The awarding of the Nobel Prize in Economics to Thomas Schelling is a well-deserved recognition for his research. He has made many contributions to economics which Tyler Cowen summarizes here. The segregation model is a classic as is his discussion of focal points. One aspect of his work that has not been discussed today (at least that I know) is its relationship to last year's winners, Edward Prescott and Finn Kydland (K&P). K&P won for their contributions to macroeconomics. In particular, they used a representative ("single") agent model to understand how technological factors can explain a substantial portion of business cycle variation.
In many ways, Schelling represents an entirely different paradigm for understanding macroeconomic outcomes. He rejects the simple representative agent model. Instead, he adopts a richer understanding of human interaction with a recognition of the limits to individual and social rationality. He addresses the problems associated with aggregating microeconomic outcomes. In Schelling's models, what is individually rational can lead to socially irrationality. The process of aggregation introduces problems that K&P avoided by assumption. Consider his simple rubbernecking illustration. Suppose you, along with numerous other individuals, are traveling southbound on a highway. There is an car collision on the northbound side. People in the southbound lane will slow down to catch a glimpse of the collision. Yet, if you asked each person in the southbound lane do you prefer (A) drive at 60 mph with no glimpse or (B) drive at 5 mph with a glimpse almost everyone would choose A. However, the southbound group chooses B. In the world of the representative agent, A is always chosen.
Unfortunately, the Schelling approach to macroeconomics has few followers. Richard Wagner is pushing in this direction as is Rob Axtell. Maybe someday macroeconomics as an emergent phenomena will challenge the representative agent. If it does, we have Thomas Schelling to thank.
