The Experimental Economist
Nobel laureate Vernon Smith takes markets places they've never been before.
Interviewed by Mike Lynch and Nick Gillespie
When Reason interviewed George Mason University economist Vernon L. Smith back in May, one of the first questions we put to him was, "You're always mentioned as a short-lister for the Nobel Prize in economics. What do you think of that?" The 75-year-old Smith, the founding father of experimental economics, responded with a hearty laugh. "It's nice, but whenever I hear that, I always ask, 'Do any of the people saying that have a vote on the selection committee?'" It turns out that they did. Today, the Royal Swedish Academy of Sciences awarded Smith the Nobel "for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms."
What do experimental economists do? "We take propositions of economic theory and we test them with real people in controlled settings," explains Smith, who's also a research scholar in the Interdisciplinary Center for Economic Science and a fellow of the Mercatus Center, both affiliated with George Mason. "Take the idea that there's a tendency for markets to achieve price levels at which they'll clear-at which buyers and sellers agree with one another and no money's left on the table. I'll run experiments where I motivate buyers to buy low and sellers to sell high." Smith helps keep living, breathing human beings at the center of a discipline notorious for transforming flesh and blood into impersonal theoretical equations.
"We're less interested in what people think than in what they actually do in specific situations," says Smith. "The thing that's not very explicit in much of economics is what the rules of trading are and how they affect outcomes. Experimental economics asks how the performance of a market is influenced by its rules."
Over the past 50 years, Smith has overseen thousands of experiments, with everyone from school kids to business tycoons to congressional staffers. He also has been instrumental in developing policies that create true markets where they've never existed, such as in electricity sales...
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