UB professor of economics James Holmes is not modest about his claims, which he hopes will earn him his dream of a Nobel Prize in economics.
"Everything you think you know about economics is wrong, and will soon become irrelevant," says Holmes.
The University of Chicago trained economist believes he has pinpointed a major problem with modern economic thought and so-called economic "laws," which are believed to guide relationships between economic variables.
Many economists suggest that to optimize returns, a business should base employee salaries on its profit margins. Theories such as the "Nash equilibrium," developed by John Nash, whose life inspired the film "A Beautiful Mind," for example, posit that firms in competition cannot act unilaterally or they will harm all involved parties, including themselves.
Through his research, Holmes seeks to prove mathematically that this is not the case, and that established theories of modern economics are irrelevant. In his latest paper, "Can a Competitive Market be Inherently Unstable and Inefficient?" Holmes claims that employees' wages are not necessarily determined by a firm's output. He suggests instead that firms pay "nominal" wages, or simply pre-determined dollar amounts.
The professor's hypothesis flies in the face of current economic thinking, which views economic laws of supply, demand, price and wage as "deterministic," or predictable based on the analysis of relationships between the variables involved. Holmes, in contrast, views such laws as "stochastic" or random.
"The human brain is hard-wired to think deterministically," says Holmes, "The reality is that the universe is stochastic."
According to Holmes, trying to determine the profitability of a firm through methods like the Nash equilibrium will never work, and a more accurate measure of a firm's failure or success would be a coin-flip.
"A coin can only come up heads or tails; it cannot be half heads and half tails," Holmes said. "The entrepreneur is a gambling man, and sets his wage with the hope that the wage will be lower than if he indexed the wage according to his company's profits."
When people predict outcomes such as weather, elections, baseball games or economic health, they make their predictions based on determinants, or variables. For instance, a determinant in predicting the weather would be the previous day's temperature, or whether the barometer is rising or falling. Holmes does not believe that end results are necessarily going to follow the information gained from these variables, and that the reality we perceive is random.
"If it weren't," he said, "then firms would behave differently, for instance they would index wages if they could truly optimize profit."
Holmes believes his work has the potential to fundamentally alter everything from workers' unions to the idea of a minimum wage and will demonstrate that government intervention is needed for the economy to maximize its efficiency.
Aside from contributing to the wealth of economic knowledge, Holmes suggests another motivation for pursuing the prestigious award. The professor suffers from what he calls an "invisible" learning disorder, one that remains undiagnosed but may manifest itself in trouble reading at an early age, and later cause difficulty in cognitive functions like remembering correct spellings.
Holmes believes there are many people who suffer from these hidden learning disorders, many of them in silence, unaware that they are inhibited by something beyond their control until they discover a device that assists them in overcoming the impediment.
For Holmes, that device is a special voice-recognition typing program that allows him to work at a much faster pace that he otherwise could. The professor envisions himself standing in Stockholm with a Nobel Prize and dedicating the award to all those with "invisible" learning disorders.
The Nobel Prize, for him, would not only recognize his contribution to the field of economics, but would shed light on people who live with similar afflictions.
Holmes has worked in the United States, Canada, and Australia, and is affiliated with the American Economics Association, the American Statistical Association, the Econometric Society, and the Royal Economic Society. His work ranges on topics from employment ratios to government expenditures, and has been published in 22 different economic and statistical journals worldwide.
