Some thoughts on the Nobel Prize in economics

Columnist David R. Francis talks with former Nobel laureates.

By David R. Francis | columnist

from the October 22, 2007 edition

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Last week the Royal Swedish Academy of Sciences awarded its 2007 Nobel Prize in economics to three American economists. The choice demonstrates how much the emphasis of academic research has changed since Paul Samuelson, the oldest living recipient of the economics prize, received his award in 1970.

The new laureates – Leonid Hurwicz, a professor emeritus at the University of Minnesota; Roger Myerson of the University of Chicago; and Eric Maskin at the Institute for Advanced Study in Princeton, N.J. – won "for having laid the foundations of mechanism design theory." It deals with the interactions among individuals, markets, and institutions.

Dr. Samuelson, of the Massachusetts Institute of Technology, Cambridge, was honored for "the scientific work through which he has developed static and dynamic economic theory." In other words, his heavily mathematical work concerned the national economy.

Samuelson calls himself the "last generalist" in economics. Many of his fellow laureates of recent years, including the latest trio, deal with more specific issues, often ones that border such disciplines as political science, finance and derivatives, nonmarket behavior, and so on.

Professor Maskin, for instance, co-wrote a paper, "On the Robustness of Majority Rule and Rule by Consensus." It asks how a nation should choose a president and how a legislature should select bills to enact, and concludes that majority rule "works well." The paper includes a look at the George W. Bush-Al Gore election of 2000.

Robert Solow, another MIT professor who won a Nobel in economics in 1987, says mechanism design theory involves how decisions are made by a group too small to form a standard market. (In a standard market, competition and the law of supply and demand often govern.) The goal is to design a protocol, rules of the game, and institutions that enable the players to make decisions reflecting their self-interest but also produce outcomes that benefit society.

It is the "visible hand" helping determine good, efficient results, rather than the "invisible hand" of self-interest and competition written about by Adam Smith, the 18th-century Scottish professor who is regarded as the father of capitalism, says Professor Solow.

The goal is to design a system that aligns private incentives with public goals. It has been useful in helping provide the design of government auctions for radio and TV spectra and for gas and oil leases in offshore waters.

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