Sure, markets work well in general. But for some transactions — like school admissions and organ transplants — money alone can’t solve the problem. That’s when you need a market-design wizard like Al Roth. Plus: We hear from a listener who, inspired by this episode, made a remarkable decision.

Before we get to today's episode, I have a couple announcements.

Last week we told you that this week's episode would be about the super agent and dealmaker Ari Emanuel, But that episode just isn't ready yet.

We recently told you about a special series we're working on, a series about failure.

We all know failure can be hard to talk about, but there's also a lot to be learned from it.

So we asked you to send in your personal stories.

We got a lot of replies, but the vast majority were from men.

We know that about half of our listeners are women, but for some reason, those weren't the listeners who got back to us.

It could be that women simply don't fail as much, but we want to hear those stories, too.

So if you are female and have any kind of failure story to tell, personal, professional, academic, creative, whatever, we want to hear it.

Just send an email to radio at freakonomics.com with the subject line failure.

Last month, the federal government announced plans to modernize the U.S.

They want to speed up the process by which organ transplant patients are matched with donated organs.

They also want to reduce racial inequities in the system.

When we saw this news, we decided to go into our archive and put together the episode you are about to hear it is a mashup of a 2015 episode number 209 called make me a match and a portion of a 2016 episode number 237 which includes a personal story from a listener who was inspired by that earlier episode to make a remarkable decision.

All the relevant facts and figures have been updated.

Okay, I'm Al Roth, and I'm a professor of economics at Stanford.

For many years, Roth had taught economics at Harvard, but he and his wife, who's a human factors engineer, had relocated.

We had just moved into our new apartment.

Shortly thereafter, on October 15th, something memorable happened.

And my wife woke up around 3 in the morning and said, the phone's ringing.

And I woke up and it wasn't ringing anymore.

We only had 1 phone at that point and it was in her office, which was downstairs.

So I said to her, it's not ringing, and I went back to sleep.

And she went down and got the phone, and it started ringing again.

Roth, half asleep, was informed that he, along with Lloyd Shapley, had won the Bank of Sweden Prize in Economic Sciences in memory of Alfred Nobel, also known as the Nobel Prize in Economics.

You know, it's hard to answer that humbly.

So I knew that I was on the big list of people who, if I won a Nobel Prize, it wouldn't cause the Nobel Committee to be embarrassed.

You know, The newspapers the next day would not say craziness and stop them.

But there are many, many people in that category.

And it's an interesting call because 1 of the things they're concerned about, they have a lot of experience with this, is convincing you that it's not a prank.

So the person who first spoke to me said, you know, congratulations, you've won the Nobel Prize.

And then he said, and I'm here with 6 of my colleagues and 2 of them know you and they're going to talk to you now.

But they call you up and they say, so in half an hour this is going to happen.

And, you know, I took a shower and got dressed, which was a good thing, because there wasn't an opportunity to do that again all day.

And what was the rest of the day like then?

Well, so at 5 minutes to, someone calls you back.

And again, they're still, I guess, concerned that you shouldn't appear confused on the phone.

So what she said is she said, point your browser to the Nobel site and you will see your name being announced.

And then we will come on the line and have a press conference by telephone.

So by the time that happened, I was ready.

And then the Stanford press office fortunately descended on our house at 4 a.m.

And started fielding calls from journalists.

You know, they'd say, Professor Roth is ready now.

And I'd get the phone and I'd get 5 questions from someone and I would speak to many, many people.

And apparently I mostly answered them very, very seriously, but I told a joke or 2 that I hadn't intended to tell.

But people would say to me, oh, I heard you on NPR, you said something a little odd.

But, and then there was a press conference, and then at 11, I had a class.

So, people seemed a little surprised, but, you know, that's how we ended the press conference.

You know, this was a surprise, and it was a Monday, and I teach on Mondays.

Word had traveled to your students by then I assume.

