<bt>Vernon Smith sat in his office at George Mason University, waiting for a briefing on his schedule in the coming days.
The update didn’t concern experiments or published papers. There were concerns about coordinating Smith’s clothing for a series of formal balls in Stockholm. It’s an unusual conversation topic in an academic setting, but things change when professors win the Nobel Prize.
Smith, a professor in GMU’s Interdisciplinary Center for Economic Science, just became the university’s second Nobel Laureate in economics, following James Buchanan’s 1986 prize, making GMU the only Virginia university with two Nobel winners.
“‘Winners’ isn’t a very good word,” Smith admonished. “It’s not a race.” Or maybe it was just a very long race. “My friends have been predicting this for 20 years,” he said. Now that their predictions have finally come true? “I feel a sense of relief that they’re finally right,” he said.
Even with a two-decade buildup, the honor was still a surprise. “You give up expecting when it goes on for 20 years,” he said.
SMITH CALLS HIMSELF a member of the “first generation” of researchers in the field of experimental economics.
Prior to the development of the field, Smith said, many economists tried to explain complex economic theories without proof of how they worked in the real world. “People would tell these stories with no idea what they meant,” he said.
Smith’s first tests of those stories grew out of a “teaching exercise” at Purdue University in 1956, where students participated in a particular type of bargaining arrangement known as a double-auction.
“I gave assigned values privately and secretly to the buyers and sellers,” said Smith. The buyers and sellers then negotiated to arrange acceptable prices, and earned profits or losses based on how far the negotiated price deviated from their assigned values.
The negotiations constituted an economic market that functioned properly despite a small number of participants, which conventional economic theory believed to be impossible. “You don’t have to have a huge number of buyers and sellers for a market to be competitive,” said Smith.
The participants also did not need to understand the subtleties of the market, another finding that refuted then-current economic wisdom. “Economics doesn’t teach markets from the perspective of the people that are in it,” he said.
If it did, the field would be based on the concept that ordinary people, going about everyday commerce, do not have extensive knowledge of the principles of economic markets. Smith’s test subjects knew their own values, but not those of other participants. Smith said the tests prove that in the real world, consumers don’t have to understand the market in order to make it work.
FOLLOWING HIS PIONEERING work in experimental economics, Smith’s work evolved and became more complex. In 1975, while working at the University of Arizona, Smith used computers to simulate market conditions in a laboratory, creating what was in essence the first e-commerce, though no such term existed at the time.
“We got into more and more complicated experiments once we got computerized,” he said. This work led him into investigating electric power and natural gas in the 1980s, even advising the government of New Zealand on how to keep their energy suppliers afloat by privatizing the previously government-owned industry.
Although he’s 75 and well-past retirement age, Smith continues his work with no plans for slowing down. “The current problem that we’re very interested in,” he said, “is using markets to better manage airport congestion.”
Since flights have higher or lower priority depending on their schedules, airport traffic could be managed more efficiently, Smith argues, by allowing airlines to bargain for runway times. But Smith says there is no mechanism in place for trading those times. In his laboratory, he is experimenting with ways to create that kind of bargaining arrangement.
NOBEL HONORS FOR Smith were shared this year with Daniel Kahneman, a Princeton University professor who pioneered the study of how individuals’ mental processes affect their economic decisions. The pairing makes sense, according to Smith. “I really see [Kahneman’s work] as part of experimental economics,” he said.
There’s a different focus to the two men’s work, though. “Kahneman [and his associates] are primarily concerned with cognitive processes… what value do you put on things. We start with values,” he said.
Press coverage has focused on the conservative implications of Smith’s research.
For instance, Smith once proposed that all federal assets be auctioned off to the general public. The interstate highway system, for instance, costs taxpayers huge sums of money for maintenance each year.
But if the roads became privately owned, they could generate wealth rather than siphon it out of the economy. Highway owners could charge tolls, but because no single agency would control all the roads, prices would remain reasonable. “The whole thing then gets disciplined by competition,” he said.
Smith said his theories and scholarly research do not lead him to agree with any political party. He even joked about the possibility of writing a paper denying allegiance to the Republican, Democratic, and Libertarian parties. “The problem with all three is there are things they do that I disagree with,” he said.
The problem with economic politics, he said, is the politics. Leaders sometimes promise impossible solutions in order to secure votes, and those political maneuvers don’t interest Smith. “What we’re interested in is how to make social systems work better for people, and how to grow the economy,” he said.
He downplayed the political implications of his work, even though he is often asked to provide his thoughts on governmental actions. He would rather focus on the work itself, he says, and stay out of the political realm. And as for suggestions that his discoveries could pose threats to the plans of liberal policy-makers, he simply joked, “I’m not afraid of those liberals, and they shouldn’t be afraid of me.”