishing. Unfortunately, we know this is not always reality. Instead, 5.14 million academic articles hit the web each year, and I can tell you that most are never read. Of those that are read, even fewer are read by anyone who could ever benefit from them. Of those that read them and could benefit, even fewer understand how to instantiate those benefits. We end with an amalgamation of obscure, esoteric, and useless churn of fiber out of the Ivory Tower. Academia's response, at least in economics, has been to accept the status quo as unavoidable circumstances---oh well, at least I get paid!

Of course, I do not write to disparage the important intellectuals that increase our general understanding of the world. Papers with few readers and fewer citations can still contain immense value. Nevertheless, you, my surely attentive reader, and I are witness to a pattern. The populace mocks academia for its research-reality disconnect, and, unfortunately, the populace is not entirely incorrect.

One could postulate reason after reason for the state of affairs, but I offer a simple one, derived from one of the most useful observations from economic literature. The university incentivizes academics to further career goals, not further human flourishing. Consider the entire pipeline from PhD student to tenured professor. To live a life producing research, one must reach tenure or an even more coveted spot at a research or policy institute. Before this, one must attain a doctoral degree. In the discipline of economics, attaining your degree hinges on writing a collection of papers; papers that your academic overseers must approve of. Once one attains a doctoral degree, one must find a university willing to hire a research professor. The hiring decision hinges on the collection of papers you wrote; papers that those hiring you must approve of. Finally, once one has labored to become a research professor, one last rung remains: become tenured. How does your tenure board decide to grant or reject your dreams? Why, of course, the decision hinges on those collections of papers you wrote; papers that your tenure board must approve of. One's academic career is about a series of approvals, not a serious pursuit of helping others.

Nevertheless, this does not describe every economist. Some do find meaning in their research and do attempt to improve others' wellbeing. Some do not, yet they still positively contribute. One booming area of applied economic literature that aids real people's real, deep, wicked problems is Market Design. (Yes, I am plugging my own subfield.) The depth of knowledge is too grand to capture in one blog post, so take recent efforts to improve refugee resettlement as an easy example. In many countries, including the United States, deciding the best destination for an asylum seeker is a task that is complex and, simultaneously, totally ignored. Yet, the refugee's resettlement location determines a great deal about their future prospects such as education and career earnings. Certainly, one could think of possible options: send the refugee to the state with the most capacity, or the state that the refugee chooses, or so on, but, as it turns out, these may not generate good outcomes. This is a deep wicked problem. In the paper linked above, Delacretaz, Kominers, and Teytelboym (2023) use economic theory to design algorithms for use in a software that matches refugees to resettlement locations in a way that respects localities' priorities, respects refugee's preferences, and mutually benefits all. 

Their work succeeds because it is grounded in new knowledge and contextual insight. Without the former, a deep wicked problem cannot be solved. Without the latter, economist only observe surface failures: a deficiency in some area that is a symptom of a deep, wicked problem, but not the problem itself. For example, economists have long ago solved some deep, wicked problems where the public only acknowledges the surface failure. Rising rent prices plague the United States, and some areas respond with rent control; "Rent is going up so much," an urbanite might say, "I cannot believe that my landlord is so greedy. I'm glad rent control was passed in the last city council." Unfortunately, rising rental prices are simply the surface failure. The deep, wicked problem is a matter of the classic principle of supply and demand. Housing supply is low, and demand in an area might be high. Prices increase until the quantity of rental units supplied equals the quantity of rental units demanded. This is the theory of general equilibrium, established in 1870, and economists are nearly unanimous that rent control only exacerbates the problem.

The stage is set. Deep, wicked problem are afoot everywhere. Academics do not solve them. The public does not have the requisite knowledge to understand them. However, some are making inroads on them. What comes next?

For economists interested in elevating the human condition of life through dismantling deep, wicked problems, I propose an amendment to one's research process---and possibly methods---to begin creating real solutions. There are three simple steps: understand, research, and engineer.

UNDERSTAND. This is the missing step for many economists; we only understand previous literature, not what is important to real people. Identify a human need. Then, understand the institutional context around it according to those who experience the need. As if you were a sociologist: interview, interview, and interview more. Collect anecdotal and qualitative evidence documenting the need, pain points, and potential solutions from insiders. While this does not constitute academically rigorous evidence in economics, it is a useful complement. Ultimately, you should peel away the surface failures to uncover the deep wicked problem and to lay a basis for intersection with economics and feasible solutions your research could address.

RESEARCH. Isolate some aspect of the deep, wicked problem that you can use economic methods to study. Here, your economist brain shines. Ultimately, some research methods are more useful than others if you want to go beyond understanding to fixing deep wicked problems. Two general directions hold promise if you are an incoming PhD student or first/second year exploring research interests. The first, which I decided to pursue, is Market and/or Mechanism Design. Market Design has a host of toolkits to analyze human behavior, incentives, and institutions then introduce mechanisms that resolve systemic failures. Many researchers are also now implementing mechanisms in the field and evaluating their empirical performance, showing that theory can be put into practice. The second area is Applied Economics. Empirically evaluate policies and programs that posit themselves as effective answers to deep wicked problems. Dive deeper into theoretical literatures to understand which levers might be at work in deep wicked problems, and test them. Collaborate with Market Design to evaluate mechanisms.

ENGINEER. Think like an engineer. Aim your research at a goal of helping a specific part of a specific need. Your research should present several insights that practitioners can actually use, whether that be a simple answer of, "Yes, you should pilot this new policy" or a more complex, "This XYZ new mechanism will meet ABC performance metrics when executed in a 123 manner." Enter conversations with practitioners humbly, knowing that you will probably have to revise your work according to an organization's feasibility constraints. Rework your mechanisms until your schematics are implementable.

We economists can chip away at giants and greatly increase the welfare of many.