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John Taylor,
President of the Virginia Institute for Public
Policy, publisher of Virginia Viewpoint.
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By
Donald J. Boudreaux, J.D., Ph.D.
Congratulations
to Professor Vernon Smith!
He is the second George
Mason
University
economist to win the Nobel Prize in Economic Science,
the highest professional award any economist can
win. Like his
GMU colleague James Buchanan, winner of the 1986
Nobel Prize, Vernon
made an indelible mark on economics by successfully
challenging some of the profession’s dogmas and
stale assumptions.
Vernon
invented experimental economics.
Rather than repeat textbook accounts of how
markets work –- accounts that Vernon
discovered did not persuade many of his students
–- he constructed real markets in laboratory
settings. He
gave students real money that became theirs to keep
or to spend as they chose in the laboratory on
various assets and items that he designed.
His
findings are as important as they are unmistakable.
Most fundamentally, he discovered that free
markets work better than their textbook
models. Unlike
in textbooks, markets do not need a large number of
sellers to be competitive.
Only a small handful of sellers –- as few
as four -– ensure vigorous competition. In other
words, free markets are not seriously beset with
problems of monopoly.
Also contrary to textbook doctrine, efficient
and competitive outcomes do not require that any
buyer or seller be fully informed about the state of
the market. All
each party needs to know is his own preferences and
abilities.
Turns
out, then, that critics of free markets are right to
insist that textbook economics inadequately explains
real-world markets. But
Vernon
showed that this correct observation leads to quite
a surprising conclusion –- namely, that real
markets outperform, rather than underperform, their
textbook cousins.
In
short, it took one Smith (Vernon) to prove just how
powerfully correct were the intuitions of another
Smith (Adam) that free markets are unmatched at
creating widespread prosperity.
Another
important, and unexpected, finding in Vernon’s lab is that people are generally more
cooperative than economists had previously assumed.
Rather than cheat or short-change others
(even when these others will never be able to
identify the greedy malefactors), an encouragingly
large number of people will play fairly and
cooperatively. This
finding is immensely important.
It shows that private, cooperative solutions
are possible in many situations that were previously
thought to require government taxation and
regulation.
Vernon, however, has done more than demonstrate that
markets and other private arrangements work
surprisingly well. He
has used his lab experiments to discover the best
ways of creating markets where none yet exist.
For example, Vernon’s work is a key for government officials seeking
ways to reduce airport-runway congestion at peak
travel times. In
his lab, Vernon
crafted a system of auctions that airport managers
can use to allocate landing slots among different
airlines. If
implemented, the delays that we passengers endure
would be fewer and shorter.
Similarly,
Vernon
is now hard at work studying markets for
electricity. Already,
he has incurred the wrath of California Governor
Gray Davis, who dislikes Vernon’s demonstration that California’s recent electricity crisis was not caused by
deregulation. Vernon’s scientific conclusion is that too much of that
state’s electricity market remains under the
thumbs of inept government bureaucrats.
His findings point to greater deregulation as
the best means of ensuring reliable and inexpensive
supplies to electricity users.
Vernon, of course, does not work alone.
While he is a pioneer, he readily
acknowledges that his remarkable achievements were
made possible only because he is surrounded by
excellent colleagues who share his deep
understanding of economics and his commitment to
scholarly integrity. As
the late economist Peter Bauer once remarked, “a
voice is rarely effective without an echo,” and
Vernon’s colleagues not only have been effective
in echoing and amplifying his message, but in
themselves creatively advancing the reach of
experimental economics.
Consequently,
in 2001 when we sought to bring Vernon Smith to George
Mason, we courted not only him but also six of his
colleagues. Of
course, since the arrival at GMU of “the
magnificent seven,” as several of us now
affectionately refer to Vernon
and his team, the stature of our already notable
economics department has grown tremendously.
And so, too, has the enthusiasm of our
faculty and students.
George
Mason’s department of economics has long been
distinguished by its commitment to interesting and
relevant scholarship.
This commitment was crucial to enticing Vernon
and his team to our University.
We have no wish to be a second-rate Harvard.
Instead, we have become one of the world’s finest
economics faculties by rewarding creative research
that challenges accepted dogmas and in the process
we lead the way in showing that markets almost
always outperform government.
--
April 7, 2003
Donald
J. Boudreaux is chairman of the department of
economics at George
Mason
University,
and a member of the Board of Scholars of the
Virginia Institute for Public Policy
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