So what kind of work did Al Roth do to land a Nobel Prize in economics?

Well, it's not the kind of work that typically wins a Nobel.

He has helped people who need a kidney transplant find a donor.

He's helped new doctors find their first jobs.

He's helped high school students in New York City find the right high school, even though Roth himself, who grew up in New York City, dropped out of high school.

I was a, you know, poor, ungrateful student and didn't appreciate what my teachers were trying to do for me.

You should tell all your listeners, they should complete high school.

This is Freakonomics Radio, the podcast that explores the hidden side of everything, with your host, Stephen Dubner.

Back in 2015, I visited Palo Alto, California, home to Stanford University and a few other things to talk with Al Roth.

He was, as you have heard, a high school dropout.

But don't worry, he did go on to college, many, many years of college.

Not finishing high school isn't the only odd thing about Al Roth as a Nobel laureate.

Consider this, even though he won the prize in economics, and even though he is a professor of economics, he is not technically an economist.

And, you know, I wrote a paper once, a manifesto of market design called The Economist as engineer.

So, I think of myself as something like an engineer.

A manifesto of market design, Roth calls it.

The Nobel Committee's citation noted his theory of stable allocations and the practice of market design.

So what is market design and why can it win you a Nobel Prize?

Market design is an ancient human activity.

You know, when you look at the distribution of stone tools around the Middle East and Europe.

You find that long before the invention of agriculture, stone tools were moving thousands of miles from where they were quarried and made.

And that's a sign that there were markets for stone tools.

There were ways to meet and trade things.

And we don't really know much about those markets, but the stone tools, which are very durable, are evidence that markets are older than agriculture.

But the stone age men who traded those stone tools and weapons had to make markets somehow.

They had to feel confident that they could bring the things they would trade for these stone tools and not be robbed by guys with stone axes who would take their stuff.

And that's been a big part of market design for a long time is making markets safe.

Today we think about fraud and identity theft and securing your credit card.

But there was a time when kings thought about securing the roads against highwaymen so you wouldn't be waylaid on your way to and from the market.

So if I were the king of England and I wanted to have markets in England, I had to make sure that the roads were safe to get to the market.

Al Roth has now written a book, a really wonderful book I should say.

The New economics of matchmaking and market design.

If market design is, as Roth says, an ancient human activity, why does someone like him need to get involved?

After all, we're told that markets generally organize themselves, right?

There are sellers and buyers, supply meeting demand, with price being the glue that holds it all together.

In this regard, the invention of money was a big breakthrough.

Barter is very hard because you need a double coincidence of wants.

You need to find someone who has what you want and who wants what you have.

You happen to have salt, I happen to have wool, and we each want what the other wants, or we find a third party.

Well, so finding the third party starts getting you involved in other things.

And of course, money is a great market design invention for helping you find third parties because you can sell what you have for money and then go look for what you want.

But there are some transactions, entire realms of transactions really, where money cannot do what it does in a typical market, where for whatever reason, supply is not allowed to naturally meet demand with price as the arbiter.

And that is where someone like Al Roff comes in handy, the economist as engineer.

Because these atypical markets have to be set up differently.

This is sometimes called a matching market.

Matching markets are markets where money, prices, don't do all the work.

And some of the markets I've studied, we don't let prices do any of the work.

And I like to think of matching markets as markets where you can't just choose what you want, even if you can afford it, you also have to be chosen.

Those things cost money, but money doesn't decide who gets into Stanford.

Stanford doesn't raise the tuition until supply equals demand and just enough freshmen want to come to fill the seats.

Stanford is expensive, but it's cheap enough that a lot of people would like to come to Stanford.

And so Stanford has this whole other set of market institutions, applications and admissions, and you can't just come to Stanford, you have to be admitted.

Or think about this problem, which Al Roth has worked on directly.

What is the best way for hospitals to hire newly minted doctors and for those doctors to find the most appropriate hospital for them to work in.

