Three Americans Earn Nobel Economics Prize
STEVE INSKEEP, Host:
Three Americans will share this year's Nobel Prize for Economics. The winners named today are Leonid Hurwicz of the University of Minnesota, Roger Myerson of the University of Chicago, and Eric Maskin of the Institute for Advanced Study in Princeton, New Jersey. They were cited for work trying to explain situations in which markets work, and situations in which they don't. NPR's Jim Zarroli is covering this story. Jim, good morning.
JIM ZARROLI: Good morning.
INSKEEP: So they came up with something called Mechanism Design Theory. What in the world is that?
ZARROLI: Well, this is a complex branch of economics that, as you say, basically helps determine when markets work. What is the most efficient way to get them to work? When do you need outside institutions like government, or like some kind of alternative trading system to make them work better? It was really pioneered by Leonid Hurwicz back in 1960. And, by the way, according to the Nobel committee, Hurwicz is 90 years old, and he is now the oldest Nobel Prize winner ever. Maskin and Myerson basically played key roles in advancing the work that he had begun. Mechanism Design today plays sort of an important role in economics and in political science. Myerson said this morning that he was surprised to win because so many of the people who are familiar with his work are dying off.
ZARROLI: He is, by the way, the 80th Nobel Prize winner in economics from the University of Chicago.
INSKEEP: Well, I want to try to get my brain around this concept if I can. You're saying that, well, for example, you've got financial markets. And they're pretty free to trade and buy and sell in ways that they want, but the government also picks moments to step in. The Securities and Exchange Commission imposes a lot of regulations. Are you saying these guys tried to figure out when that kind of government intervention makes sense and when it doesn't?
ZARROLI: That is part of what they studied. As you remember, Adam Smith's invisible hand analogy basically says that under ideal conditions, the markets always ensure the most efficient allocation of resources...
INSKEEP: All of us together are wiser than any one of us would be at once. That's what you're - that's what they're...
ZARROLI: Exactly. That's the theory. But in the real world, conditions aren't always perfect. You may have a - for instance, in a company or a firm, you may have somebody who acts in a way that is beneficial to that person, but not to the institution as a whole. Or, you know, what is much more common, people may not have complete information about a product or a resource that they want to acquire. So there are lots of ways that the markets may not work efficiently, and that is what these three men studied.
INSKEEP: How in the world can an economist get his brain around the idea, then, of human nature?
ZARROLI: Well, that is what Mechanism Design is about. It tries to find a way to quantify these situations. It basically enables you to find a mechanism that allows trade to function more efficiently. How do you design an auction, for instance, that is most likely to facilitate trade? The outcome of an auction can vary tremendously, depending on how it's designed. When do you need government regulation to step in? These are difficult questions because of the way organizations work, and Mechanism Design helps you find a more precise way of addressing some of these questions.
INSKEEP: Okay, Jim. Thanks very much.
ZARROLI: You're welcome.
INSKEEP: That's NPR's Jim Zarroli, reporting on a Nobel Prize for Economics. It goes to three Americans for work that may very well affect how much money we're making right now, even though it may not always be easy for us to understand how.
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