And the Winner Is ...

The unexpected -- if you listen to econobloggers -- trio of Leonid Hurwicz, Eric S. Maskin and Roger B. Myerson received the 2007 Nobel Prize in economics today. (Or if you want to get technical: The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2007)

They were awarded for their contribution to mechanism design theory which is used to figure out what setup (market system, taxes, etc) is best given the inherent inefficiency of many real-world economic systems:

"Mechanism design theory show why an auction is typically the most efficient institution for the allocation of private goods among a given set of potential buyers, and it frequently also specifies what auction format will give the largest expected revenue for the seller. Likewise, mechanism design theory explains why there is often no good market solution to the problem of providing public goods. Indeed, the theory demonstrates why the efficient provision of public goods may require substantial departures from the principles of unanimous decision-making."

The universities affiliated with today's winners also saw their Nobel award count bumped up:

82 80 - University of Chicago (Myerson) -- the UofC is third behind Cambridge and Columbia as the most Nobel-ed school. Press release
30 - Princeton (Maskin) Press release
20 - University of Minnesota (Hurwicz) Press release

Some early reactions:

Josha Gans is one of the few who came close to predicting the prize winners:

"...I added Maskin and Myerson to the Thomson shortlist (although for different stuff). I think I was the only one around to add those names. They are a deserving trio."

Greg Mankiw:

"Eric is [sic] used to teach economic theory at Harvard and was a great teacher and colleague. If my recollection is correct, when he moved from Harvard to the Institute for Advanced Study in Princeton, he bought the house Albert Einstein used to live in. I wonder if there are any other houses that can claim two Nobel laureates."

Tyler Cowen:

"...this is precisely the kind of work which is going out of style in the broader profession. These guys are smart, smart, smart, and Hurwicz is probably the best known of the three. They are all high-powered theorists, doing incentives, mechanism design, and social choice theory. None of them are easy to explain to your grandmother."

George Borjas:

"I don't have much to add, except to note that NONE of these 3 economists appeared in the list of "favorites" in the Intrade marketplace (see the screen shot below of the list of potential winners that were in the trading). Next time you hear a complaint about the failure of economists to forecast major economic shifts, just remember this: we even have trouble forecasting who amongst us is being seriously considered for a Nobel."

Peter Boettke on the connection between Hurwicz and Friedrich Hayek:

Mechanism design theory ---- which seeks to find rules of the game so that the institutional structure operating under those rules will produce social optimum ---- was a by-product of Hayek's informational and incentive challenge to socialism and market socialism in the 1930s and 1940s. Mathematical economists who took Hayek's challenge seriously set off on the path to provide the appropriate mechanism design that would meet Hayek's challenge.

Koopmans to Hurwicz to Stiglitz, etc. Mirowski's Machine Dreams is a very useful source to understand this trajectory of economic science in the post-WWII period.

So while in many ways this sort of work has fallen out of favor in economics in recent years, it is still foundational for so many of the presuppositions that many economists hold dearly concerning existence, stability, and welfare comparisons. In other words, while the effort might not have high professional returns, to me a very worthy research project for younger Austrians would be demonstrating the flaws in the research program of mechanism design theory and to demonstrate competently that arguments in the end fail to actually meet Hayek's challenge and Kirzner's elaboration. Esteban Thomsen's Prices and Knowledge was a good start, but much more can be (and must be) said on this subject.

However, this years prize does reinforce two things:

1. the prize is a lagging not leading indicator for work in economic science;

2. the pervasive influence of Hayek's ideas in 20th century economics.

Justin Fox wonders why he hasn't heard of any of the prize winners before:

"I think maybe I've sort of heard of Hurwicz before. But Maskin? No. Meyerson? No. Mechanism design theory? No.


I'm not an economist, so that isn't saying much. But I also don't remember any of those names coming up in any of the pre-Nobel speculation among econobloggers (there's a nice roundup in this Greg Mankiw post and the list of links to it).


What does this mean? Mainly that most economists have a pretty narrow view of their own discipline, and the economists who maintain blogs or get quoted in the press a lot tend to be macro types who don't know a lot about off-the-beaten track stuff like mechanism design theory. Which means it's nice that the Swedish academy seems to try so hard to get away from just looking at citation indexes and such to find people who came up with genuine innovations."

UPDATED
Steven Levitt:

This Nobel is not for the idea that you can design incentives this way, but rather for coming up with ingenious proofs that simplify the task of proving that, indeed, all parties have the right incentives -- a task that can turn out to be awfully difficult.


In addition to being great economists (see my last post about what it means if you win the Nobel when you are young -- both Maskin and Myerson are under 60 years old), they are both incredibly kind and generous people. In fact, they may challenge George Akerlof for the title of nicest people to win the Economics Nobel.


I don't know Hurwicz personally. I'm embarrassed to say I don't even know his research, for that matter. He must be at least 90 years old.

Felix Salmon:

This Nobel prize is exactly the sort of thing that journalists have nightmares about. They wake up early, and read a citation from the Royal Swedish Academy of Sciences giving the Economics prize to three economists they've never heard of, for helping to develop an entire discipline - mechanism design theory - that they've also never heard of.

Alex Tabarrok:

"Suppose that you are selling a rare painting for which you want to raise the maximum revenue. There are two potential buyers, Tyler, who values the painting at $100,000, and Alex who values it at $20,000. The problem would be simple if you knew this information - you would then set the price at $99,999 and Tyler would buy maximizing your revenue. But how much Tyler and Alex value the painting is their own private information. How then should sell the painting?"