The current system is called the National Resident Matching Program.

So I got involved in helping it during a crisis in the 1990s.

But you have to go back to the 1900s to understand how doctors get jobs.

And the 1900s is around the time when the medical degrees as we know them, the MD degree, became the dominant medical degree.

So, instead of graduating from medical school and immediately beginning to practice medicine, as we say.

The first job, the standard first job for medical graduates became what was called an internship and is today called a residency.

And that's a job where you work in a hospital and take care of patients under the supervision of a more experienced attending physician.

And it's a giant part of the professional education of doctors.

So it's very important to doctors where they get their internship and residency.

And it's very important to hospitals because the interns and residents are a very important part of the labor force of a hospital.

As Roth tells it, there was an arms race between hospitals for the best future doctors.

They began grabbing medical students earlier and earlier, sometimes 2 years before graduation.

And when you try hiring people 2 years in advance, it's hard to tell who the good doctors will be.

It's also hard for the doctors to tell what kind of jobs they want.

In 1952, they created the National Resident Matching Program.

They developed a marketplace that has a form that has survived till today, although my colleagues and I have helped modify it since then.

And what that form was, you go on interviews and you find out the salary and the working conditions of the various jobs that you might be offered.

And then instead of working the phones and maybe getting an offer that says you have to take it yes or no right now on the phone, what you do is you consider in advance which jobs you would like and you submit a rank order preference.

This would be my first choice of the jobs I've interviewed at.

Here's my second choice, here's my third.

And the jobs do the same thing, the hospital residency programs do the same thing.

And then a match is made in a centralized clearinghouse.

By the 1990s, this system was showing strain.

Some people thought the hospitals had too much leverage over the residents.

Also, by now, there were a lot more female medical students, some of whom had a significant other who was also a medical student, and such a couple typically wanted to get a residency in the same hospital or at least in the same region, but the matching program couldn't handle that kind of request, so those candidates might opt out.

In 1995, Al Roth was asked to help write an algorithm that could fix these problems.

The algorithm worked well, and it now matches about 40, 000 applicants each year.

It sounds as though this works pretty well, according to most people involved.

Most people involved in this scenario are pretty happy with how it works, correct?

Well, labor markets are stressful for everyone.

So I think you're overstating how happy people are with the labor market.

I mean, in the medical residency matching particularly.

Or at least as an improvement over what was before it.

OK, here's my question really for you is this, is broader labor markets.

If we consider the medical residency matching program relatively successful to what preceded it at least, why is it not used more widely in the labor markets?

Well, the medical market is an easier 1 to coordinate than many markets because just about everyone becomes available at the same time when they graduate from medical school, and they all start their jobs there for about the same time in July.

So, it's a market that can easily move people all at the same time.

Whereas many markets, think about the market for journalists, they might be hired at different moments and jobs might become available and need to be filled and not be able to wait for you to consider many jobs.

you and your colleagues are pretty brilliant and you have mathematical backgrounds.

I would think you could deal with rolling admissions, is it right?

I mean, for all the talk about how modern labor markets have so many mismatches in them, so many people doing jobs that they don't really want to be doing, so many corporations with all these theoretically qualified people out there not being able to find the people to fill them without going to a lot of trouble.

I mean, hiring practices become more and more complicated, it seems, as 1 way to address the matching problem.

But it seems as though your complicated mathematical foundation might provide, ironically, a simpler way to address that problem.

Again, 1 of the special things about residency positions is, although they're very different to different places, they're sort of similar to each other.

If you're thinking about should you be a journalist or an airplane pilot or a chef, you're dealing with very different jobs with very different employers.

And 1 of the things that we do in the medical match is we make all the jobs available at the same time that allows you to consider them, to have preferences over them.

That's hard to do if you're thinking about being a chef or an auto mechanic.

I'm curious to know what's a market or scenario that you've looked at before that you thought, boy, I would love to help fix that 1, but either haven't had a shot or maybe tried and failed?

