A family of immigrants’ children
Peter Arthur Diamond was born on April 29, 1940, in New York City, into a Jewish family. His grandparents had come to the United States around the turn of the twentieth century: his mother’s parents and their six older children from Poland, and his father’s parents from Russia and Romania, meeting in New York. His parents, both born in 1908, grew up in New York and never lived outside the metropolitan area. Both finished high school and went straight to work. His father studied at Brooklyn Law School at night while selling shoes by day. When they married in 1929, Diamond later wrote, his mother was earning fifteen dollars a week as a bookkeeper and his father five dollars a week as a novice lawyer.
His father practised law into his late eighties. His mother left paid work before Peter was born but volunteered for many organizations, often as treasurer; her son reflected that, with the opportunities later open to women, she would have had a fine career. He has one brother, Richard, born in 1934. Peter started school in the Bronx and moved in second grade to Woodmere on Long Island, to a house so close to the Long Island Rail Road that the family joked the first train at five in the morning came through the bedrooms. He graduated from Lawrence High School.
Mathematics, then economics
At Yale he considered engineering, then chose mathematics, learning rigorous proof from Shizuo Kakutani. An introductory economics course drew him in, and he went on to take Gerard Debreu’s graduate course in mathematical economics, a grounding in general equilibrium theory that, he said, shaped his thinking ever after. As a summer research assistant to Tjalling Koopmans in 1960, he was asked to find a single example of a mathematical function and instead produced a whole class of them; Koopmans reorganized his project around the idea and made the undergraduate a co-author. Diamond drew a lifelong lesson from it: part of education is learning to recognize the value of what you stumble over. He graduated summa cum laude in 1960.
He went to the Massachusetts Institute of Technology to study mathematics, but a registration officer transferred him, fellowship and all, to the economics department, where Robert Solow supervised his doctorate, completed in 1963. After two years teaching at the University of California, Berkeley, where he met his wife, Kate (Priscilla Myrick), then a law student, he returned to MIT in 1966. He has been there ever since, becoming a full professor in 1970, head of department, the first holder of the Paul A. Samuelson chair and, in 1997, an Institute Professor, MIT’s highest faculty rank. He has joked that he loved college and simply never left.
Why markets do not clear instantly
Textbook economics long assumed that buyers and sellers find each other instantly and costlessly, so prices adjust until supply equals demand and nothing is left idle. Diamond, who knew general equilibrium theory deeply, was most interested in its limits. Rather than asking how an economy might reach that ideal equilibrium, he asked where a realistic process of searching, in real time, would actually lead. In a celebrated 1971 paper he showed that in a market where shoppers must spend effort to compare prices, even tiny search costs can push prices all the way up to what a monopolist would charge. The result, sometimes called the Diamond paradox, launched a large body of research on markets with search frictions.
He then applied the same thinking to the labour market and the whole economy. In work published around 1980 and 1982 he showed that when workers and employers must search for each other, an unregulated market need not be efficient, and that an economy can get stuck in more than one possible outcome, only one of which is best. Building on this, Dale Mortensen and Christopher Pissarides developed what is now called the Diamond–Mortensen–Pissarides model. The Royal Swedish Academy of Sciences describes it as the most frequently used tool for analysing unemployment, wage formation and job vacancies.
What search theory explains
The theory answers a question that puzzles many people: why, at the same moment, are there millions of unemployed workers and millions of unfilled jobs? Because matching takes time and effort, unemployment and vacancies coexist, and the pace of matching depends on how well job seekers and employers can find each other. The model explains the Beveridge curve, the observed trade-off between unemployment and vacancies, and helps economists tell whether rising unemployment reflects a weak economy or a labour market that has become worse at matching people to jobs.
Governments and central banks use search-and-matching models to study how unemployment insurance, employment agencies, hiring and firing costs and interest rates affect jobs. The theory also helps design unemployment insurance that protects workers’ incomes while supporting good matches between people and jobs, and it has been applied to housing, money and family economics. Diamond shared the 2010 Nobel Memorial Prize in Economic Sciences with Mortensen and Pissarides for their analysis of markets with search frictions.