Well, the markets for new lawyers might fall into that category.

And certainly, the fanciest job that top graduates of elite law schools get is a lot like a medical residency.

It's a clerkship with an appellate judge.

That market is presently in the kind of situation that the doctor market was around 1940, where jobs are being contracted far before law school graduation.

And probably a dozen times in the last 30 years, the lawyers have tried to fix this with things like setting dates before which you shouldn't hire and things like that.

But it turns out it's hard to make rules that judges have to follow.

Judges are a law unto themselves, and they break the rules.

If you know someone who's in law school now who wants a clerkship, they're probably going to get an offer sometime in their second year, you know, so the middle of their second year, a year and a half before they are ready to graduate.

would it take for you to have the authority to get in there and redo that market?

The question is, is there a desire for judges to coordinate in a way that would control the market?

So you can win all the Nobel Prizes you want and there's a limit to your power nonetheless.

As complicated as it may seem to match future lawyers or doctors with their employers, consider an even more complicated match.

A person who will die unless they can get a kidney transplant.

You can't buy a kidney, you can't pay for somebody's college education to get a kidney, you can't buy them a car.

It's illegal in the United States to obtain a kidney through any kind of valuable consideration.

I'm the program manager for the Kidney Pair Donation Program at the United Network for Organ Sharing.

The United Network for Organ Sharing, or UNOS, maintains the registry of all the people in the U.S.

Who need an organ transplant, at least for now.

The Biden administration's new modernization effort would put some of UNOS's current responsibilities up for bid.

According to the National Kidney Foundation, out of the roughly 122, 000 people awaiting an organ transplant, more than 100, 000 of them, roughly 80 percent, need a kidney.

We don't have enough supply of kidneys available.

And so the list is ever-growing, but the number of kidneys available for transplant is pretty stagnant.

It's estimated that 13 people die each day in the U.S.

While waiting for a life-saving kidney transplant.

And that's because, as Leishman says, the demand for kidneys keeps rising, but the supply hasn't risen to meet it.

Consider where most donated organs come from.

They primarily come from cadavers, from people who have died, but who have died under just the right circumstances, from a brain trauma, for instance, to allow their still-functioning organs to be harvested for transplant.

Only about 1% of the population who die are actually able to donate their organs.

So if you need a heart transplant, let's say, you are waiting for a cadaver organ.

Because humans are born with 2 kidneys and yet we really need only 1.

Which means that in a country like the US with a few hundred million people, there are potentially a few hundred million spare kidneys out there.

When someone has kidney failure, typically both their kidneys fail, so they're left with 0 healthy kidneys, whereas the typical healthy person has a perfectly good spare.

So while it might seem that there is a massive demand for donated kidneys, remember there are more than 100, 000 people on the list.

The fact is that the potential supply is really massive.

If you're healthy enough, you can remain healthy with just 1.

And that means if someone you love is dying of kidney disease, you could give him a kidney and save his life.

And that's where kidney exchange comes in.

Because remember, unlike some markets where price is allowed to let demand meet supply, organ donation is a market that doesn't allow money.

As a society, we've decided it isn't right to reimburse people in any way for donating an organ.

Although I should say some economists have argued that we should rethink that.

But for now at least, kidney donation is reliant on altruism.

Which, judging by the backlog of kidney patients waiting for an organ, isn't working so well.

People often ask me how I got involved in kidney transplantation, and I think the romantic thing that they're hoping I'll say is that I knew someone who was ill or that I was ill.

Coming up on Freakonomics Radio, how Al Roth and his comrades used mathematics to save lives.

And eventually we wrote a paper about how to organize kidney exchange if you weren't too worried about logistical problems.

So we hadn't yet talked to doctors, we hadn't yet talked to surgeons.

I'm Stephen Dubner, this is Freakonomics Radio, We'll be right back.

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Make Me a Match (Ep. 209 Update)