Fair taxes
Diamond’s other major field was public finance. In 1965 he published an influential model of an economy in which new generations are constantly born, showing that a competitive economy can save too much and that government debt can, in some circumstances, improve welfare. In 1967, after he gave a seminar in Cambridge, England, James Mirrlees suggested that his model could be extended to many households, and the two began a collaboration that produced a dozen papers. Their 1971 work on optimal taxation produced the Diamond–Mirrlees result that, under broad conditions, a government raising revenue should avoid taxing transactions between businesses and keep production efficient, taxing consumers instead. It remains a benchmark for tax design. Later, with his former student Emmanuel Saez, he wrote on how high the top income tax rate should be.
Protecting retirement
From 1974 Diamond turned increasingly to pensions, after Paul Samuelson recommended him for a panel on Social Security financing advising the U.S. Senate Finance Committee. Pensions, he wrote, were a perfect topic for him, fitting both his theoretical interests and his social concerns. He served as an adviser to the Advisory Council on Social Security in the late 1980s and 1990s, and was a founding member of the National Academy of Social Insurance. With Peter Orszag he wrote Saving Social Security: A Balanced Approach (2004), which proposed closing the programme’s long-term funding gap through a mix of gradual benefit and revenue changes, including adjusting for rising life expectancy and taxing a larger share of earnings, without diverting Social Security revenue into private accounts, protecting a basic lifetime benefit that stock market crashes and inflation cannot erode, and raising benefits for especially needy groups such as long-term low-wage workers and low-income widows and widowers.
His influence reaches well beyond the United States. With Nicholas Barr of the London School of Economics he wrote Reforming Pensions: Principles and Policy Choices and Pension Reform: A Short Guide, and in 2010 the two produced recommendations for pension reform in China. He has advised on public pension systems in Australia, Chile, China, France, Germany, Italy, the Netherlands, New Zealand, Spain, Sweden and the United Kingdom, among others; in Chile he and his co-authors were received by President Michelle Bachelet. He has often ended talks on Social Security with Franklin Roosevelt’s words that the test of progress is whether we provide enough for those who have too little.
A teacher of teachers
Diamond has said that teaching and research reinforce each other; several of his best papers grew out of preparing classes. His students have included Ben Bernanke, later chairman of the Federal Reserve and himself a Nobel laureate, and he supervised the doctorates of Andrei Shleifer and Emmanuel Saez, both later winners of the John Bates Clark Medal. He served as president of the Econometric Society and, in 2003, of the American Economic Association, and he is a member of the National Academy of Sciences.
In 2010 President Barack Obama nominated him to the Board of Governors of the Federal Reserve. Republican members of the Senate Banking Committee blocked the nomination over more than a year, and in June 2011 Diamond withdrew, writing in The New York Times that understanding how workers and jobs come together and separate is critical to sound monetary policy, and criticizing partisan polarization in the confirmation process.
Jewish roots and family
Diamond’s story is a classic one of the Jewish immigrant generations in New York: grandparents from Poland, Russia and Romania; parents who left school for work and studied at night; and a son who went from the public schools of the Bronx and Long Island to Yale and MIT. He is listed among Jewish Nobel laureates by the Jewish Virtual Library. In 1968 and 1969 he spent an extended leave in Jerusalem while his wife chose Nairobi, an experience he called eye-opening. He has not written publicly about religious practice.
He and Kate married in 1966; they have two sons, Matt and Andy. Kate, an art historian, was a curatorial associate at the Museum of Fine Arts, Boston. For his seventieth birthday she commissioned a piece for two pianos from the composer John Harbison, “Diamond Watch,” and arranged for him to throw the ceremonial first pitch at Fenway Park, a lifelong dream of a devoted Red Sox fan. Apart from following sport, he says, economics is his only hobby.
Legacy
Diamond’s work runs from abstract theory to the practical question of whether ordinary people will have enough to live on when they are old. His search theory changed how economists understand unemployment and is used daily by central banks and labour ministries. His tax theory set benchmarks for fair and efficient taxation. His pension research, carried from Washington to Beijing and Santiago, has helped governments keep their promises to retirees while adapting to longer lives. Few economists have done more to connect rigorous theory with the security of ordinary households.
Sources & further reading
Peter A. Diamond, Biographical, NobelPrize.org · Popular information: The Prize in Economic Sciences 2010, NobelPrize.org · Distinguished Public Lecture: Good Pension Design, Professor Peter Diamond, Chinese University of Hong Kong · Jewish Nobel Prize Laureates, Jewish Virtual Library · A Summary of Saving Social Security: A Balanced Approach, Brookings Institution · Peter Diamond, Wikipedia · Researched from the sources above and checked against them. Spotted an error? Tell us.
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